Capitalism vs. minimum wage laws

Many people, especially liberals, still widely accept the view that we need minimum wage laws to provide the working poor with a fair wage. A minimum wage is a legally mandated price floor for labor — for instance, in California it is illegal to hire a worker for less than $8 an hour.
On the surface, this sounds perfectly reasonable. After all, it would be unfortunate to receive such low wages that one would struggle to acquire basic goods such as food or health care.

This is just one example of how many who claim to support capitalism believe it needs to be mitigated or controlled in some way; otherwise it leads to exploitation.

Unfortunately, these views are mistaken; indeed, they are flawed from both an economic and a moral perspective. Economically, because minimum wage laws create unemployment among some lower skilled laborers (those very groups they are designed to protect). Morally, because these laws attack people’s rights to negotiate their income and moreover imply that an employer has a moral obligation to provide workers with a certain income (she doesn’t).
These two aspects are interrelated, of course, but I will start by first discussing the economic flaws and then move to the moral argument.

It is important to remember that wages are essentially no different than any other price: the price of one’s labor. Furthermore, this price reflects certain facts: it reflects facts about how much an employer values your work (if they valued it less than your wage, they would not hire you at that wage) and whether, everything else being equal, you find that work worth doing at that wage. A worker’s value to her employer depends on factors, such as how much training she needs, her employment history and her ability to efficiently carry out tasks.

But if this is true, then surely increasing a minimum wage via legislation cannot alter these facts. As 20th century economist Henry Hazlitt once wrote, “You cannot make a man worth a given amount by making it illegal for anyone to offer him anything less. You merely deprive him of the right to earn the amount that his abilities and situation would permit to him to earn, while you deprive the community even of the moderate services that he is capable of rendering.”

The attempt to change those facts creates unemployment, as those whose work is worth less than the minimum wage cannot be employed at a profitable wage. In other cases, where hiring fewer workers is too detrimental, employers might simply increase the prices of their goods and services, which in turn reduces the purchasing power of lower-income people (who suffer more from price inflation than other groups).

But who are those whose work might be worth less than the minimum wage? It is inexperienced or low-skilled people (such as students!). The wages of middle and high-income workers are not directly affected by the minimum wage.

We can see now why we cannot eliminate poverty by simply dictating a minimum wage of, say, $50 an hour. This would likely result in drastic price increases, massive unemployment among low-skilled laborers, or both.
Minimum wage laws are immoral insofar as they constitute a violation of our rights — specifically, our ability to trade freely in the labor market. To be able to make the decisions to live the best possible lives we can, we need to be free to rely on our independent, rational judgment.

Sometimes, it will be advantageous for me to accept a low-paying job, if I need to build experience or I have other sources of income to supplement it. Similarly, employers will sometimes find it profitable to hire workers with less skills, and therefore will sensibly want to pay them less than other workers. This does not constitute exploitation: one could only reach that conclusion by dropping the context that employers are offering a positive benefit to potential employees, and that the relationship between a worker and her employer is a trade.

Laws that regulate economic activity, of which minimum wage laws are merely one example, attack our ability to engage in trade with others and force us to act against our rational judgment and our values.

In a laissez-faire system, wealth creation and productivity are unfettered by government interference, and everyone (including the working poor) can benefit the most from the rational and productive behavior of others. It may be true, though, that even in a free society, poverty will exist. And to the extent that people see it as a problem, we can help those in need through private charities.

In doing so we can recognize the fact that charity is and ought to be the voluntary decision to support causes that we value, not the redistribution of wealth or regulation of economic activity by force.

In conclusion, I would like to stress that the primary issue is not “how to provide the working poor with a ‘fair’ wage,” (which is not the province of a proper government) but rather how to achieve society governed by justice and a rational economic policy, which themselves depend upon a foundation of political theory (individual rights) and ethics (rational egoism). The answer, once again, is freedom.

TRISTAN DE LIEGE can be reached at tflenaerts@ucdavis.edu.

7 Comments

  • Locke
    January 31, 2013

    A short summary of why minimum wage laws are critical is that they serve as a basis for the protection of workers who would otherwise be exploited. Many people looking for work, particularly from out of the country, find themselves unable and unsure of finding out how much their labor is worth, and even if they do, they find themselves unable to negotiate for that amount due to the knowledge of their employers that they are unable to fight/negotiate for a reasonable amount.

    Of course, exploitations and workarounds of the minimum wage laws still occur, but that is not reason to give these workers less protection.

    Your use of the word “freedom”, is ironically, used too freely/liberally. Freedom to pursue what we want and live how we wish is a right, but with given conditions. Pursuing that which would unfairly interfere with the pursuits of others is not a right, and so, for example, the pursuit of maximum profit margins via not paying one’s workers a reasonable wage would not be a right.

    If there were no economic laws, the first well-prepared venture into a monopoly in each industry would each have us by the throat, and what Ayn Rand imagined as utopia would end up being hell. Ayn Rand’s ideas of utopia, such as in Atlas Shrugged, were predicated off of unspoken but crucial underlying principles, such as perfect information amongst each producer of the desires of others, morality amongst the producers, etc. As such, it can be said that Ayn Rand’s works have far more actual need in the realm of work ethic as opposed to actual economic system/de facto system.

    • ttime09
      February 4, 2013

      Locke,

      thanks for your interesting remarks. I’ll address them in turn.

      “workers who would otherwise be exploited” “a reasonable amount”

      Just focusing on these terms for a moment, what do you mean in these phrases? I think both of these terms get thrown around a lot without proper definitions (not to say that they can’t ever be properly used) and they can confuse the issue.

      Here’s what I will say about this: it’s important to remember that just as workers need jobs, so employers need workers. Often people believe that employers have full control over the wages of their employees, but there is a definite sense in which this isn’t true–they have to compete with other businesses, and if they want the best employees, they will have to raise wages. Another thing to note is that a worker in difficult conditions does not thereby acquire a claim to the life or effort of anyone else, and this includes the privilege of working for someone, which must be based on a trade. Surely you would agree that employers have no right to force workers to remain working for them even if business is going poorly; the principle is the same.

      “Pursuing that which would unfairly interfere with the pursuits of others is not a right, and so, for example, the pursuit of maximum profit margins via not paying one’s workers a reasonable wage would not be a right.”

      Why would this not be a right? Who gets to decide what is a “reasonable wage”? Either you have an absolute, inviolable right to your life or your property, or you only have it by someone’s permission. There is no alternative.

      “If there were no economic laws, the first well-prepared venture into a monopoly in each industry would each have us by the throat, and what Ayn Rand imagined as utopia would end up being hell. Ayn Rand’s ideas of utopia, such as in Atlas Shrugged, were predicated off of unspoken but crucial underlying principles, such as perfect information amongst each producer of the desires of others, morality amongst the producers, etc. As such, it can be said that Ayn Rand’s works have far more actual need in the realm of work ethic as opposed to actual economic system/de facto system.”

      These are fair points to make, and I appreciate your perspective. However, I think again you are mistaken.
      Regarding monopolies, I recommend either the essay “Antitrust” found in Capitalism: The Unknown Ideal, or my column (though I don’t regard that as one of my better columns).
      Regarding perfect information/morality of producers, what I would say here is that capitalism isn’t supposed to suddenly make everyone omniscient and incredibly productive. It doesn’t even require that to work, since we can clearly create wealth and benefit from trade even with limited information. It is interesting that you bring up morality, because that is the very basis for my views. I regard it as immoral to initiate the use of physical force against others, and this is fundamentally the reason for my opposition to economic regulations by the government. What capitalism achieves is the banishment of force from society and allows people to act on their own judgment and determine how they want to live their lives.

      • Locke
        February 4, 2013

        For “workers who would otherwise be exploited”, I refer to workers who are born to a poor background and in a poor and thus often lack leverage to negotiate fair terms. If someone in a certain town feels like paying a worker a certain rate for doing so much work in a certain amount of time, then it makes sense that another person performing the same amount & quality of work at the same location under the same conditions should be equal in worth to the other worker. However, the reality is that migrant/immigrant workers are often hired for lower wages because:
        * they are not provided with the knowledge of how much their labor is worth
        * they may not know where to find anything to compare the value of their labor worth to
        * the loss they face by not taking a job is greater than the loss they face from taking a wage that is lower than what their labor is worth

        “a reasonable amount” refers to a wage paid to the worker which is less than the amount of value that the worker actually adds to his/her employee’s enterprise but more than the time is worth to the worker (with a minimum of being able to keep the worker alive). Of course, the division of surplus should be judged on a case-by-case basis, particularly with the rubric of who needs whom more. Even then, quantifying it is difficult. Yet, at the very base, employers should not offer jobs that provide less than a minimal living wage, as the only way to justify that would be to provide a job that would not be worthwhile assigning to someone else besides themselves in the first place. In short, there shouldn’t be any jobs that do not provide for a basic living in terms of wage rate, as it would be inefficient for the employer to offer in the first place and unsustainable for the employee in the long run.

        I absolutely agree that people are not entitled to jobs and money. Everything of value has a price, and that is something I did love about Ayn Rand’s works and philosophy. I also agree that employers have less control over wage rates than many people might imagine.

        “Why would this not be a right? Who gets to decide what is a ‘reasonable wage’? Either you have an absolute, inviolable right to your life or your property, or you only have it by someone’s permission. There is no alternative.” I take issues with some of the logic going on in this passage, which refers to my:

        “Pursuing that which would unfairly interfere with the pursuits of others is not a right, and so, for example, the pursuit of maximum profit margins via not paying one’s workers a reasonable wage would not be a right.”

        *Response to “Why would this not be a right?”: Something that a lot of people overlook is that each person’s pursuits may not interfere with the pursuits of others. Otherwise we would have no resolution to one person’s pursuit of another person’s life. Essentially, you may try for what you want, as long as you do not directly trample others on your path to it. There should be no laws against making more money, as long as you do not force other people to part with theirs. There should be no laws against acquiring food, so long as you do not encroach upon the domain of others and deprive them of their food.

        Also, it is not a right to exploit your workers to maximize profits because you then violate other people’s rights to their work. Of course, that is not to say that you must give them what they make, but if there is a worth to their labor, that part belongs to them. Reasonable wage is always subjective. For example, the ability to produce a piece of paper is worth much less now than it used to be, holding the quality and amount of paper the same in both time periods. That is due to the invention of technology, of course. Yet, there are relative, even if not absolute, standards for evaluating worth. A systems administrator is worth more than someone only capable of data entry. This is an inalienable truth, backed by empirical reasoning (systems administrator can do what data entry person can do, plus more that is useful), and with a near infinite number of comparisons amongst different jobs, we can figure out reasonable ranges of labor worth. We start with inherent worth of labor, but must then compare each job to others in order to translate the inherent worth to money, inherent worth being something like “10 trees chopped down/hour”, “5 million pounds of corn produced/year”, etc.

        We disagree that we have “absolute, inviolable right[s] to [our] life or [our] property…”, as what if we forfeit these rights? For example, to consciously choose to deprive someone of their rights to live (eg unjustified murder of an innocent person) is to violate someone else’s right to life, and in doing so, we surrender our rights to the life we want. Without such a system (or similar system) in place, there is no intrinsic reasoning as to why we should not interfere with the lives of others if doing so would benefit ourselves.

        Monopolies have historically led to abuses and the inability to prevent these as consumers (and with the institution of capitalism we would have no arbiter to prevent them either). Even modern-day oligopolies of industries are already proving the failures of allowing relatively unchecked companies free reign to abuse what economic power they have.

        A good example of this issue is present in ISPs, which are continually being found to charge high prices for quality of service that is not costing them anything proportionately what it is costing the consumers. An example is that increasing bandwidth for consumers is not costing the companies on the same scale that it is costing us. While I approve of more gains being given to the company for every innovation that either improves on production or cuts down on prices, I also think that if the benefits are exponential for the company, they should also be exponential for the consumers.

        Furthermore, while it is easy to say that the consumers would never have been able to provide such benefits for themselves, it is also easy to say that the companies would never have been able to gain so much in profits if they did not earn something from each of the individual innovators who worked for them. In short, speciality and division of labor in a somewhat organized society are necessary to develop and sustain the higher standard of life that we have. It is more efficient than having the same number of people and having them each try to be a jack-of-all-trades.

        Indeed, capitalism does not make people omniscient and more productive, but in order to properly associate what we really earn with what we do, perfect information (or nearly perfect information) is required, as otherwise information would naturally take an artificially inflated value. An example would be someone who does not communicate (out of inability or choice, either works) to anyone besides the person they deal in business with. They would not be able to earn what they deserve, regardless of how talented they are, if the other person does not inform them of the worth. Otherwise, there is no standard to base their labor off of, and they could have inaccurate perceptions of their wealth. This ties back to the earlier situation of the immigrant/migrant workers.

        In challenging your opposition to economic regulation by government, I propose a hypothetical scenario:

        A company develops technology such that it can produce food in quantities and quality greater than all other companies at a cheaper price. Under a capitalistic system, people all begin to buy their food. To support the increase in demand, the company buys up more and more arable land to increase production. Other companies go out of business, as they are less efficient and cannot quite compete in price and quality. Eventually, this leads to the company owning all or most all arable land, producing food for all (or most all) of the world, without competitors. What happens if the company decides to abuse its power? Charge ridiculously high prices, raise prices artificially by keeping food it produces for itself for later sale, etc. Is a potato worth a house? No. But under this scenario, it would be, and there would be no way to prevent this from happening, not to mention that there would be no way to create another company to challenge the company and bring a situation where there is capitalistic competition and a situation where companies would not be able to abuse their powers.

        Of course, the opposite problem is that companies are artificially propped up, regardless of their actual worth and productivity, and their worthlessness becomes subsidized by the rest of the productive society, leading to the scenario on which Atlas Shrugged was based.

        Sadly, both problems are, to great extents, present in the systems we have. There is not enough control in certain areas to prevent abuses from happening, and so laborers get exploited and so do consumers. There is too much expensive, bureaucratic, useless red tape in the standardizing and regulation of industries so that tons of money is wasted on nothing.

        The solution is not in extreme capitalism, nor is it present in extreme regulation. Instead, there is a solution that has not been thought up of yet, but it will require intricate knowledge of game theory and each specific industry that exists, not to mention human nature itself. Sadly, economics is a cumulation of business models, psychology, social anthropology, technology, etc. for which we have only begun constructing ineffective hypotheses for. In the world of economics, most of what we have done amounts to little more than voodoo ritual experimentation on the greater scale of things.

        Capitalism does not banish force from society, sadly, as most of what capitalism is not the enforcing of things, but rather the lack of enforcement. Amongst some people this works out well, but amongst others, not so much. Furthermore, people should learn to develop their own judgements not on the system they live in, but on what they learn themselves, just as in Atlas Shrugged.

        As such, the answer is going to take a long time to find, it will be very hard to find, and the simplistic models humans have as yet tried to fit upon society are not going to cut it.

        Perhaps my greatest opposition to capitalism is that it does not function as it is intended to work when it is applied to human beings, as human beings do not, on the whole, possess the moral principles championed by Ayn Rand: Honesty, self-integrity, an objective knowledge of the truth, and a work ethic to make it all work. One of the most accurate truths in Atlas Shrugged is the distribution of moral character amongst all people.

        If history has told us the truth, it is not the systems that we live under so much as how we administer the systems and how we live in relation to the systems. Given the right people, communism, monarchy, anarchy, etc. can all work. Given the wrong people, even the most intricately designed systems will not work as intended.

        When I said before that the solution was complicated, I meant that the solution involves changing people who as of yet are far more complicated than the systems they have designed.

      • mertinburl
        February 4, 2013

        Ain’t nobody got time for this.

      • mertinburl
        February 4, 2013

        Word.

  • mertinburl
    January 29, 2013

    OH, and I can’t forget this. Base your arguments in fact please: you sound like a broken record player for the Republican party.

    http://thinkprogress.org/economy/2013/01/28/1505761/new-jersey-governor-vetos-minimum-wage-increase/

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