Quotation of the Day…

by Don Boudreaux on July 9, 2017

in Competition, Cooperation, Economics, Myths and Fallacies, Seen and Unseen, Work

… is from page 26 of the late Paul Heyne‘s 1978 article “Economics and Ethics: The Problem of Dialogue” as it is reprinted in the 2008 collection of Heyne’s writings, “Are Economists Basically Immoral?” and Other Essays on Economics, Ethics, and Religion (Geoffrey Brennan and A.M.C. Waterman, eds.) (original emphasis):

But voluntary exchange is the focus of attention [of good economists] and voluntary exchange is a method of inducing others to cooperate by adding to their range of opportunities rather than subtracting from them.  Market interaction secures social cooperation, in short, through persuasion rather than coercion; and orthodox economic theory has developed over the last two centuries largely in an effort to explicate the coordinative potential in voluntary exchange.

DBx: This point about voluntary exchange is simple yet profound.  Yet it is often overlooked by critics of the market order.  Consider the minimum wage.  Looked at from the perspective of employers, a minimum wage arbitrarily narrows low-skilled workers’ options to add to the range of opportunities for potential employers.  Prevented by a third-party (the state) from offering to work for a monetary wage below the dictated minimum, low-skilled workers are thereby made less able to add to employers’ range of opportunities.  These workers, in turn, are made less-attractive as bargaining partners to employers.

Looked at from the perspective of low-skilled workers, a minimum wage arbitrarily narrows employers’ options to add to the range of opportunities for workers.  The employer who would increase a low-skilled worker’s range of opportunities by offering her a certain kind of job at an hourly wage of, say, $6.50 is prevented by the state from doing so.  This employer must increase the wage offer up to the mandated minimum, change the nature of the job by making it more demanding in any of a number of different ways, or rescind the offer of the job.  If the worker would have accepted the job offer at a wage of $6.50, this worker is made worse off by the minimum wage because that job offer was almost certainly that worker’s best available option – a reality that explains why the employer (contrary to popular belief) will be led by the minimum wage either to make the job more demanding or, more likely in most situations, to rescind the job offer.  The minimum wage, in short, denies to this worker her most-preferred option.

The only condition under which this conclusion doesn’t hold is if there is widespread and steady monopsony power in the market for low-skilled workers – meaning, a widespread and steady barrier to the ability of employers to bid underpaid workers away from these workers’ current employers.  But because it is beyond preposterous to suppose that such power exists in the American market for low-skilled labor, the above conclusion holds.  (Nevertheless, there are people who do believe that such monopsony power infects the market for low-skilled labor.  Why is it, I can’t help but wonder, are the same employers who are so greedy to expand their profits by exploiting their own underpaid workers so indifferent to the profits that would be available by exploiting other employers’ underpaid workers by hiring these workers away with slightly better job offers?  A real mystery, that.)

Still, some will question my insistence that it is beyond preposterous to suppose that such monopsony power exists in the American market for low-skilled labor.  To these people, I again challenge them to put their money where their mouths are and become rich by somehow getting involved in private-enterprise efforts to move these masses of underpaid workers into jobs where they are paid wages closer to the value of their hourly productivities.  By not doing so – by not accepting this challenge – these people refuse to join the ranks of those who help others by adding to others’ range of opportunities; these people remain lazily and arrogantly in the ranks of those who wrongly fancy that they are helping others by subtracting from others’ range of opportunities.

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