Economics Questions

Re: Central Planning and efficiency

DD5 — Fri, 19 Feb 2010 18:33:35 GMT

Kenneth:
they want everybody to have health care and education no matter how low quality and inefficient it is.

Then suggest that the government prints a healthcare card for everybody and that's it. No medical services will actually be provided due to low quality and inefficiency.

I'm dead serious by the way.

Only when they choose to put efficiency and quality back on the table, can you continue to maybe have a rational conversation with them.

Re: Central Planning and efficiency

filc — Fri, 19 Feb 2010 18:24:07 GMT

I've always wondered what people's criteria were for calling things a need...

Re: Central Planning and efficiency

Kenneth — Fri, 19 Feb 2010 09:37:30 GMT

Wow. I never expected an exciting debate to happen. Thank you all for your intelligent answers. Now to be more specific about what socialists mean by needs. These are for example health care and education. South East Asian countries with fanatic leftist politicians and intellectuals want to socialize health care, they want everybody to have health care and education no matter how low quality and inefficient it is. But I'm still divided whether to move to ethics or stay with economics. I'm guessing the shorter route is to move to ethics but it's more riskier since they might not be interested in libertarian ethics and think that libertarian economics is inefficient.

If I stay with economics I'll have to show why there is a mismatch between the production of 'petty wants' and production of needs like health care and education. In which case I'll have to point out to government regulations and taxes as the cause of expensive health care and education in the market.

I'm leaning towards economic arguments for now.

Re: Central Planning and efficiency

filc — Thu, 18 Feb 2010 19:06:51 GMT

Ask them the difference between a need and a want, and who is granted the authority to make that decision on behalf of others.

Re: Central Planning and efficiency

Caley McKibbin — Thu, 18 Feb 2010 15:46:10 GMT

Kenneth:

But how do you counter the particular socialist perspective the capitalism satisfies petty wants instead of providing for everybodies needs first?

You don't counter it. You change it. Someone who is interested in helping the people in the streets does not just up and fabricate this superfluous edifice of junk about petty wants and useless products. That junk comes from a contempt of the post simple life. If "basic needs" fell from the sky, the petty wants would still be petty and useless products would still be useless and professors would still write about the evils of consumerism. Minus the gobbeldeegook, the issue is stated as, "Some people are rich, some people are poor." Now, it is apparently about equality.

Re: Central Planning and efficiency

hayekianxyz — Thu, 18 Feb 2010 14:52:28 GMT

The problem being discussed is, as far as I can tell, the issue of merit goods (merit bads). Goods that are, by some value judgement underprovided (overprovided) by the market, but do not necessarily fit into the category of public goods.

Brennan and Lomasky have an interesting argument in favour of government provision, although they admit that it is somewhat problematic and inconclusive, I forget the exact nuances so if you want to read it you'll have to pick up a copy of their book. Essentially the argument is that there are different types of wants, some which might be described as more moral others which may be described as more base. Depending on the institutional framework we will choose to indulge different types of these wants. Invoking the concept of akrasia they point out that market actors aren't very good at satisfying those wants that they recognise to be morally good due to the high initial cost of fulfilling them. I suppose one example might be smoking, another could be giving to charity. Many people feel that they should quit smoking for the good of themselves or those around them, but when the time comes to it they still end up lighting up the cigarette because the withdrawal symptoms are too painful.

Granted, because of the lack of immediate profit and loss signals and the winner takes all nature of the political market, politics is a poor means of providing most goods. However, the political arena is far more capable of providing merit wants since the cost of voting for a smoking ban is essentially zero (because of the low probability of ones vote being decisive) and as such akrasia is not as problematic. In fact, people gain positive utility from expressing certain kinds of preferences - usually those preferences they believe to be moral..

Re: Central Planning and efficiency

filc — Thu, 18 Feb 2010 06:07:30 GMT

Kenneth:
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.

At the very least it cannot be stated that the resources are wasted. Had they been wasted then they wouldn't even be consumed by petty wants. Wasted resources are idle unused resources, or resources that were used to build things no one desired. If people are using the resources then they cannot be said to be wasted.

It's really a side point but calling it being wastful is a mischaracterization of their argument, though they don't realize it. They just have to word it differently to flower up what they are really saying. What they want is "from each according to his ability, to each according to his need"

When you expose their argument for what it really it is, it becomes a bit more trivial.

Also who decides what wants and needs are and how the taxonomy of those two items is done? An elite dictatorial body of men? Or are individuals allowed to make those decisions based on their situation and preference?

Ultimately who decides what is a good resources and a bad, is it the individual man working in concert on the market? Or a omniscient being up in a castle somewhere making these decisions for us?

Re: Central Planning and efficiency

Student — Thu, 18 Feb 2010 05:58:06 GMT

All's well that ends well. :)

Re: Central Planning and efficiency

Esuric — Thu, 18 Feb 2010 05:54:54 GMT

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.

Re: Central Planning and efficiency

Student — Thu, 18 Feb 2010 05:47:30 GMT

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.

Re: Central Planning and efficiency

Esuric — Thu, 18 Feb 2010 05:18:56 GMT

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).

Re: Central Planning and efficiency

Student — Thu, 18 Feb 2010 05:16:37 GMT

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.

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.

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.

Re: Central Planning and efficiency

DD5 — Thu, 18 Feb 2010 05:06:02 GMT

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.

Re: Central Planning and efficiency

Esuric — Thu, 18 Feb 2010 05:05:33 GMT

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.

Re: Central Planning and efficiency

Student — Thu, 18 Feb 2010 04:41:19 GMT

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.