Here’s a letter to a faithful Cafe Hayek patron:
Mr. Arthur Petersen
Dear Mr. Petersen:
Thanks for your very kind e-mail about your friend who admires Bernie Sanders’s economics.
Believing that capitalism unfairly exploits workers, your friend denies your claim that “people make wages based on their value to their employer.” According to your friend, your claim (as he describes it) “is a terrible fallacy. People make what the market allows them to, not based on the value they bring to the market but how many other people could bring the same value.”
Your friend, while expressing an important detail, is mistaken.
The important detail expressed by your friend is that Jones’s wage is indeed determined by how many other workers can perform the job that Jones performs. But your friend is mistaken to conclude from this fact that Jones’s wage is not based on her value to her employer. Wages are determined by the value that the additional worker adds to her employer’s bottom line. It’s true that if many workers can perform the same task at which Jones works, then the addition that Jones contributes to her employer’s bottom line is small (because also lots of other workers are performing that same task) and so Jones’s wage will be low. In contrast, if very few workers can perform the task at which Jones works, then the addition that Jones contributes to her employer’s bottom line is large and, so, Jones’s wage will be high. In either case, Jones’s wage reflects – as you correctly told your friend – the worker’s value to her employer. In economists’ language, wages are determined by the value of the worker’s marginal product.
Now your friend might assert in response that most employers consistently pay workers less than the value of workers’ marginal products. If he replies in this way, challenge your friend to give evidence of his belief in his assertion: tell him that he can simultaneously (1) prove that he means what he says, (2) make a personal fortune, and (3) directly help many workers, all simply by himself opening a business and hiring away at higher wages lots of underpaid workers. If your friend’s response is to help solve the alleged problem of unfair worker exploitation only by voting for Bernie Sanders rather than by opening his own business, then he reveals that his understanding of economic reality is unreliable or that he, deep down, doesn’t really believe what he asserts. Either way, if your friend rejects your suggestion you’ve no need to take his argument seriously.
Don
