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Market-Price Adjustments: A Masker of Many Inequalities

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In my latest column for AIER I celebrate one of the most important, yet least-appreciated, humanitarian benefits of market prices expressed in money [2]. Two slices:

Suppose that a Thomas Edison of our era invents a substance that causes each of us to overlook all but the most serious of other people’s defects. This substance – let’s call it “X” – when used by an ugly person cloaks that person’s unattractive appearance. X causes people to ignore its users’ below-average height, above-average weight, below-average intelligence, and above-average laziness. X blinds others to most of the weaknesses of the old no less than it blinds them to the inexperience and unreliability of the young.

We would loudly applaud this invention, for it would ensure more-humane treatment of many of our fellow human beings. And so if someone demanded that this marvelous substance be banned, or at least that government severely restrict its use, we’d all be rightfully horrified.

Well, in fact such a substance already exists. It’s called money. Money works just as does X when there are no government-imposed restrictions on the adjustments of monetary prices and wages.

For example, most of the plywood inventory in Bob’s Lumber Store was damaged by a hurricane. Some of the damage was severe while other of the damage was relatively minor. Most of the damaged pieces will not sell at prices as high as they would have sold before being damaged. But they don’t go unsold. Bob is able, by charging sufficiently low prices, to make even severely damaged sheets of plywood attractive to buyers. And the more severe the damage, the lower the price. By lowering the prices charged for severely damaged sheets enough to make buyers indifferent to the damage, Bob is able to sell, to willing buyers, all of his plywood despite the fact that most of it was in poor condition.

…..

Now consider minimum-wage legislation. It turns off money’s cloaking role for those workers most in need of this marvelous property. Because no employer will knowingly employ a worker at an hourly wage higher than is the value per hour that the worker produces for the employer, no employer will employ a worker who, for whatever reason, will not produce hourly value at least as high as the minimum wage.

In the absence of a minimum wage, workers whose skills are so low that they cannot produce hourly value as high as, say, $10.00 per hour would cloak their low skills by offering to work at wages low enough to make them profitable to employ. Given that no employer will knowingly fail to employ any worker willing to work at a wage that’s not in excess of the hourly value produced by that worker, workers with very low skills – when they have unimpeded access to money’s cloaking property – will have no trouble finding employment. But because the minimum wage prevents such cloaking, many low-skilled workers remain unemployed and unemployable.