WorldSys: Austrian Home Study Course, Week 17

READINGS: Chapters 7, 8, 19, 20, 21 of Henry Hazlitt’s Economics in One Lesson, Chapter 7 of Gene Callahan’s Economics for Real People.

1 What is the definition of a laborer?

A person selling his labor on the open market to achieve some end. Put another way: anyone who is not entirely supported by other people is a laborer.

2 What is the difference between rents and wages?

Rent is a typically-fixed amount paid to the owner of a property or a good for its use. Wages are just the price paid to people for their labor.

3 Won’t workers be paid starvation wages without government regulation?

No. If there were some force inexorably pushing wages down then why isn’t everyone paid the minimum wage now? As it happens a relatively small fraction of people are paid the legal minimum, which suggests that things like investment in capital, rises in productivity, and more options in other sectors consistently pushes wages up without government interference.

If this is true then there is no reason to suspect that workers would be paid starvation wages in an unfettered market.

4 What is marginal productivity?

The additional unit of production gained by hiring one more worker (or the unit lost by firing one worker).

5 How can a worker increase his or her marginal productivity?

Learning new skills, earning new accreditations, exploring and mastering the responsibilities of the position to which she aspires?

6 What are the effects of capital accumulation on wages?

Wages will rise, on average and over time. Capital accumulation means that someone (probably an investor-capitalist) is investing in more and better machines, equipment, etc. — this is what is usually meant by ‘capital goods’. It is exactly this kind of investment that leads to increases in productivity, which leads to rising wages. Giving a worker a better machine which allows him or her to work at 120% their previous rate makes paying them more economically justifiable.

7 Do workers benefit from high prices?

It depends. If the product they’re making increases in price it probably means more profits for their firm, more investment in capital goods, more marginal productivity on their part, and eventually higher wages. Of course other workers paying higher prices for the product in question may or may not benefit, depending on their relative situations.

8 Why do professional athletes earn higher salaries than teachers or nurses?

There is vastly more demand for the athlete’s services. There is only one Lebron James, but even so he would have to be a welder if no one were willing to buy tickets to see him play. Sports franchises are willing to pay so much money to have him play because he wins games, which draws crowds, which makes the team money, which makes paying him millions of dollars possible.

9 Do “labor-saving” inventions destroy jobs?

No, more often than not they result in the expansion of an industry which then employs more people or they temporarily free up workers who move to other industries.

10 What is the cause of unemployment?

There are myriad causes of unemployment, but in Hazlitt’s book voluntary unemployment results from machinery increasing production so much that people can afford to work less.

11 Is the value of a good proportional to the amount of labor required to make it?

Of course not; this is the good ‘ol labor theory of value, refuted in an earlier set of answers.

12 Without unions, how would workers bargain with employers?

They could bargain individually, of course, but we must also ask ‘what is meant by a union?’ In the present conversation I think it’s fair to say that a union is considered to be a collective bargaining entity with a spate of legislation behind it giving it privileges it wouldn’t otherwise have. I don’t get the sense that Hazlitt has an issue with the first part of the definition, only the second part. A libertarian would see nothing wrong with employees forming associations to collectively bargain as long as they don’t, say, physically assault employees who abstain from the union and continue to work.

13 Can unions raise wages for union members?

Perhaps, artificially and through political means. But this will not be a “real”, “organic” increase in wages. Wages are a price for labor, and they increase on their own when labor becomes more productive. The way to achieve this is to investment in management, equipment, and training and make each worker more productive. This approach is what made wages among American workers much higher than those paid out to English and German workers during the period in which the strength of labor movements was waxing in those countries.

14 Can unions raise wages for all workers in society?

No. Hazlitt walks us through a fictional example in which six groups of workers form unions and attempt to achieve wage raises. There is no way an economy can sustain the simultaneous increase in hourly earnings for every single group, and in any case it is exceedingly unlikely that all six unions will end up in exactly the same strategic position. So this means that some unions will get wage hikes and others will stay where there are.

Because wages are a price for labor an increase in wages has to be result in an increase somewhere else, probably in the cost of living. Let us imagine that the unions manage to get a raise of 25% on average. Some raises are higher, some are lower, and this is what it works out to on average.

Well, any member of a union that didn’t get a wage raise of this amount or higher now must get by in a more expensive world.

And this isn’t factoring in various secondary effects. Increases in unemployment almost always accompany increase in wage rates, often in the industries that gain the most. This is because workers on the margin — those just barely able to produce $12/hr of value — simply aren’t worth employing any more. Perhaps we could ameliorate this effect somewhat by setting up government relief plans. But where do you suppose the money for that comes from? From the wages of those still employed in the industries that fought so hard for a wage raise. If members of the unsuccessful unions are taxed at a higher rate, they’re now in pretty bad shape, and if members of the successful unions are taxed at a higher rate their wages are reduced, so it’s not clear what all the striking and picketing was for.

Nor can we blithely assume that it will merely be employers and investors who are getting screwed. If a capitalist realizes that the rate of return on her investments is shrinking rapidly and permanently it won’t take long to conclude that her money is best invested elsewhere, or not at all.

15 In a recession, should we raise wages so that consumers can have more money to spend?

There isn’t any way to do this that wouldn’t also raise production costs and eventually raise prices. If we pay toothpaste manufacturers 30% more then it is only a matter of time before toothpaste costs more, ultimately helping no one.

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