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Now About The Minimum Wage

| 01.19.2017 |

Wages and the cost of supplies are the two fundamental expenses for every business, but wages reflect the "worth" of the individual worker. A higher wage can instill pride in an employee because it represents higher worth, but wages are not a status symbol. Instead, wages must be closely aligned to the actual value that the worker provides or the economic system is imperiled.


In this column, we have discussed the concept of the minimum wage and how the great thinkers oppose an artificial increase in wages: Mark Twain mocks those who wanted an increase based on logical grounds; Edmund Burke criticizes the idea from a political perspective; Thomas Malthus debunks the need for an increase at a sociological level; Benjamin Franklin believes it would undermine hard work; and Adam Smith argued that it would disrupt the economic system. Jean-Baptist Say, the French businessman who defined and popularized the term “entrepreneur,” takes on this topic from a practical business perspective in A Treatise on Political Economy.


In Chapter XXI of Book I, Say disagrees with Adam Smith's idea that labor is based on production because it does not consider a greater supply and demand component: “With great deference to so able a writer, it by no means follows, that, because labour in the same degree is always to the labourer himself of the same value, therefore it must always bear the same value as an object of exchange. Labour, like commodities, may vary in the supply and demand; and its value, like value in general, is determined by the mutual accord of the adverse interests of buyer and seller, and fluctuates accordingly.”


He goes on to agree with most of what Smith argues, but he makes sure to add more nuance: “The value of labour is affected materially by its quality. The labour of a strong and intelligent person is worth much more than that of a weak and ignorant one. Again, labour is more valuable in a thriving community, where there is a lively demand for it, than in a country overloaded with population. In the United States, the daily wages of an artificer amount in silver to three times as much as in France.”


In essence, selling your own labor is no different from selling a product you have made. If there is more money available to pay wages, then greater wages can be paid. If there are more people with the same skill base, then employers can force the employees to be more competitive. Often, businesses turned to immigrant labor in the United States because immigrants are willing to charge far less for the same amount of work.


However, Say warns that the wages paid to an employee do not necessarily denote how well off that employee is, “Are we to infer, that silver has then but 1/3 of its value in France? The artificer is there better fed, better clothed, and better lodged; which is a convincing proof, that he is really better paid. Labour is probably one of the most fluctuating of values, because at times it is in great request, and at others is offered with that distressing importunity occasionally witnessed in cities where industry is on the decline.”


This is a similar point to one made by Twain, who argues that wages must also be compared to the price of goods and other benefits. Wages without the context of expenses are not comparable. But Say adds another aspect: sometimes wages have to be greater to entice workers into a dangerous or unsatisfying region or market. Our urban areas often suffer from negative conditions that scare away labor.


By artificially increasing wages, urban areas are trying to entice labor to enter into their markets, but this solution cannot truly work. The labor left because of the declining problems, which are not being addressed merely by higher wages. As Say points out, the higher wage does not actually create a better living condition.


In a greater sense, we cannot compare employees from two different regions just on their wage: “Its value has, therefore, no better title to act as a measure of two values at great distances of time or place, than that of any other commodity. There is, in fact, no such thing as a measure of value, because there is nothing possessed of the indispensable requisite, invariability of value.”


However, those who fight for an increase in the minimum wage are often those who demand legal price caps for the same reason. They believe that the government must set the value of labor and the cost of goods, as if such a law could allow workers to make more and pay less for goods. In terms of price fixing, medicine is currently the cause celebre, relying on emotional anecdotes to push bad economic policy.


In Book II, Chapter I, Say warns against trying to fix prices to help laborers, “When the price of any object is legally fixed below the charges of its production, the production of it is discontinued, because nobody is willing to labour for a loss: those, who before earned their livelihood by this branch of production, must die of hunger, if they find no other employment; and those, who could have purchased the product at its natural price, are obliged to go without it.”


Trying to fix wages by inflating the minimum wage or by mandating lower prices causes the same problem: the disruption of the natural labor market. But price fixing also disrupts supply, “The establishment of the fixed rate, or maximum, is a suppression of a portion of production and consumption; that is to say, a diminution of the prosperity of the community, which consists in production and consumption. Even the produce already existing is not so properly consumed as it should be. For, in the first place, the proprietor withholds it as much as possible from the market. In the next, it passes into the hands, not of those who want it most, but of those who have most avidity, cunning, and dishonesty; and often with the most flagrant disregard of natural equity and humanity.”


We can see Say's prediction currently taking effect in Venezuela, with the disappearance of basic goods. Those who were lucky enough to buy a product then horde it, while suppliers are unable to provide more product because there is no revenue to be had.


Ultimately, Say attributes many of these bad policies to the abusive monopoly that is government: “The functions of national government, which is a class of industry, whose result or product is consumed by the governed as fast as it is produced, may be too dearly paid for, when they get into the hands of usurpation and tyranny, and the people be compelled to contribute a larger sum than is necessary for the maintenance of good government.”


Often, a government that pushes artificial wage increases or artificial price decreases is too large and powerful. They are obtrusive because they are corrupt, but they are not alone in their systematic corruption.


It is possible that those who are supposed to safe guard us against corrupt government may also become corrupt, “But it is the province of the political philosopher, and not of the political economist, to teach us how this evil may be avoided. In like manner, although it be the province of ethics, or of the knowledge of the moral qualities of man, to teach the means of ensuring the good conduct of mankind, in their mutual relations, yet, whenever the intervention of a superhuman power appears necessary to effect this purpose, those who assume to be the interpreters of that power must be paid for their service. If their labour be useful, its utility is an immaterial product, which has a real value; but, if mankind be nowise improved by it, their labour not being productive of utility, that portion of the revenues of society, devoted to their maintenance, is a total loss; a sacrifice without any return.”


To Say, the economist and the philosopher alike must work to ensure that the people recognize how wages and costs operate. They must teach people that artificial changes do not actually benefit the whole of the population but instead give a net negative effect. They must also teach the people to watch out for a large, abusive government that pushes artificial changes simply because it allows them to amass more power.


The theorists who back these artificial changes are those who do not produce anything of “utility.” They are part of the corrupt class that takes wages without earning them. The bureaucrat, the philosopher, the theorist, or the teacher who seek to disrupt markets are those who, according to Say, are not worth being paid.


Jeffrey Peters is an Annapolis, Md.-based writer and political consultant.