"An increase in the minimum wage will raise workers' incomes, which will increase aggregate demand, which will increase output and employment. So would an increase in union wages."
I remember hearing that argument a lot in the 1970s. You don't hear it as much nowadays, but it still lives on in the underworld of economic ideas.
It's (usually) wrong; but it's not a stupid argument. And you can't dismiss it just by drawing a downward-sloping labour demand curve, and showing how an increase in wages will cause a movement up along that demand curve, to a point with lower employment. The whole point of the argument is that an increase in aggregate demand will shift the labour demand curve to the right.
And (most) firms (nearly) always want to expand output and employment. What constrains firms from doing so is not that wages (and other costs) are too high to make additional sales at current prices unprofitable. What constrains firms is demand. They want to sell more output, and would be able to hire the extra labour needed to produce more output. They just can't find the extra customers to buy more output.
Ask any firm this question: "If I could bring you more demand, at your existing price and quality, would you be able and willing to produce more and sell more?" Most would answer a very enthusiastic "Yes!". That's why they spend money on advertising, for instance.
When I put down the textbook and look out the window I see a world where output and employment are (nearly always) constrained by demand, not by supply. So it seems very plausible to suppose that an increase in wages across the economy, if it raised aggregate demand, would increase output and employment, even if it did raise costs a bit. You wouldn't want to raise wages too much of course. If you did raise wages too much so that marginal costs increased above the price of the good, it wouldn't work, because firms would no longer want to increase output and employment to satisfy an increase in demand.
So, what's wrong with the argument?
First, if you wanted to increase aggregate demand, why not just use monetary and/or fiscal policy? Why increase minimum wages? Fair enough. But suppose you wanted to change the distribution of income as well? Why not use an increase in minimum wages to increase aggregate demand?
Second, why would an increase in minimum wages increase aggregate demand? The simple argument is that an increase in wages increases people's incomes and if people's incomes rise, their demand will rise. But that simple argument is fallacious. It forgets that capitalists are people too. For a given level of output, which means a given level of income, if wage income takes a greater share, then non-wage income must take a lesser share. You need to argue that the distribution of income affects aggregate demand.
It might. Maybe there's a lower propensity to save out of wage income. Or maybe the velocity of circulation is higher for wage income.
But let's get to the main point.
Start in equilibrium where there is no upward or downward pressure on prices (or where the upward and downward pressures are exactly balanced). That does not mean that supply equals demand. It would mean that supply equals demand if markets were perfectly competitive, but they aren't. Markets are imperfectly competitive.
If markets were perfectly competitive, in equilibrium each firm (and worker) is on its supply curve. Price = Marginal cost (Wage = Marginal disutility of leisure). It doesn't want to sell any more output (labour) at the current price (wage). The economy as a whole is on its aggregate supply curve.
The one great thing about New Keynesian macroeconomics is that it let us think about macroeconomics when markets are imperfectly competitive, and each firm (worker) faces a downward-sloping demand curve. And most firms (and some workers) do want to sell more output (labour) at the current price (wage). The economy as a whole is off its aggregate supply curve. It wants to sell more.
Offered a deal in which demand increases so they can sell more output and labour, but cannot raise prices or wages, most firms and some workers would accept the deal. Aggregate output and employment could rise.
But that's not the deal they are offered when aggregate demand increases. They are offered an increase in demand; they can choose to increase output and employment, or increase prices and wages, or a bit of both. Most will choose a bit of both. And that's the problem.
Starting in equilibrium with no upward pressure on prices or wages, any increase in aggregate demand, output and employment will put some upward pressure on some prices and wages. It doesn't matter how small it is; even if the average individual firm (worker) raises its price (wage) just a little, the positive feedback effect results in an infinite rise in prices and wages.
There is positive feedback because each individual firms and worker cares only about the real price and wage — which means the price and wage relative to other prices and wages. Upward pressure on prices and wages means upward pressure on relative prices and wages. And it's impossible in aggregate for the average firm to raise its price and wage relative to the average price and wage. The attempt by each to do so results in an upward spiral of unlimited speed.
It's the Long Run Phillips Curve that limits the effectiveness of aggregate demand, not the Long Run Aggregate Supply Curve. Both are vertical, but they are not the same curve. The LRAS curve tells you the level of output at which firms and workers would be unwilling to sell more output and labour at existing prices and wages. The LRPC tells you the level of output at which firms and workers would be unwilling to try to raise their relative prices and wages.
If the economy is in equilibrium, at a point on the Long Run Phillips Curve, an increase in minimum wages, or union wages, even if it does increase Aggregate Demand, will not increase output and employment in any sustainable way. Nothing that only increases Aggregate Demand will increase output and employment in any sustainable way.
It's worse than that.
An increase in minimum wages will cause a firm's Marginal Cost curve to shift up. For a given level of demand, an increase in MC will cause an increase in the firm's profit-maximising price. Start in equilibrium, at a level of output and employment where there is no upward (or downward) pressure on prices and wages. So the economy is on the LRPC. Then increase the minimum wage. Now there is upward pressure on prices and wages. The economy is no longer on the LRPC. The LRPC has shifted. We would now need lower output and employment to create an offsetting downward pressure on prices and wages. Anything that increases the upward pressure on prices and wages, for a given level of output and employment, will reduce the sustainable level of output and employment.
Are there any cases where an increase in the minimum wage would cause a sustainable increase in employment? Yes, I can think of three:
1. Suppose aggregate demand is too low, so we are off the LRPC, and there is risk of a deflationary spiral. And suppose that monetary and fiscal policy cannot be used, for some reason. Then it is conceivable that an increase in minimum wages could increase aggregate demand, and bring the economy back to the LRPC, and be the only way to do so. Maybe.
2. Suppose the labour market has monopsony power. Wages are below the competitive equilibrium. There is excess demand for labour at the given wage. Firms won't hire more labour because they would need to raise wages to persuade workers to sell more labour. In this case, an increase in minimum wages would shift each firm's MC curve down, not up. They would respond by lowering prices. For a given level of output and employment, this would put downward pressure on prices. This would shift the LRPC curve in a good direction. But that's a labour market where firms are hungry for workers; not a labour market where workers are hungry for jobs. It doesn't sound much like Canada, on average.
3. This one's weird. Start in equilibrium, at a point on the LRPC where there is neither upward or downward pressure on relative prices and wages. Now suppose that an increase in output and employment would cause downward, not upward pressure on prices and wages. That means the initial equilibrium is unstable. Any small increase in output and employment would cause prices and wages to start falling, and the economy would move down along the AD curve to higher output and lower prices, until it eventually hit the LRAS curve, and prices and wages stopped falling, because nobody wants to sell any more output and labour at given prices and wages. As with all cases of unstable equilibria, the comparative statics have the "wrong sign". Anything that increased upward pressure on wages and prices would shift the LRPC in the good direction.
I could rig up a model that looked like this, if I wanted. Assume some combination of: increasing elasticity of an individual firm's demand curve as aggregate output increases; increasing marginal product of labour as aggregate output increases; downward-sloping aggregate labour supply curve. Anything that causes an individual firm's Marginal Revenue curve to shift up, and/or Marginal Cost curve to shift down, when aggregate output increases.
But we can rule out that last case. It would only be by sheer fluke that any economy found itself in an unstable equilibrium. Almost certainly, the economy would already be at maximum capacity, or else be at zero output.
And in any case, if we were by fluke at that unstable equilibrium, and an increase in minimum wages shifted the LRPC in the good direction, the economy would likely go off in the other direction, towards zero output and employment. The better thing to do would be a sudden burst of monetary expansion, which would cause output to rise and prices to fall.
Worthwhile Canadian Initiative 
It is both an argument and questions. A technique of disproving someone is taking their logic to the logical extreme. I ask the question of how those things I explained related to the minimum wage. As you said, the foundation of all prices is minimum wage. So tell me how an independent contractor’s costs are related to the minimum wage, since by law, they are not entitled to minimum wage since they are not employees of any company.
This statement here is simply asking for proof of your claims. Put it in math form. How did you come up with the fact that raising coke prices from $1 to $5 will keep sales the same for one month? What else is there to understand from your comment?
This is mostly argument. I am simply giving counter-examples to what you said. Since you argue with using “all” “everything” “always” etc. it is easily to prove you wrong by simply pointing to one example. A lesson in logic is that if someone argues using those words, there is most likely a counter-example.
Allan, you’ve pretty much exhausted my patience. Answer, don’t answer, but stop with the snark. SG
Three times I politely request someone to clarify Xevec’s postings, to back him up, rephrase his arguments or his queries, and I get censured for this? Too much.
Looks like the marginal cost of responding to Allan’s ravings exceeds the marginal benefits of doing so.
Nick
Thanks for your thoughtful response to my question.
Putting all the equations aside that are essentially trying to fit ones view of labor supply and labor demand into a coherent paradigm, I really prefer we start with a basic premise for our economy;
Everybody that wants a job should have one. Period. If the private sector doesnt want to hire them all the currency issuer has a queue of jobs paying a minimum wage that keeps them in the labor force and supporting agg demand. This queue will naturally fluctuate in size as the private sector goes through cycles but it will place a real floor under aggregate demand. There are other benefits besides agg demand that a steady job will provide, keeping to a schedule, fitting in with others etc.
There is no financial reason we cant do this. None. Talks about not having enough money are complete nonsense. Whatever level of inflation it causes getting to that point should just be accepted as the cost of getting everyone working. With a full employment economy there will be much more price stability and narrower swings during the business cycles.
Why do we continue to insist that some people who want jobs just cant have them, thereby suffering extreme differences in their living standards, just to control inflation?? Especially when inflation is such a nebulous term with varied definitions depending on which economist you talk to. Its senseless, baffling and cruel.
Our obsession with fighting inflation is becoming a malignancy I believe. We are willing to do almost anything to avoid it, including shut out tens of millions of people form having a goddam minimum wage job.
Greg: ” Whatever level of inflation it causes getting to that point should just be accepted as the cost of getting everyone working.”
In the 1960’s we thought that there was a stable trade-off between unemployment and inflation, and that we could get to something called “full employment”, if we were just prepared to tolerate some inflation. In the 1970’s we learned we were wrong. Attempting to do so though aggregate demand policies would fail, but cause infinite inflation as the price of trying.
Which brings us back to my latest post.
Isnt it possible that what we learned in the 70s is that when you have a rise in energy prices everything costs more? I believe people are attributing a “cost push” inflation to a “demand pull” cause. We reacted as if the wages were the problem driving the prices where in reality the real prices of energy were rising (due to the induced shortage, not true shortage) and wages chased it.
Actually this is exactly what happened in Weimar Germany and ZImbabwe during their inflationary crises. Severe supply contraction caused prices to rise and wages rose leading to spiral.
And money supplies increased billionfold.
Well said Nick.
You can not fix the problems with more money. There is certainly enough money in the system, and more money simply devalues it. The adequate money supply is just very poorly distributed. The only thing that seems to have good effect on the distribution is the minimum wage and nothing else, and the only arguments against increasing minimum wage are antiquated theories that are quite frankly wrong.
Nick
Its still important to note the direction of causation. The fact is that the REAL price increase due to the supply contraction WAS the precipitating event.
They didnt just wake up one morning and say “Hey Im gonna print more money today for the people of Germany” . After the factories of Germany were stolen by France and Belgium (I think it was Belgium) the die was cast. What do you expect Germans to do? The workers left, as every American, Canadian, Australian or even Austrian would do. This lack of production caused an immediate REAL price rise. The German govt still paid the workers, which escalated prices (since they were no longer producing). Yes its easy now to say they should have stopped paying their workers more and more but they were German citizens who needed to buy stuff to live. The fact of the matter is that acts of war (the actions of France and Belgium should be described no other way) do lead to severe economic dislocation. The common myth that Weimar was a pure money printing problem is incomplete and I think, dangerously ideologically driven. It puts the fear that “Any govt money printing wont be controlled and will lead to hyperinflation” and its pure hyperbole. Your friend Winterspeak has talked about this as well.
The truth is the US is nowhere near a Weimar situation. We are paying no war reparations (we are enriching Halliburton to rebuild the Iraq we destroyed) we have no border states capable of (or looking to) commandeering any of our supply networks and we are operating at less than 70% capacity. Where is the inflation danger?
All these labor curve analyses seem to simply amount to post hoc attempts to justify ideologies which are essentially saying, “I dont care if you want a job, your working would be too costly to the rest of us so buzz off” Thats a perfectly defensable position to take, there are scads of people who think there is NOTHING to which every American is entitled to. I work with dozens of them. That is simply a belief though that gets presented and defended as one of those “truths”. Reams of paper and millions of gigabytes have ben devoted to showing with formulas, axioms,theorems and LAWS that we just cant “afford” it. My BELIEF is that there are things every American is entitled to and a job is one of them. Of course there is a cost, just as there is a cost to not doing it. I believe the cost of not doing it is higher…. you and many others dont. I wont even begin to try to prove my belief as a “truth” but I do KNOW we have the money to do it. That IS a truth.
Greg,
That would be a reasonable analysis if your description of the problems facing Weimar Germany were accurate. Problem is, it isn’t.
France and Belgium occupied the Ruhr, alright, but only AFTER the rampant run-up of inflation started in 1921, and really took off by mid-1922 (between July 1921 and july 1922, whole sale price levels increase 8 fold, and by January, 1923, wholesale price levels increased another 25-fold, while the value of the mark relative to the dollar plumetted). The Ruhr, you will recall (or maybe not), was not occupied until January 1923 (in order to ensure that German reparation payments were paid in real goods). If you’re going to rag on Nick based on your understanding of historical event, you might want to make sure that you understand the timeline of the events you’re describing. Unless your cotention is that the French and Belgian occupation of the Ruhr in January, 2003, caused rampant German inflation starting in 1921, your analysis doesn’t hold up.
The occupation of the Ruhr certainly aggrevated German hyperinflation(because of the couscious decision of the Weimar government to pay workers not to work as a form of political protest). But it aggravated the problem not because of the contacting supply, but because the German goverment chose to print even more money to fund those wage bills and to counter-act their lost tax revenue. To describe Weimar inflation as being caused by a supply contraction (as opposed to a conscious decision of the German government to finance its domestic obligations by printing money) is simply ahistorical.
“You can not fix the problems with more money. There is certainly enough money in the system, and more money simply devalues it. The adequate money supply is just very poorly distributed. The only thing that seems to have good effect on the distribution is the minimum wage and nothing else, and the only arguments against increasing minimum wage are antiquated theories that are quite frankly wrong.”
There is no evidence of minimum wage controlling distribution. Only through increasing government control of resources, can distribution be limited. Many companies nowadays are hiring people as independent contractors instead of actual employees. In this regard, they can avoid minimum wage laws, since you can not enforce minimum wage on these people. Minimum wage doesn’t apply to everyone, nor does it dictate a majority of the market.
But Allan, remember the main article nick pointed out. Minimum wage doesn’t change distribution. If that is the case, then minimum wage does not give a net increase effect to the economy. The economy doesn’t become better off thanks to minimum wage. It shouldn’t then be able to increase employment overall. It is simply shifting employment. Shifting employment is not the same as increasing it.
So in other words Allan, my questions for you are as such:
1. How does a price increase like minimum wage increases not have the same effect as other price increases? you said earlier that an increase in price controls growth. How does minimum wage differ?
2. Can you please show evidence of minimum wage leveling out distribution? An easy way of doing is linking minimum wage increases to an increase in the middle class.
Overall Allan, please show some evidence of your claims. You talk about how economics is not linked to the real world, yet, you don’t present real world evidence. More evidence for your claims.
Sorry, that should read “the French and Belgian occupation of the Ruhr in January, 1923”, my bad.
2. Can you please show evidence of minimum wage leveling out distribution? An easy way of doing is linking minimum wage increases to an increase in the middle class.
In 1924 the US courts trashed minimum wage. Growth between 1924 and 1929 was etheric, as was proven in 1929. 1933 minimum wage was part of the NRA mandate. Very bureaucratic but the minmum wage was there. The economic collapse halted immediately and began a growth never ever seen anywhere before. 1935 the NIRA was trashed in the courts. Growth between 1935 and 1937 was etheric, as was proven in 1937. The FLSA was enacted in 1938, and since then, nothing has been able to seriously cripple the American economy in spite of very stupid policy.
As for middle class, look at the places in the world that have a decent minimum wage, and compare to places that have none.
Zimbabwe had a model economy between 1979 and 1989 when it slashed the minimum wage and limited union powers. Last year it went back to a minimum wage and is slowly putting the country back together.
1. How does a price increase like minimum wage increases not have the same effect as other price increases? you said earlier that an increase in price controls growth. How does minimum wage differ?
Prices that are too low cripples profit and impedes spending. Prices that are too high cripples profit and impedes spending. It is not that prices should get lower nor that prices should get higher, but that prices should have a tighter formation.
Minimum wage is the foundation price. What you are willing to sell your wares for is dependent on how much labor went into it. The labor rate is dependent on reference to what the newbie on minimum wage can produce. Guy one can make 2 an hour, and guy two can make 4 an hour and so guy two is worth twice the pay of what guy one is. But as I said, the cost is not the main determination in the price. The main determination of the price is the consumer demand, and guy 2 can spend twice what guy one can; but this is all related back to the foundation of guy one’s wage. Without this reference, there is none, and prices spread out even farther than before. Minimum wage should be adjusted annually according to the GDP/capita or other reference to all individual earnings, so as to keep the prices from spreading out and causing stagnation.
(2) That’s nonsense, and doesn’t even pass the whiff test. The notion that minimum wages drive economic growth is laughable. By focusing on minimum wage, you’re ignoring all the other (far more compelling) explanation for the historical phenomenon you observe (To cite two obvious examples, tchanges in monetary policy being crucial factors in both the cause of, and recovery from, the Great Depression in the US, and the practices of the Zibabwean government in shutting down it’s most productive industries, being white-owned farms and having them taken over by political cronies).
(1) Basically, you believe in the labour theory of value. That’s fine. It’s nonsense, but people can believe what they want. The notion that prices are a function of labour input is just goofy.
I can’t answer your question to Greg, because it’s incoherent. You might as well ask me to answer why the purple monkey dishwasher?
You have no idea as to where government should put its money to get the best bang for its buck? I thought you were interested in economics.
Had you asked the question where should the governemnt put its money to get the best bang for its buck, you might have gotten an answer. Instead you asked a bunch of rambling gibberish.
And, no, I have no idea where the government should put its money to get the best bang for its buck (other than the vague suspicion that the best bang for the government’s buck is not taking that buck from me in the first place). I could tell you all sort of things the government SHOULDN’T do. Goofy minimum wage legislation is one of them.
Bob
Yes there was inflation prior to the occupation but not hyperinflation. Inflation was due to high labor unions which had high COLAs and 30+% of gvt spending was war reparations (in gold). The London ultimatum broke the Marks back and the occupation of the factories was next. The point was to say ANY comparisons of the US to Germany are ABSURD. It is not just govt spending which drives hyperinflation, it is MUCH more complex than that. Any failure to admit such factors and simply point to govt spending is disingenuous and (usually) intentionally misleading.
Yes in retrospect the German govt acted irresponsibly but for people to jump up and down and scream when a govt like the US (who faces nothing like the conditions facing Weimar) wishes to spend more to try and lift the population (it is REQUIRED to defend) out of a deep recession, it is they who are being A-historical.
Allen
“Jobs come from business”
Uhhhhhh they come from govt too. And many a business is making a nice profit off the spending of govt employed people
“Jobs come from consumers” …….. and where do consumers come from?? Kind of circular logic here I think
“Where you need to pay is the consumer. Consumer demand is the source of all jobs, and so getting more money into consumer’s hands so as to increase consumer demand is the only logical way to increse employment.”
Great Allen, now tell me how to get a consumer from an unemployed person. You obviously understand that all incomes are the result of someone elses spending so we have to raise spending in order to create more incomes. Who raises their spending now and why??
” All other methods are simply bureaucratic meddling that has more negative consequences than positive.”
This is a purely IDEOLOGICAL statement. There is no fact here.
“There is no better way to increse consumer spending than by increasing the minimum wage, and if the minimum wage was high enough, (and the government bureaucracy was at present size or smaller) all economic problems would just go away.”
I’m not sure I believe with the totality of your statement but I definitely support minimum wage laws. It is absolutely clear that no wage supports would lead to a race to the bottom, especially in our current personal debt level situations. Allowing all wages to fall is classic fallacy of composition thinking.
A 200 fold price increase in the course of 18 months doesn’t constitute hyper-inflation? What world do you live in? It got worse in 1923, but it started long before that. Come on, you’re embarassing yourself here. There’s not serious scholar of Weimar inflation who blames it on labour unions or cost of living allowances. And the notion that hyperinflation was caused by reparations has been widely discredited (thought that was certainly an excuse much favoured, for obvious reasons, by the German government of the day).
In any event, no one is saying that government spending causes inflation. On it’s own, it clearly doesn’t (as a proportion of GDP the current German government probably spends considerably more than the German government of 1922). It’s government spending “financed” by printing money that causes hyperinflation, in Weimar Germany and elsewhere. Had Weimar Germany paid its bills by raising taxes (as some scholars suggest it was more than capable of doing) it wouldn’t have faced hyperinflation (any more than does the German government of 2010). It didn’t. It chose to start running the printing presses and rampant inflation, not surprisingly, was the result.
I agree that the comparison between Weimar Germany and the US isn’t appropriate (for now), and I don’t think I suggested otherwise. The US still has a relatively low debt-to-GDP ratio (though how long it will stay that way is debatable), will likely experience significant nominal GDP growth down the road (even without high inflation, as a result of having a growing population – unlike most European countries), and if push came to shove, it still has room to raise taxes to try and bridge it’s deficits (though there’s little political courage to do that). That said, if the US doesn’t do something to bring its deficits in line in the medium term, be it cuttin spending or raising taxes, at some point in the future, it may face a situation where it’s politicians are tempted to try print money to try to pay their bills. Or worse, it might be faced with a situation where that’s it only choice
Bob
Just to be clear
I never have heard YOU claim that the US was on a Weimar track, I was just reflecting on the state of much of the deficit hysteria in this era. I will take issue with a couple things in your post though. I do not mean to present myself a scholar of economic history. My knowledge of Weimar comes form two primary sources Bill Mitchell a phD economist from Australia http://bilbo.economicoutlook.net/blog/?p=3773 and Marshall Auerback. They are both “serious” scholars who might debate some of your contentions. Auerback in particular mentioned Germanys labor market in the 1915-1920 era as being very high priced and unionized which led to a demand push inflation. And to dismiss Germans claims of war reparations as simply an excuse seems to dismiss the idea that possibly the human desire for punishment of Germany may not have veered into the “harsh” range. Be that s it may though, you are correct that there were certainly other ways for Germany to respond to their crisis. We have all learned that I hope.
I’ll just add that the term “financed” by printing” is an obsolete term.That is a gold standard leftover that is completely inapplicable today. If you mean ” govt spending not accompanied by dollar for dollar debt issuance” you would be more accurate in describing operationally what goes on but wrong that the debt issuance makes the spending non inflationary. The spending happens BEFORE the debt issuance so any inflation from the spending would already be present before the debt is issued.
I really wish the perjorative term printing money were dropped from all reasonable economic discussions because it is not relevant anymore.
“Uhhhhhh they come from govt too. And many a business is making a nice profit off the spending of govt employed people”
I do not believe government creates any jobs. They never have. This is because government money comes from tax dollars. This means that government jobs created means less jobs created in the private sector. This is why public work projects creates more taxes, not more jobs. I shall refer to frederic bastiat(as written by henry hazlitt) about public work projects(simply using tax dollars to create jobs)
http://jim.com/econ/chap04p1.html
I would like to comment more about Allan’s belief in the labor theory of value. For those who do not know, this is the labor theory of value:
The labor theories of value (LTV) are economic theories of value according to which the values of commodities are related to the labor needed to produce them.
Basically Allan, this is what Greg thinks you believe. Adam Smith, David Ricardo, and even Karl Marx all believed in this idea. They were totally wrong about where value is derived.
“Great Allen, now tell me how to get a consumer from an unemployed person. You obviously understand that all incomes are the result of someone elses spending so we have to raise spending in order to create more incomes. Who raises their spending now and why??”
Now greg, this is interesting to me. You are a supporter of minimum wage, but not for the same reasons as Allan. You do not believe in Allan’s idea of the glories of minimum wage to that degree.
Let me also say this Allan, like I said before, minimum wage did not exist in 1933. The NRA did not have a national minimum wage mandate in 1933. It was planned to exist, but it never took action, nor was it enforced. Also again, unemployment was still above 10% during that time. Actually, all throughout the 30’s, unemployment averaged 14%. You say that this is propaganda, but alas, you can not find evidence to the contrary. Your argument allan is that the revisionists have made sure to hide the truth.
Since you hate reading Allan, let me conclude my points:
1. the supposed recovery of 1933 did not happen through minimum wage, since there was no minimum wage in the NRA. Only through the FLSA did minimum wage come about from a federal level. No federal minimum wage existed until 1938.
2. Do you agree with that quick explanation of the labor theory of value? Here is one explanation of it:
“The real price of every thing, what every thing really costs to the man who wants to acquire it, is the toil and trouble of acquiring it. What every thing is really worth to the man who has acquired it, and who wants to dispose of it or exchange it for something else, is the toil and trouble which it can save to himself, and which it can impose upon other people.”
3. your idea that there is always more supply than demand means nothing is valuable using the subjective theory of value. In order for something to be valuable in the economic sense(meaning having a price), it must satisfy two conditions.
1. Useful in satisfying human wants, therefore desired.
2. Not enough to satisfy demand.
In other words, those useful items that are of insufficient quantity to satisfy demand have a price, and those that exist in numbers superfluous to demand (or that satisfy no wants) are free
Xevec
“I do not believe government creates any jobs. They never have. This is because government money comes from tax dollars. This means that government jobs created means less jobs created in the private sector. This is why public work projects creates more taxes, not more jobs. I shall refer to frederic bastiat(as written by henry hazlitt) about public work projects(simply using tax dollars to create jobs)”
Thank you for at least being honest enough to recognize that this is simply your belief. This is an ideological statement not an economic fact. You are however a little misguided when you say that govt money COMES from tax dollars. Govt defines what is money, ISSUES THE MONEY,enforces the use of that money and THEN collects taxes. The govt is an issuer of the currency and the taxpayer is a seeker and user of that currency.
You have come upon a car wreck where there are no survivors or witnesses and in your efforts to reverse engineer the situation have come to the wrong conclusion. It LOOKS now like we supply the money to govt via taxation but if you just think how currency comes into being you will realize that WE dont issue it so therefore it can NEVER be the case that WE provide the money to anyone. At any given time the amount the govt spends might be equal to what they collect in taxes (budget balance), less than what they collect (budget deficit) or greater (budget surplus), but dont jump to the wrong conclusions about these dynamic situations. The govt (currency issuer) ALWAYS spends to us and then collects taxes back. It cannot be any other way. That is not “theory” that is FACT.
Greg,
Money is simply a medium of exchange. And yes, you are right about government being able to create money through the central bank. Despite what Allan says, the central bank has the power as a lender of last resort, as well as controlling the interest rate at which people take out loans. In other words, the federal reserve has the power of controlling how much money is produced via control of the interest rate.
I should’ve said two ways in which government obtains money. Through taxes AND creation of money. But alas, using the creation of money to fund things does not help at all. You can not print your way to prosperity. Real wealth comes from production of actual goods, not the currency.
You also got budget surplus and deficit mixed up. Not that big of a deal, but you are right about that. If the government collects more money than it spends, that’s a surplus. But then it boils down to the ideological statement that this should not happen. Why take money for no reason?
I don’t get what you are saying about “government always spends to us.”
And I can show that it is an economic fact that government has not created jobs. It is simply looking beyond what you can not see. This is what as known as the broken window fallacy. Let me explain it to you:
A young man decides to throw a brick through a baker’s window. The crowd looking at this broken window and thinks this may have a bright side to the situation. Now it will generate business for the glazier. Let us say it costs $1000 to replace the window. The glazier will now have $1000 to spend with other merchants, and those merchants will have $1000 to spend on other merchants, and so on and so forth. That $1000 will go on and provide employment and money all around. In other words, this kid is a public benefactor to breaking that window.
What do you think about this young man greg? Do you think he is a public benefactor?
Ohh gosh Ya got me now. The old broken window fallacy. Of course, everytime the govt just issues currency to someone to do a job (like maintain a road or a park) it is JUST LIKE breaking a window and then paying someone to fix it. Unless the money to pay him comes form an existing stock of money being saved it is simply inflation in the form of currency devaluation.
What if a hurricane comes and knocks out all the windows on the entire eastern seabord?? What if their isnt enough tax money to collect to fix everything?? I guess we all just move west where they actually have windows, get a job and then go back and pay for the reconstruction later?
This obsession to somehow defend the “value” of currency ends up screwing up our value systems I fear. Floating exchange rate currencies are soft currencies and should be allowed to “revalue” as REAL economic conditions dictate. These misguided attempts to defend currency values will always hurt people. Check out Britain and their attempts to defend the sterling in hard times and the Eurozone now, which is on a defacto gold standard because of all its currency rules. Its going to be ugly. But of course the Austrians would just say, well too bad so sad they must deserve it. While the financieers continue to collect rents at the expense of austerity measures for everyone else.
Im curious about one other thing Xevec.
You said…………”I should’ve said two ways in which government obtains money. Through taxes AND creation of money. But alas, using the creation of money to fund things does not help at all. You can not print your way to prosperity. Real wealth comes from production of actual goods, not the currency”…….. are you suggesting we would be better off if the govt NEVER created new money?
If there were no new money created and we continued to tax wouldnt all money disappear?
No, what are you talking about? Money is created naturally. It was around before any central printing press. You seem to say greg that we CAN print to prosperity.
And no, the austrians believe that money can only be created when the appropriate goods are increased. Inflation is simply a devaluation of the currency.
And I doubt the EU is on some sort of gold standard. The gold standard is good because it is a check against government spending. An infinite printing press is not a good way of paying someone.
“Ohh gosh Ya got me now. The old broken window fallacy. Of course, everytime the govt just issues currency to someone to do a job (like maintain a road or a park) it is JUST LIKE breaking a window and then paying someone to fix it. Unless the money to pay him comes form an existing stock of money being saved it is simply inflation in the form of currency devaluation. ”
And no, that’s not what the broken window fallacy is about. And your statement simply repeats my example. What I am saying is that you can not become richer by simply taking money from your left pocket, and putting it into your right pocket. Simply creating more money devalues the money. It follows the law of supply. If you increase supply, the value of each individual one decreases. Allan would even agree with this based on his idea of economies of scale. The more you produce of something, the cheaper each unit is to produce. Funny how that follows the law of supply, which Allan deems “illogical.”
“What if a hurricane comes and knocks out all the windows on the entire eastern seabord?? What if their isnt enough tax money to collect to fix everything?? I guess we all just move west where they actually have windows, get a job and then go back and pay for the reconstruction later?”
The question is, why DOES there need to be tax money? Why does the government need to get involved? We all know how good of a job the government did with Katrina. Yeah, FEMA is really a good program. And no, it wasn’t because of the republican party, that thing was crap to begin with.
“This obsession to somehow defend the “value” of currency ends up screwing up our value systems I fear. Floating exchange rate currencies are soft currencies and should be allowed to “revalue” as REAL economic conditions dictate”
Bob makes a good point that government spending on its own does not cause inflation. But by simply running the printing press to pay for goods DOES cause inflation, based upon the law of supply. You must then take your job of showing the law of supply is crap. That when supply increases, prices decrease.
“That when supply increases, prices decrease.”
Really, always?
Adam P: you lost me there. “Perfectly elastic demand curve” is the only counterexample that comes to my mind, and I think of that as just a limiting case.
How about Balassa-Samuelson? Productivity growth in tradeables can cause increased AS and inflation.
Adam P: OK, I get you now. (Assuming the nominal price of tradeables is fixed, which could happen under fixed exchange rates and if the productivity only increased in the domestic economy.)
But formally, that’s a bit like an improved technology of mining gold, which creates an increased supply of gold under the gold standard.
Bretton Woods is the motivating example Nick, differential productivity growth in the member nations. This is one of the reasons it didn’t work.
But of course, differential productivity growth across sectors of a closed economy can get you the same result. That was really my point.
Adam P. I get the Bretton Woods example. Not sure I get the closed economy case. Relative prices would change, sure. Aggregate real income would presumably increase, and that would presumably increase the demand for money. If you hold the nominal money supply constant, that would require a fall in the average nominal price level to re-equilibrate money supply and demand, holding money supply constant. Or are you holding something else constant?
You need downward sticky prices. Then the higher real income supports and expansion of credit (which presumably comes first to finance the capital investment that causes the productivity increase) so the (inside) money supply endogenously adjusts.
With respect to outside money it shows up as an increase in velocity.
Or, I suppose if the CB is holding the nominal short rate constant then the supply of outside money increase.
Adam p:
Well, when I said “when supply increases, prices decrease” I should’ve also added “when everything else is held equal.”
Greg:
“If there were no new money created and we continued to tax wouldnt all money disappear?”
No, it would not. Money can come about naturally. Initially, when the US was created, there was no printing of money. If you read the constitution carefully, it says “coining money and the value thereof.” If they wanted printing of money, the founders would’ve said so.
To me, money has to be backed by a real good, not the faith of the government. That is why the gold standard is necessary or any other precious metal. It becomes more idealogical for me to say government spending for the sake of creating jobs just means higher taxes or inflation. Creating money without the corresponding increase in goods doesn’t help.
Xevec
How would dollars come about naturally? From trees?
Dont give me the constitution crap. Somone still decided by fiat how much the coin was worth. It did not come about “naturally”.
You want to see how a gold standard can fail look at the Eurozone. They are a defacto gold standard.
“You seem to say greg that we CAN print to prosperity.”
I never said that and wouldnt say that.
“And no, the austrians believe that money can only be created when the appropriate goods are increased.”
And this is the weakness of the Austrian ideology (as you present it, I’m not sure they say this) How do you get the “appropriate goods to be increased”?. Someone will have to mine, grow or build the appropriate goods. Either a new worker will be needed for that production or a current worker will have to work more. If the money isnt “available til the work is done and the “wealth ” created, arent you getting someone to do something for nothing. Sounds pretty anti capitalist.
“Dont give me the constitution crap. Somone still decided by fiat how much the coin was worth. It did not come about “naturally”.
You want to see how a gold standard can fail look at the Eurozone. They are a defacto gold standard.”
not dollars, money. Money is a medium of exchange. And no, eurozone is not a gold standard. Their money is also tied to fiat. They use fractional reserve banking. And if they are using a gold standard, they would be doing a lot better than us. I mean, china is thinking about switching the money they have in reserves from the US to something else. The dollar as the reserve currency is being questioned.
“Someone will have to mine, grow or build the appropriate goods. Either a new worker will be needed for that production or a current worker will have to work more. If the money isnt “available til the work is done and the “wealth ” created, arent you getting someone to do something for nothing. Sounds pretty anti capitalist.”
It isn’t anti-capitalist. The Austrians believe that money has to be tied to a good. Just like how money used to be. It was an actual physical good that had a limit to it. If the only limit of how much money is created because of the printing press, it devalues the money. It then makes it harder to trade overseas, and people lose confidence in the money. Wealth is not money. Money is not tied to wealth. There is a difference.
And are you sure you are not telling me that we can print to prosperity? I mean, you say it to solve economic problems. If a hurricane hits, we need to print money to fix it. We don’t need money, we need resources. Resources are the important thing. But money needs to represent these resources. That is why money is used. It is like barter, except using a universal form of exchange.
And no, nobody determined by fiat how much the coin is worth. You can’t decree value. Value comes from the individual, not the government. The government can say all it wants that the economy is recovering or that the dollar can buy you X amount. If the people do not believe it, then it fails. That is how fiat money works. It is based on faith. It is much more stable to base it on a real good.
Government spending does not help an economy. Remember, there are two ways government raises money. By printing it, and taxes.
Taxes doesn’t help the economy overall because it is simply re-distribution. It does not create anything new. You are subtracting from one place to add to another.
Printing harms those who get the money last. It causes inflation and hurts the lowest wage earners.
Also, doing something for nothing isn’t necessarily anti-capitalist. I mean, what do you mean “for nothing?” Does a person volunteering their time for the red cross or a charity organization doing something for nothing? Capitalism isn’t about making necessarily money. It is to me about doing what you want to do without interfering with the rights of others.
But ask yourself this Greg. How did money come about before fiat? What is the history of money? Money didn’t always have a legal decree to them. There are countries that do not have a central bank. Hell, somalia doesn’t even have a central government. But their status is much better than it was with a central government. Granted, it is still a pile of crap, but saying they would be better under a central government is crazy.
Xevec@4:07: “Well, when I said “when supply increases, prices decrease” I should’ve also added “when everything else is held equal.” ”
The real point I was getting at was that if everything else was equal then supply wouldn’t increase.
The example I gave to Nick was just a way to say something he would understand without having to type out a full explanation.
@Adam
Heh, I also kinda messed up the law of supply anyways. It is suppose to say “as prices are increasing, supply increases. If prices decrease, so do supply.”
I was spouting the wrong idea about supply this whole time.
And to Allan, this makes perfect sense.
As prices start to rise, companies tend to try and produce more product to take advantage of the higher price.
Let me speak of quantity demanded too Allan:
When an economist speaks of quantity demanded, they are speaking of how much people will buy at a given price.
Quantity supplied is how much of a product will be produced at a given price.
Therefore, the relationship between supply and demand is reflected by price.
It is also good to note the difference between a shift and a movement. Shifts happen when demand or supply change when the price stays the same. A movement is where price changes, and the demand and supply curve do not. So when you speak Allan of movement along the curves, you are speaking of price changes(when speaking of supply and demand, or the y axis).
Since Allan does not like to read, let me sum this up:
1. law of supply: relationship between price and production is a positive relationship
2. law of demand has an inverse relationship between quantity demanded and price
3. Shift of the supply or demand curve implies quantity changes without a change in price
4. Movement along the supply or demand curve implies only a price change.
Nick, or anybody else who studies economics, please correct me if I was wrong with any of my understanding of supply and demand with the post above.
Xevec
The Eurozone is acting AS IF they are on a gold standard. If you understand the rules of the Maastricht Treaty and the manner in which gold standards dictate the way money can be ‘created” you would see that they are operationally almost identical. Now they are becoming an example of how such rigid money rules can FAIL.
” I mean, china is thinking about switching the money they have in reserves from the US to something else. The dollar as the reserve currency is being question” ………………. China is running a “dollar standard” by pegging their currency to ours. It is to their advantage in the import export sector to do so. That is why many here want them to stop so their currency can “float” to a higher RELATIVE value to ours, making our products cheaper to them. You, who is probably “fretting” the national debt levels, should be applauding loudly that China “might” want no more US reserves( I’ll believe it when I see it). If they liquidate our national debt will fall by almost 20% YIPPPEEEE!!
“Wealth is not money. Money is not tied to wealth. There is a difference”
Send me your money because I think money is wealth. Money has value, at this point in time.(which is the only point in time I’m sure of anything)
If we sent a trillion dollars to the cavemen(someone used this example to me recently) of course it would have no value to them, neither would 4 tons of gold or a system of paved roads, but all those things have value to us, because we know how to use them. I can prove that dollars have value because there are people who go to great lengths to make FAKE ones. If the real one is worth nothing why would anyone make a fake?? I can also prove that the dollar is worth something because it COSTS something. You cant just find them anywhere. You must go invest something, time, effort or talent to acquire one and bilions of people do every second of every day. Do we all just engage in worthless activities ?
“And are you sure you are not telling me that we can print to prosperity? I mean, you say it to solve economic problems. If a hurricane hits, we need to print money to fix it. We don’t need money, we need resources. Resources are the important thing. But money needs to represent these resources. That is why money is used. It is like barter, except using a universal form of exchange.”
My hurricane example was to point out the fallacy of your window example. Clearly, no one would advocate needlessly breaking windows and paying window makers to fix them as sound resource management (but the window makers would have a nice income NO DOUBT) but its NOT an example of why someone who is getting a check form the govt to do ANYTHING is just like that window maker. That is the implication of your story. We cant just give him money without taking it from someone else. The Hurricane example is to show that when something is more expensive than what we could reasonably expect to get from taxing people WE CAN STILL DO IT!! There are no MONEY limits to what we can do. ONLY resource, effort and will limits. You think the hurricane example proves your position but it shreds it……. miserably.
“And no, nobody determined by fiat how much the coin is worth. You can’t decree value. Value comes from the individual, not the government”
This is where you have left the reservation. All coins that functioned as money (not as some reward like a “gold medal” or something) had a value ASSIGNED and determined. In many instnaces they were later “cried down” (the earliest form of devaluation) but the value was assigned and universal. Otherwise it just like any other commodity and NOT money. There were official coin makers that put seals and stamps so they couldnt be counterfeited. You really need to read and understand your history of money. Sounds like you just read the 3 page article by Mish Shedlock .
“Also, doing something for nothing isn’t necessarily anti-capitalist. I mean, what do you mean “for nothing?” Does a person volunteering their time for the red cross or a charity organization doing something for nothing? Capitalism isn’t about making necessarily money. It is to me about doing what you want to do without interfering with the rights of others’
Doing something for nothing voluntarily is fine, when you have no choice its SLAVERY! You described a situation where “The only way to ADD money to an economy was to actually acquire something of worth FIRST to tie (the new money) to.? Acquiring that “thing” requires effort no (or else its just like PRINTING valueless money) . You are saying acquire the thing first and then we will finally “have” the money to pay and thus you are asking someone to work for nothing ( but you’ll surely pay him TUEEESSDAY). I say pay him first and he will be happy to produce something of value if you pay him fairly. We agree that work should create value (for someone).
“There are countries that do not have a central bank. Hell, somalia doesn’t even have a central government. But their status is much better than it was with a central government. Granted, it is still a pile of crap, but saying they would be better under a central government is crazy.”
WTF are you raving about now??!! Central banks? (been listening to Ron Paul a little too much there buddy) Somalia…. yeah theres an example for us all to aspire to. Since Somalia has no central govt they are better ???? Naw They need an EFFECTIVE central government. One that actually protects the needs of all the citizens not just provides cover for militant thugs. You IMAGINE this libertarian paradise where no one devalues your currency, steals it form you in taxes and simply allows the miracles of human ingenuity and compound interest to provide all a human could ever imagine. All the while making sure you can seek redress against your neighbor in a court and have legal contracts that are enforcable without you having employ your own personal militia ( I dont know maybe you like the idea of your own personal militia but I digress). Yes you want a state that simply suits YOUR needs and allows everyone else to seek theirs too……………… and of course everyone AGREES on what those needs look like.
Living in a civilization is messy Xevec. You must understand that. You seem to have read too much Ayn Rand and have either stayed stunted like ALLAN GREENSPAN ( a 70+ yr old man who has notions of life usually associated with petulant teenagers) or are in fact under 25 and have no kids or friends unlike you. Civilzed places with lots of people living in them have GOVERNMENTS. Always have always will. Will they look different in a few decades god I hope so but be careful what you wish for, they could look like Sarah Palins theocracy. And in spite of your incomplete history of money one of the things a govt has ALWAYS done is determine what functions as LEGAL TENDER (aka ….money) in their jurisdiction. Surely you can understand why this is so.
Xevec
law of supply: relationship between price and production is a positive relationship
law of demand has an inverse relationship between quantity demanded and price
Shift of the supply or demand curve implies quantity changes without a change in price
4. Movement along the supply or demand curve implies only a price change.
Are these real laws?Like the laws of thermodynamics ? Or more strong suggestions?
“My hurricane example was to point out the fallacy of your window example. Clearly, no one would advocate needlessly breaking windows and paying window makers to fix them as sound resource management (but the window makers would have a nice income NO DOUBT) but its NOT an example of why someone who is getting a check form the govt to do ANYTHING is just like that window maker. That is the implication of your story. We cant just give him money without taking it from someone else. The Hurricane example is to show that when something is more expensive than what we could reasonably expect to get from taxing people WE CAN STILL DO IT!! There are no MONEY limits to what we can do. ONLY resource, effort and will limits. You think the hurricane example proves your position but it shreds it……. miserably. ”
Are you sure? I mean, some economists and commentators felt that the 9/11 incident would bring about jobs and actually be somewhat beneficial to the economy. I mean, we believe that war and destruction brings about prosperity. And I believe you do not understand what is meant by the broken window fallacy. The broken window fallacy means to see what is seen, and what is not seen. The money sent from the government in order to help the hurricane victims means less money to use towards something else. I do not believe politicians can be as effective as say business owners who are out in the field. It is like telling me a soldier knows less about the horrors of war than say, a college professor.
“Are these real laws?Like the laws of thermodynamics ? Or more strong suggestions?”
Note that everything I said there assumes other factors remain equal. yes, there could be times where an increase in price also creates an increase in quantity demand. An example I can think of is how mercedes-benz responded to lexus when they came out with their cars. A perception of people is that the higher the price, the higher the quality. Lexus said that there cars were cheaper, yet higher quality than mercedes. Mercedes responded by increasing their prices. This in turn increased sales for mercedes because people’s perception of the car changed.
“WTF are you raving about now??!! Central banks? (been listening to Ron Paul a little too much there buddy) Somalia…. yeah theres an example for us all to aspire to. Since Somalia has no central govt they are better ???? Naw They need an EFFECTIVE central government. One that actually protects the needs of all the citizens not just provides cover for militant thugs. You IMAGINE this libertarian paradise where no one devalues your currency, steals it form you in taxes and simply allows the miracles of human ingenuity and compound interest to provide all a human could ever imagine. All the while making sure you can seek redress against your neighbor in a court and have legal contracts that are enforcable without you having employ your own personal militia ( I dont know maybe you like the idea of your own personal militia but I digress). Yes you want a state that simply suits YOUR needs and allows everyone else to seek theirs too……………… and of course everyone AGREES on what those needs look like.”
you seriously believe that those people WANT a central government? Every attempt of a central government resulted in civil war and more deaths than without the government.
If anything, I believe in a de-centralized government. I can compromise with you about having a government system in place. But more a de-centralized system. That is what the united states originally had. Think about it. The US constitution gave the central government little power while the states had a lot of power. You can control your own local government a lot better and prevent corruption easier than say, corruption from the US congress.
The government seems to be a necessary evil that will be impossible to get rid of. The only way that I can see possible is a small central government that has little to no power. Think about it. Driving laws, marriage laws, voting laws, are not done by the US government. Even drinking laws technically are controlled by the state. Even employment laws are different for each state. This is how a government should work. The central government(meaning, the US government) should have very little power in controlling anything. If a state deems a federal law wrong, then the state has the right to not follow it. This is the only kind of government I can trust.
In terms of monetary creation, there should be some form of gold standard simply because it curbs pork barrel spending. Rigid money rules do not “fail.” The gold standard wasn’t the problem in the great depression. It stopped government corruption, and even inflation. Oh yeah, it is a great idea to devalue currency. Devaluing currency harms the poor and helps the rich.