The is a six letter correspondence I had with K and then with K and Y on this subject.
Letter 1
From: K
Sent: Friday, October 18, 2019 8:27 AM
To: Walter Block
Subject: Minimum Wage Considerations
Dear Walter,
I was reading through your blog posts on minimum wage and I was wondering about how supply and demand work into the picture. You say that discounted MRP is the driver of wages but it seems to me that discounted MRP is not the primary driver of wages but instead is the driver of the supply of jobs at a certain price. That is to say an entrepreneur thinks that the discounted MRP of a job they are creating will be greater than the marginal cost of employing another person at a certain cost. Then the actual wage is determined by supply and demand of labor.
Then the minimum wage is rightly seen as a price floor in the labor market and so we see shortages (in the context of jobs this is unemployment.) One of the reasons I’m bringing this up is that by saying discounted MRP is the driver of wages we confuse the issue of why CEOs make so much more than unskilled laborers. Yes the CEO does have a higher discounted MRP than a common laborer but not only that is why they make so much. It is also because the pool of CEO labor as a ratio to the number of CEO jobs is much smaller than the pool of un/semi-skilled laborers as a ratio to the number of jobs they can fill. With the analysis I think it becomes clear that a minimum wage also has a depressive effect on the wages in general and in particular of people near the minimum wage level because there is now have an increased supply of labor due to the fact that there is no one employed below the minimum. It also becomes clear of the economic destruction cause by the minimum wage because no jobs with an discounted MRP less than the minimum will be created. It isn’t just a matter of people raising their productivity to get employed but also that there is now an artificial minimum on the productivity of a job that could be created. This causes a distortion because of the law of diminishing marginal returns. For every dollar of increased pay there is less of a productivity increase so two people making $7.50 an hour should have a higher discounted MRP than one person making $15. What I’m trying to point out is that it isn’t just unemployment that is the effect of a minimum wage but also a depressive effect on productivity in general because of the diminishing marginal returns on wages. Just some thoughts on the matter.
Best Regards, K
Letter 2
On Fri, Oct 18, 2019 at 6:01 PM Walter Block <[email protected]> wrote:
Dear K and Y:
Please allow me to introduce the two of you to each other.
I make this introduction, since Y and I, too, have been having some friendly debates about this issue. She takes roughly your position. Y, correct?
I agree with you, K, that the number of CEOs, relative to the need for them, explains, in large part, their high salaries. But, I still insist that (discounted marginal revenue) productivity is the key element here. Yes, the supply curve of CEOs relative to the need for them, is way to the left, compared to the supply and demand (based on productivity) for ordinary workers. But, wherever this supply curve hits that demand curve is where the level of productivity comes in.
Well, perhaps, a better way of saying this is that wage levels are the product of both supply and demand, and leave it at that.
I once wrote about the importance of discounting:
Block, Walter E. 1990. “The Discounted Marginal Value Product – Marginal Value Product Controversy: A Note,” Review of Austrian Economics, Vol. IV, pp. 199-207; http://www.mises.org/journals/rae/pdf/rae4_1_7.pdf;
http://www.mises.org/journals/rae/pdf/R4_7.pdf; reprinted as Block, Walter E. 1994. “On Marginal Productivity Theory,” Peter Boettke, ed., The Elgar Companion to Austrian Economics, Hants, England: Edward Elgar, pp. 123-130; http://www.academia.edu/1355567/The_Discounted_Marginal_Value_Product_-_Marginal_Value_Product_Controversy_A_Note
Best regards,
Walter
Walter E. Block, Ph.D.
Harold E. Wirth Eminent Scholar Endowed Chair and Professor of Economics
6363 St. Charles Avenue
Loyola University New Orleans
New Orleans, LA 70118
tel: 504 864 7934
skype: Walter.Block4
Letter 3
From: Y
Sent: Friday, October 18, 2019 4:17 PM
To: Walter Block
Cc: K
Subject: Re: Minimum Wage Considerations
Dear Walter, K,
Thanks so much for copying me in this interesting discussion.
I agree with Walter that productivity is the key element to determine wages. But I still think wages as the price of labor is ruled by scarcity. The relatively scarcity of CEOs not only means they have very high marginal productivity, but also means they have monopoly power in the job market as well, so that they have more bargaining power and so much higher wages.
But I believe Walter still does not agree with the market power in this issue.
Best regards, Y
Letter 4
On Fri, Oct 18, 2019 at 6:36 PM Walter Block <[email protected]> wrote:
Dear Y, K:
Yes, I think market power stems from neoclassical economics, but Austrianism rejects this concept.
It is part and parcel of market failure, and praxeological economics does not admit of it.
Best regards,
Walter
Walter E. Block, Ph.D.
Harold E. Wirth Eminent Scholar Endowed Chair and Professor of Economics
6363 St. Charles Avenue
Loyola University New Orleans
New Orleans, LA 70118
tel: 504 864 7934
skype: Walter.Block4
Letter 5
From: K
Sent: Friday, October 18, 2019 7:00 PM
To: Walter Block
Cc: Y
Subject: Re: Minimum Wage Considerations
Dear Y and Walter,
I think I am mostly in agreement with Walter. I think perhaps our disagreement is definitional because the entrepreneurs perception of the discounted marginal productivity is a key part in determining which jobs will be created and the productivity must have a time preference discount because the factors of production are being combined over a process in a period of time and he will only realize his gains at the end when he makes a sale. To me, the laborers are the supplier of the “labor” good in the labor market and an employer is the consumer. So taking Rothbard’s analysis of a market where the supply curve is vertical (in this case it represents the current state of the labor pool at any given point in time) and adding the insight that in this market the demand curve shape is determined by the subjective valuation (which may be data driven or any other means) by the entrepreneur of the discounted marginal productivity of the laborer’s “labor good” in his particular productive process we arrive at how wages are determined and what the effect of a minimum wage laws are. They create a surplus of “labor goods” by putting a floor on the price of the good. Which looking at it from the perspective of the laborer is a shortage of available jobs or consumers of his product. This fully explains high CEO salaries as well as the effects of the minimum wage. In the CEO scenario, I think the fact that the supply curve of CEO labor is far to the left on the hypothetical graph is much more significant than the shape of the demand curve due to their increased marginal productivity over the average laborer in answering the question of why they command such a higher price. I think this as speculation only because while I am sure that discounted productivity and scarcity are the two main drivers of wage prices, I don’t think it is possible to know precisely where and how the two meet outside of actual market prices determined by entrepreneurs. I’m not even sure we could say that there is a constant proportion between the two factors. It is probably specific to particular “labor goods” in their particular markets. I don’t think monopoly fits into it at all. The idea of market monopoly has been trenchantly criticized by Thomas DiLorenzo in his Myth of the Natural Monopoly https://mises.org/library/myth-natural-monopoly. In it he explains that traditionally monopoly meant a government grant of privilege and then goes through a number of historical examples that illustrate this definition is still correct. So the analysis you, Ying, are applying to CEOs probably does strongly apply to those professions where there is a “State Board” or some other licensing agency e.g. doctors, lawyers, engineers, beauticians.
Thank you to all as well for including me in the discussion and considering my arguments.
Best Regards, K
Letter 6
From: Walter Block <[email protected]>
Sent: Friday, October 18, 2019 9:37 PM
To: K
Cc: Y
Subject: RE: Minimum Wage Considerations
Dear Friends:
There is an entire literature regarding the Austrian critique of natural monopoly, and market power; Tom’s excellent article is only one of the publications:
For an Austrian critique of neoclassical monopoly theory, see Anderson, et. al., 2001; Armentano, 1972, 1982, 1989, 1999; Armstrong, 1982; Barnett, et. al., 2005, 2007; Block, 1977, 1982, 1994; Block and Barnett, 2009; Boudreaux and Costea, 2003; DiLorenzo, 1992, 1996; DiLorenzo and High, 1988; Henderson, 2013; High,1984-1985; Hull, 2005; McChesney, 1991; McGee, 1958; Rothbard, 2004; Shugart, 1987; Smith, 1983; Tucker, 1998A, 1998B
Anderson, William, Walter E. Block , Thomas J. DiLorenzo, Ilana Mercer, Leon Snyman and Christopher Westley. 2001. “The Microsoft Corporation in Collision with Antitrust Law,” The Journal of Social, Political and Economic Studies, Vol. 26, No. 1, Winter, pp. 287-302
Armentano, Dominick T. 1972. The Myths of Antitrust, New Rochelle, N.Y.: Arlington House.
Armentano, Dominick T. 1982. Antitrust and Monopoly: Anatomy of a Policy Failure, New York: Wiley
Armentano, Dominick T. 1989. “Antitrust Reform: Predatory Practices and the Competitive Process.” Review of Austrian Economics. Vol. 3, pp. 61-74. http://www.mises.org/journals/rae/pdf/rae3_1_4.pdf
Armentano, Dominick T. 1999. Antitrust: The Case for Repeal. Revised 2nd ed., Auburn AL: Mises Institute
Armstrong, Donald. 1982. “Competition versus Monopoly: Combines Policy in Perspective.” The Fraser Institute: Vancouver, BC, Canada
Barnett, William, Walter E. Block and Michael Saliba. 2005. “Perfect Competition: A Case of ‘Market-Failure,’” Corporate Ownership & Control. Vol. 2, No. 4, summer, p. 70-75
Barnett, William II, Walter E. Block and Michael Saliba. 2007. “Predatory pricing.” Corporate Ownership & Control, Vol. 4, No. 4, Continued – 3, Summer; pp. 401-406
Block, Walter E. 1977. “Austrian Monopoly Theory — a Critique,” The Journal of Libertarian Studies, Vol. I, No. 4, Fall, pp. 271-279.
Block, Walter E. 1982. Amending the Combines Investigation Act, Vancouver: The Fraser Institute.
Block, Walter E. 1994. “Total Repeal of Anti-trust Legislation: A Critique of Bork, Brozen and Posner, Review of Austrian Economics, Vol. 8, No. 1, pp. 35-70.
Block, Walter and William Barnett. 2009. “Monopsony Theory.” American Review of Political Economy. June/December, Vol. 7(1/2), pp. 67-109; http://www.arpejournal.com/ARPEvolume7number1-2/Block-Barnett.pdf; http://www.arpejournal.com/
Boudreaux, Donald J., and DiLorenzo, Thomas J. 1992. “The Protectionist Roots of Antitrust,” Review of Austrian Economics, Vol. 6, No. 2, pp. 81-96
Costea, Diana. 2003. “A Critique of Mises’s Theory of Monopoly Prices.” The Quarterly Journal of Austrian Economics. Vol. 6, No. 3, Fall, pp. 47-62; http://www.mises.org/journals/qjae/pdf/qjae6_3_3.pdf
DiLorenzo, Thomas J. 1996. “The Myth of Natural Monopoly,” Review of Austrian Economics, Vol. 9, No. 2, pp. 43-58; http://www.mises.org/journals/rae/pdf/rae9_2_3.pdf; https://mises.org/library/myth-natural-monopoly
DiLorenzo, Tom and Jack High. 1988. “Antitrust and Competition, Historically Considered,” Economic Inquiry, Vol. 26, No. 1, pp. 423-435, July.
Henderson, David R. 2013. “The Robber Barons: Neither Robbers nor Barons.” Library of Economics and Liberty. March 4;
http://www.econlib.org/cgi-bin/printarticle2.pl?file=Columns/y2013/Hendersonbarons.html
High, Jack. 1984-1985. “Bork’s Paradox: Static vs Dynamic Efficiency in Antitrust Analysis,” Contemporary Policy Issues, Vol. 3, pp. 21-34.
Hull, Gary, ed. 2005. The Abolition of Antitrust. New Brunswick, NJ: Transaction Publishers
McChesney, Fred. 1991. “Antitrust and Regulation: Chicago’s Contradictory Views,” Cato Journal, Vol. 10; https://www.cato.org/sites/cato.org/files/serials/files/cato-journal/1991/1/cj10n3-10.pdf
McGee, John S. 1958. “Predatory Price Cutting: The Standard Oil (New Jersey) Case,” The Journal of Law and Economics, October, pp. 137-169
Rothbard, Murray N. (2004 [1962]). Man, Economy and State, Auburn AL: Ludwig von Mises Institute, Scholar’s Edition; http://www.mises.org/rothbard/mes.asp
Shugart II, William F. 1987. “Don’t Revise the Clayton Act, Scrap It!,” 6 Cato Journal, 925
Smith, Jr., Fred L. 1983. “Why not Abolish Antitrust?,” Regulation, Jan-Feb, 23; http://cei.org/op-eds-and-articles/why-not-abolish-antitrust
Tucker, Jeffrey. 1998A. “Controversy: Are Antitrust Laws Immoral?” Journal of Markets & Morality. Vol. 1, No. 1, March, pp. 75-82; http://www.acton.org/publications/mandm/mandm_controversy_35.php
Tucker, Jeffrey. 1998B. “Controversy: Are Antitrust Laws Immoral? A Response to Kenneth G. Elzinga.” Journal of Markets & Morality. Vol. 1, No. 1, March, pp. 90-94; http://www.acton.org/publications/mandm/mandm_controversy_37.php
Best regards,
Walter
6:36 am on November 3, 2019
