The intuitive idea that appeals to socialists is that Capitalism wastes resources because it creates useless products for the comfort and satisfaction of petty wants for those who have money while there are people in the streets who do not even get their basic needs satisfied. So therefore, the government should control the means of production so that resources will be allocated to fulfill basic needs of everybody before going into wants.
Now I am somewhat already familiar with the calculation problem so I don't need to be told socialism doesn't work. But how do you counter the particular socialist perspective the capitalism satisfies petty wants instead of providing for everybodies needs first?
DD5,
Therefore, examining their plans according to their own end goals is a problem of economics.
The end goal of the hypothetical socialist, as stated by the op, is to ensure that each person has access to resources to fill their "basic needs" (though the OP neglected to mention what those needs were). You actually did not do that. You responded to the hypothetical socialists argument about market waste with an odd line of reasoning trying to show the argument was self-refuting. That doesn't sound like you were examining their plans according to their end goals, it sounds like you were arguing about the definition of waste (and even though you didn't use the word subjective, your argument rests on the market producing the goods that people deem most 'urgent' in "their own eyes", do we really want to play semantics here?).
Now, you are right that if one rejects using value as a criteria, they are also rejecting utility as a criteria. But so what? Not everyone believes that primarily goal of public policy is to maximize value/utility. indeed, I am surprised I am getting so much resistance on this notion. I always thought most Austrians were staunch anti-utilitarians.
In any case, I think I made my explaination pretty clear in my previous post and I am not sure how to re-explain it without copying and pasting. If you still can't see why the socialist's argument is about how we evaluate market outcomes in general and not how we use economic principals to evaluate parts of his plans, then I can only suggest you re-read the original post and then re-read my previous post.
If that still doesn't help, we'll have to agree to disagree.
Ambition is a dream with a V8 engine - Elvis Presley
Cite this.
http://mises.org/etexts/HayNonseq.pdf
Very short article, that defeats the line of thought that some wants are "artificial".
Esuric: Incorrect. The answer is extremely obvious once one thinks about it. The movie star satiates the desires of a greater number/portion of society--thus his remunerations are higher. The highschool teacher, or the doctor, at the margin, satiates the demand of a lower portion of society. This is why the steel producer, who has little to no education, is that much wealthier than, say, Noam Chomsky (even though Dr. Chomsky is a very educated man). People are more interested in steel than they are in Chomsky's ideas (who can blame them?). But this situation arises, that is, the demand for luxury goods, only when absolutely essential items, like food and water, are already produced at extremely plentiful levels. This is why you don't have movie stars in Somalia, for example.
Incorrect. The answer is extremely obvious once one thinks about it. The movie star satiates the desires of a greater number/portion of society--thus his remunerations are higher. The highschool teacher, or the doctor, at the margin, satiates the demand of a lower portion of society. This is why the steel producer, who has little to no education, is that much wealthier than, say, Noam Chomsky (even though Dr. Chomsky is a very educated man). People are more interested in steel than they are in Chomsky's ideas (who can blame them?). But this situation arises, that is, the demand for luxury goods, only when absolutely essential items, like food and water, are already produced at extremely plentiful levels. This is why you don't have movie stars in Somalia, for example.
Esuric,
I can see why you would think this was respoding to my post if you only read a fraction of the second sentence in the paragraph you quoted. Of course, if you read the whole paragraph (or better yet the whole post), you would see that I was not talking about "why" movie stars make more than teachers, I was talking about arguments people use to DEFEND the fact that movie stars make more than teachers on moral/philosophical grounds.
I am more than familiar with mechanics underlying the marginal revenue productivity of wages. I am glad to see you mostly understand it as well. I would like to think my corrections of your post on this subject last year have something to do with your grasp of the subject. Yet I wouldn't want to flatter myself too much to suggest that was the case.
http://mises.org/Community/forums/t/12468.aspx
Student:Kenneth, in answer to your question, the only real way to answer it is with a detailed philosophical argument for why you think market outcomes are ethically preferable to whatever outcomes they have in mind. This usually pops up when people defend why movie stars make millions each year and even the best Medical Doctors or Teachers only make a few hundred thousand dollars. But there is really no economic answer for it. So I think you might want to move the thread to the Political Theory or Philosophy sections.
Student:Of course, if you read the whole paragraph (or better yet the whole post), you would see that I was not talking about "why" movie stars make more than teachers, I was talking about arguments people use to DEFEND the fact that movie stars make more than teachers on moral/philosophical grounds.
That's great, but you said economics can't answer this question, which is wrong. The very job of economics is to answer such questions, or solve such "riddles." (Like the so-called water-diamond paradox).
Student: I would like to think my corrections of your post on this subject last year have something to do with your grasp of the subject. Yet I wouldn't want to flatter myself too much to suggest that was the case.
You remember a conversation you had with me a year ago?! I'm flattered . Yes, I've come a long way since then.
"If we wish to preserve a free society, it is essential that we recognize that the desirability of a particular object is not sufficient justification for the use of coercion."
If you read that sentence along with all the other ones in the post it should be apparent that I was saying there is no economic answer as to why market outcomes are ethically preferable to whatever outcomes the hypothetical socialist had in mind.
Or, similarly, there is no economic argument for defending why movie stars make more than teacher on *ethical grounds*.
I'm sorry if this wasn't clear.
PS* It wasn't too hard to remember. It was only December. ;)
Student:PS* It wasn't too hard to remember. It was only December. ;)
Looking at that post, it seems that you only disagreed with points three and four, but I don't really understand your objections/positions.
You said,
Are you saying that producers actually try to measure the marginal productivity of each laborer before they hire them/pay out salaries? My position, just to be clear, is that capital tries to absorb the entire labor supply, and engage in production. The most productive capital and the most productive employment of capital gets first dibs, and so on and so forth until the entire labor supply is absorbed. The market, through competition, pushes wage rates towards the marginal productivity of labor--but we should never expect it to actually reach or remain at this position. So an increase in the supply of real capital (brought about by savings) has to absorb a relatively fixed supply of labor, which pushes up real wage rates, and increases productivity (basically the same as saying that MPK falls, Q rises, MPL rises). As opposed to entrepreneurs using production functions trying to figure out how much labor to employ, and what to pay them.
Maybe I'm not understanding what you're trying to say.
You also said,
But trade unions elevate their wage rates above their marginal product, necessarily diminishing demand, and lowering the real wages rates of "out-sider's." Are you saying that wage rigidity doesn't affect the demand for labor? If so, you're going to have to explain why elevating the minimum wage rate generally leads to higher unemployment amongst teenagers and minorities. It may not mean anything for your linear homogeneous production functions (though it may), but we're talking about the real world.
Esuric: Are you saying that producers actually try to measure the marginal productivity of each laborer before they hire them/pay out salaries? My position, just to be clear, is that capital tries to absorb the entire labor supply, and engage in production. The most productive capital and the most productive employment of capital gets first dibs, and so on and so forth until the entire labor supply is absorbed. The market, through competition, pushes wage rates towards the marginal productivity of labor--but we should never expect it to actually reach or remain at this position. So an increase in the supply of real capital (brought about by savings) has to absorb a relatively fixed supply of labor, which pushes up real wage rates, and increases productivity (basically the same as saying that MPK falls, Q rises, MPL rises). As opposed to entrepreneurs using production functions trying to figure out how much labor to employ, and what to pay them.
You have me a bit confused. The marginal revenue product of labor (or the related concept of marginal productivity of labor) is not something that wages are pushed toward, it is the additional revenue the firm generates by the employment of one additional unit of labor (see wikipedia for mathematical derivation: http://en.wikipedia.org/wiki/Marginal_revenue_productivity_theory_of_wages). Essentially, it is just the function that describes a firm's demand for labor.
And you're right, I do believe that employers attempt to measure the marginal revenue product of labor they hire. This doesn't seem counter intuitive to me. For example, at my work, when we hire new people I am quite sure we try to take into some rough account the amount of output we can generate each with one extra employee and compare that to a competitive salary for that worker. It isn't an exact measurement, but the though process is exactly the same as you learn in Econ 101.
Here is a graph to help make the concept of a small firm facing a large labor market clearer. If the MRP > wage, then the firm will hire an additional workers because the value of the output they generate will exceed the cost of employing that additional worker. The firm will hire until MRP = wage. If they hired additional workers after that, then MRP < wage and they would be paying more in wages than they were receiving in output from that additional worker.
But trade unions elevate their wage rates above their marginal product, necessarily diminishing demand, and lowering the real wages rates of "out-sider's." Are you saying that wage rigidity doesn't affect the demand for labor? If so, you're going to have to explain why every time the minimum wage rises, the employment rate of teenagers and minorities falls. It may not mean anything for your linear homogeneous production functions (though it may), but we're talking about the real world.
Well, trade unions are about restricting the supply of labor. It doesn't directly impact the marginal productivity of labor (the firm's demand for labor). Instead, you will see the supply curve for labor moving *along* the demand curve. In the graphic above, imagine the wage line increasing, the quantity of labor demanded will decrease. But the actual demand curve (the marginal revenue product of labor) stays the same. The same analysis is exactly so for a minmium wage increase.
For example, lets say in equilibrium the marginal revenue product of the 10th laborer hired by McDonalds is $5 per hour and the wage determined by a competitive labor market is also $5 per hour. However, the government decides to set a new minimum wage at $10 per hour. Well, then McDonalds will cut back employment until the marginal revenue product of the last worker is $10. If the demand for labor is unit elastic, I believe that the quantity of labor demanded will fall from 10 workers to 5 (typing quickly so feel free to double check).
Now, I know that may sound confusing "hey you just said the marginal productivity of labor didn't change but in your example the marginal product of the last worker changed because the wage increased" but don't be tricked by the awkward terminology. The marginal product of the last worker has changed, but the marginal productivity of labor (the demand curve) has not. Similar issues come into play when you're dissecting phrases like "change in demand" and "change in quantity demanded".
Hope this help clarifies my objections.
Student:And you're right, I do believe that employers attempt to measure the marginal revenue product of labor they hire. This doesn't seem counter intuitive to me. For example, at my work, when we hire new people I am quite sure we try to take into some rough account the amount of output we can generate each with one extra employee and compare that to a competitive salary for that worker. It isn't an exact measurement, but the though process is exactly the same as you learn in Econ 101.
Of course the producer engages in some sort of economic calculation, but he must compete for that labor in the labor market, against all other entrepreneurs. The producers want to pay the lowest wage possible.
Student:You have me a bit confused. The marginal revenue product of labor (or the related concept of marginal productivity of labor) is not something that wages are pushed toward, it is the additional revenue the firm generates by the employment of one additional unit of labor (see wikipedia for mathematical derivation: http://en.wikipedia.org/wiki/Marginal_revenue_productivity_theory_of_wages). Essentially, it is just the function that describes a firm's demand for labor.
Traditional and basic economic theory tells us that the marginal product of labor equals real wages. The market, through competition, pushes real wages towards this position. It is a price like every price (and labor is a commodity), and markets (again, through competition) establish prices.And like all prices, we shouldn't expect it to be at its equilibrium level in a dynamic market economy.
Student:Well, trade unions are about restricting the supply of labor. It doesn't directly impact the marginal productivity of labor (the firm's demand for labor). Instead, you will see the supply curve for labor moving *along* the demand curve. In the graphic above, imagine the wage line increasing, the quantity of labor demanded will decrease. But the actual demand curve (the marginal revenue product of labor) stays the same.
Of course. But when I said labor demand, I meant it in the non-technical way. Essentially, all I was saying is that as the government (or trade unions) arbitrarily elevates wage rates by decree, above the equilibrium rate (marginal product), we should expect to see higher unemployment. Or, in other words, businessmen hire less labor.
Student:For example, lets say in equilibrium the marginal revenue product of the 10th laborer hired by McDonalds is $5 per hour and the wage determined by a competitive labor market is also $5 per hour. However, the government decides to set a new minimum wage at $10 per hour. Well, then McDonalds will cut back employment until the marginal revenue product of the last worker is $10. If the demand for labor is unit elastic, I believe that the quantity of labor demanded will fall from 10 workers to 5 (typing quickly so feel free to double check).
Right.
Student:Now, I know that may sound confusing "hey you just said the marginal productivity of labor didn't change but in your example the marginal product of the last worker changed because the wage increased" but don't be tricked by the awkward terminology.
Don't worry.
Yes, I do believe it is the norm from personal experience. But I do not have studies or anything that says this how everyone makes hiring decisions. I don't think you could. But if this were not how employers made hiring decisions, I simply couldn't imagine how else they would do it. Do you have something besides marginal analysis in mind?
Traditional and basic economic theory tells us that the marginal product of labor equals real wages. The market, through competition, pushes real wages towards this position. It is a price like every price (and labor is a commodity), and markets (again, through competition) establish prices.
Actually, the marginal product of labor would equal real wage regardless of competition. Consider my minimum wage example. In market equilibrium the wage was $5 per hour. The government came along and said "well now its going to be $10 per hour!" and the firm cut back employment until the marginal product of the last laborer was equal to $10 per hour.
It isn't competition in the labor market that makes this happen, it is profit maximization on the part of the firm.
Student:Yes, I do believe it is the norm from personal experience. But I do not have studies or anything that says this how everyone makes hiring decisions. I don't think you could. But if this were not how employers made hiring decisions, I simply couldn't imagine how else they would do it. Do you have something besides marginal analysis in mind?
Producers want to pay the lowest wages possible. The same way that you want to pay the lowest possible price for any given good/service. Competition, and therefore the price mechanism, assures that scarce resources go to the most warranted employments. The producer would love to pay his worker $1 an hour, but at that depressed price he cannot secure the level of labor he requires for profitable production. His capital would remain barren, and he would take losses. The axiom (better more profit than less profit) moves wages rates towards their equilibrium position--that is, the entrepreneur will bid up the price of labor up until the point where labor is no longer profitable (this could be the equilibrium position determined by the market, or not--if not, then this producer must free up his capital for other more warranted employments). So I don't dismiss marginalist logic, just mainstream marginalist methods/analysis.
Student:Actually, the marginal product of labor would equal real wage regardless of competition. Consider my minimum wage example. In market equilibrium the wage was $5 per hour. The government came along and said "well now its going to be $10 per hour!" and the firm cut back employment until the marginal product of the last laborer was equal to $10 per hour.
I understand your position. You're saying that if the government doubles the minimum wage (or whatever), the firm will lay off workers until the last workers marginal product equals the fiat wage rate (determined by the government). Now, it is true that even without competition, the wage rate should never exceed the marginal product of labor, and I agree with this (obviously). But without competition (one giant government protected cartel, for example) we should not expect real wages to equal the marginal product of labor. In essence, we should expect exploitation.
Student:It isn't competition in the labor market that makes this happen, it is profit maximization on the part of the firm.
It is through the process of arbitrage that prices adjust. It is this same process that adjusts wages towards their DMVP (discounted marginal value productivit). Arbitrage implies competition. By competition, I mean as defined by free entry or no restriction on entry. That is all.
Of course it is profit seeking that induces employers to bid up wages as part of this competitive process.
Esuric: Producers want to pay the lowest wages possible. The same way that you want to pay the lowest possible price for any given good/service. Competition, and therefore the price mechanism, assures that scarce resources go to the most warranted employments. The producer would love to pay his worker $1 an hour, but at that depressed price he cannot secure the level of labor he requires for profitable production. His capital would remain barren, and he would take losses. The axiom (better more profit than less profit) moves wages rates towards their equilibrium position--that is, the entrepreneur will bid up the price of labor up until the point where labor is no longer profitable (this could be the equilibrium position determined by the market, or not--if not, then this producer must free up his capital for other more warranted employments). So I don't dismiss marginalist logic, just mainstream marginalist methods/analysis.
I think this is addressing a totally different question. I agree that the wage that actually prevails in the market will depend on both the supply and demand of labor and the degree of competition in the marketplace. However, that isn't what marginal productivity theory is only about one piece of the labor market--specifically the firm's demand for labor.
A firm will hire labor until the marginal revenue product *equals* the real wage regardless of competition in the labor market place. If they did not do this, they would not be a profit maximizing firm.
Student:A firm will hire labor until the marginal revenue product *equals* the real wage regardless of competition in the labor market place. If they did not do this, they would not be a profit maximizing firm.
Why would a profit maximizing agent pay a wage rate equal to the marginal product if he can secure the same level of labor at a lower price (wage)? If he can do this, then he certainly would. But the point is that he can't (because of competition).
ohhh now I see what you're saying. You're talking about how wages are actually set in something like a case of monopsony.
http://en.wikipedia.org/wiki/Monopsony
You are right that if we had a market where an employer had some degree of market power then wages could fall below MRP.
However, this is exactly why we are talking past one another and why talking about competition is making this discussion more confusing than it has to be.
You are talking about the labor market as a whole. However, I am just talking about the demand side of this market (this was the subject of the original thread and of marginal productivity theory of wages). If a firm is simply given a wage for labor that they cannot influence, they will employee labor until the MRP equals that wage (this could be because the market a small firm is facing a wage set by a competitive labor market or it could be because as in my example the wage is set by government fiat). In other words, I am talking exclusively about how you can read the labor demand function.
If we are talking about how those wages are actually set as a result of the interaction between supply and demand, then the degree of competition will make a difference and firms could potentially pay less than the MRP. I acknowledged this in my original post in the other thread by saying the same marginal analysis could be used to consider competitive or non-competitive markets. But my point there (and here) has been to focus on the demand side of the labor market and not the labor market as a whole because that is where marginal productivity theory is most relevant.
Student:You are talking about the labor market as a whole. However, I am just talking about the demand side of this market (this was the subject of the original thread and of marginal productivity theory of wages). If a firm is simply given a wage for labor that they cannot influence, they will employee labor until the MRP equals that wage (this could be because the market a small firm is facing a wage set by a competitive labor market or it could be because as in my example the wage is set by government fiat). In other words, I am talking exclusively about how you can read the labor demand function.
Okay, so we're in agreement. Basically I thought you were saying that wages must necessarily equal their marginal product under all conditions. This was an entertaining digression.