Labor, Unemployment, and Interventionism | Walter Block

Marty ladies and gentlemen we are ready to begin you have survived day one of Mises University actually we're thinking about changing the name to Mises survivor today we got a lot of great lectures but probably none more important than on this topic and with this lecture dr. Walter block from Loyola University New Orleans he is going to be speaking to us on a topic of the utmost importance in today's economy which is labor unemployment and interventionism dr. Walter block thanks for the kind introduction month it's a pleasure to be here I've talked to a lot of students and everyone seems to be enjoying themselves and that's the usual refrain let me just ask you people that in ten years fifteen years from now when you start making some money you donate some of it to the Mises Institute so that they can keep this going this costs a lot of money and the Mises Institute isn't made of money and perhaps if you've got parents who support this they can write a check even now so think about that as a possibility okay what I'm going to do today is a bit of unemployment labor economics minimum wage unions things like that if what I do isn't clear email me and I will try to make it more clear but maybe we can discuss these things together and work on them here is a Venn diagram and a Venn diagram is an overlap like you might have this is Austrian economics this is neoclassical and there is an overlap which would be the overlap between the two sometimes this could be a could be round and C could be colored and B would be round and colored or a certain color or what-have-you so you have an overlap and what I'm going to say a lot of it what I'm going to say today is the overlap in B we're neoclassical and Austrians pretty much agree not totally but to a great degree free enterprise private property rights economic freedom is a recipe for peace prosperity reduction of poverty free trade is a wonderful thing and cons best hope Adam Smith Wealth of Nations made this point trade is mutually beneficial if I trade you my tie for your pen it must mean that I like your pen more than I like my tie if you would redo the trade it must mean that you like my tie full so lousy time more than my pen we each gain I gain a difference between how I value the pen and the tie you gain the difference between how you value the tie and the pen we each exploit each other we each benefit from each other now this insight applies also in the labor market if I hire you for $5 an hour to wash my car you must value the five dollars more than the alternative employment foregone by watching my car would rather be rather doing something else and I also make profit off of you does I value my car clean more than the five bucks I've got to pay you so it's a mutual benefit in any law that says that we can't trade either ties for pens or money for labor services or any mutual benefit first is a violation of rights from a libertarian point of view and then from an economic point of view it's a reduction in welfare it's a reduction in well-being so it's not really exploitation there's mutual gain before I get into the minimum wage I wanted to ask some more basic questions first of all why do we have to work in the first place why don't we just there twiddle our thumbs and stuff come down from heaven like manna well because we have scarcity we're not in the Garden of Eden if we were we wouldn't have to work we could play all day but we're in a situation where we don't have as much as we want of everything we want more than what we've got so we've got to work to get more stuff okay given that we have to work because of scarcity by the way we're always going to have scarcity even if you had magic machines that could create stuff they'll always be magic they'll always be scarcity because we'll always want more than we have that is that's the human condition even if they can like take I don't know who the heartthrob is now I guess in my day it was Marilyn Monroe I guess it's Lady Gaga now I'm not sure I haven't kept up as well as I should on these things but suppose you know those inflatable dolls you keep you perverts suppose they had a real Marilyn Monroe or Lady Gaga inflatable doll and and you could just get them very cheaply but still we want the real one and there's only one each of them and there aren't enough to go around so they'll always be scarcity no matter what they're always the alternative cost of time you can only be in one place at a time so get used to it guys we're go is gonna have scarcity okay given that we have work why do we have employer employee relationships why don't we just all work for ourselves well one reason for this is that the employer gives something to the employees that the employee doesn't really have gone his own for example risk suppose we we could here is a group of I don't know about a hundred people in the room suppose we wanted to make these podiums and suppose we didn't want to have an employer employee relationship we wanted to have a workers coop we're all equal you know like our friends on the left side none of this hierarchical and exploiting employment employer employee relationship we're gonna make these podiums and we're going to start right now how long will it take before the first podium rolls off the assembly line well maybe a year and during that time what we're going to do is we're gonna each a sign ourselves we'll all agree where we're great workers or workers as we say in Brooklyn and we're going to first we have to get machines we have to get the wood we have to hire a factory all sorts of things like that and we do that and at the end of the year nobody wants to buy these well we're all roll out of luck we get we have no money whereas if you have the employer the employer takes the risk he bears the risk he says well I'll be the residual income claimant I will take the money that we sell and if there's no money because nobody wants to buy these they don't like this kind of podium oh we don't need podiums or whatever it is we want a different color well the employer can't come back to the workers and say hey guess what the thing didn't sell give me back the salary that I paid you for the year so the employer is the whiskey era the second thing that the employer offers to the workers the reason that we don't have very many workers coops is time if we have workers coops what are you going to do for a salary free here you're gonna have to use your own savings you're gonna have to borrow money or you're gonna have to put a mortgage on your house or something like that whereas what the employer will do is he's the least of these the employers because he used to be a worker and he just saved up money and now he's using his savings to give you a salary for the first year what before these things come off the assembly line so the second thing that the employer gives is one is risk the other is time he gives you a year's time and the third is initiative you know usually the employer initiates this sort of a thing although theoretically the workers could initiate it so that the key elements here are time and risk okay so we have we have employers and the way you become an employee is you just save money and you setup yourself you get up on your hind legs and now you're an employer okay so he's the residual income claimant what will the wage be in the absence of the minimum wage life under free enterprise what will wages tend to be and we have a theory in economics which is subscribed to by Austrians and neoclassical and the theory is marginal revenue product we will get wages in accordance with our marginal revenue product the reason LeBron James and Oprah Winfrey and other very rich people workers get a lot of money is because they have a high marginal revenue product and the reason that I a middle class person gets a middle-class salary is my marginal product is mediocre or in the middle somewhere and the reason the people who push brooms around and ask you if you want to fries with that get lower wages is because their marginal revenue product is lower so that's the theory so what is marginal revenue product marginal revenue product is the idea that let's say you have I don't know what do I have here the marginal revenue product of a hundred and first worker can everyone see that is that clear is the difference between what 101 workers can produce and what 100 workers can produce so let's say you have a hundred workers and they're producing ten thousand and now you hire a ten thousand and first worker or a hundred and first worker rather and now the total revenue product is ten thousand and five and what you do is you tribute to the last guy you say ceteris paribus other things equal we we had 100 workers they produce 10,000 we have 100 workers they produce 10,000 and 5 we attribute the extra $5 product to this hundred and first worker and we say that the hundred and first worker has a marginal revenue product or a productivity of five dollars an hour clear what marginal revenue product is okay well now the wage we say the wage will tend to equal the marginal revenue product and in order to prove that is what we do is we assume all possibilities well one possibility is that the wage is higher than the marginal revenue product let's say we pay seven dollars an hour to this guy who's bringing us 805 well if so we lose two dollars an hour and that's no way to run a railroad if you keep losing money on your workers you're gonna go broke so that's not a sustainable sort of a thing our friends the environmentalists are always talking about sustainability well this is not sustainable this can't be an equilibrium sort of a situation this can't last because if the employer is losing money he can't continue in business another possibility is that the worker gets paid $2 an hour the problem with that is if somebody is being paid $2 an hour what will some other employer do how will another employer react if here's a worker whose productivity is $5 an hour is being paid $2 an hour and therefore the employer employer a is making $3 an hour profit off of this guy's work if you were a competing employer what would you do what would you say how would you react to this well firstly would applaud because employers are exploiting workers and that's all to the good so you know we think of that it sort of philosophically but rather than that guy make $3 an hour profit you would then offer what not for you know you know 201 that B you're a capitalist big money and you want to exploit workers you're not going what Alan's an hour of three dollars now you're getting 201 just enough to get him away from that previous employer and then maximize your profits so instead of making $3 profit and making 299 but someone else will offered 202 and 203 and you're off to the races now it usually doesn't go that way but theoretically if we look at it this way you see that the wage would tend to rise how high will it rise well it'll rise toward $5 an hour might not get there it'll only get there on equilibrium and we're never in equilibrium so it might not well get there so the marginal revenue product theory is just a tendency there it's not no one saying that it's got to be exactly five and there are pockets of places where the row workers making less than their marginal revenue product and it's expensive to go out and find them so the wage might not be as high but if place like Auburn were there many employers many employees and it's easy to find people the wage tends to get bit up more and also the impetus can come from the other side need not come from the employer side grabbing employees who are underpaid it also could come from the employees you know you're in the bowling league you talk to people hey I'm making $5 an hour and you're only making $2 an hour well you're gonna go to the other guy's employer and say hey yeah hire me so the wages tend to get up to marginal revenue product what does marginal revenue productivity look like in the course of the day marginal revenue product looks something like this I just sort of drew this freehand you know you come into work and and it's negative because you're hanging up your code and not and and you're not doing any work which would make it zero but you're talking to your co-workers hey how was your weekend it's Monday morning so what you're doing is not only are you not working but you're getting them away from their work so they're not working either so your marginal revenue product is negative and then later on it's very high and it just zags all over the place people don't come in with a little thing on their forehead or a lapel pin like saying you know my marginal revenue product is five dollars an hour it's a guess the employer has to guess and employers will succeed or not succeed partially on the basis of how well they can assess the marginal revenue product of the various workers here is another diagram of interest and it what it does is it looks at marginal revenue product over the lifespan and you know when you're say under 15 or 10 years old your margin or of your product is negative you you can't produce anything you'll just stop other people from working later on it gets high and then when you get older and the seen oil gets lower various activities sports have different profiles like swimming the put the the height is right here like at around 20 or so in math and physics it's very similar to swimming a lot of people get a Nobel Prizes when they're in their sixties and seventies but they usually get it for work they did when they were 25 on the other hand literature is a little higher namely people can still write worthwhile things when in their fifties and sixties Austrian economists are lucky because what more of a literary type so we've got a chance to keep going in their fifties and sixties where as mathematical economists peak earlier I don't know why that is psychological physiological whatever but I thought that would be of interest now there are alternative theories to marginal revenue product some people say well it's assertiveness and these are the people say well you know men get more money than women because men are more assertive or men pay less for a new car or a used car than women because men are more assertive and women are you know what Suze and you know they'll just take anything it's sort of a silly theory I don't think it's got much to recommend it lady gaga opera Winfrey and Marilyn Monroe these actresses make tons of money it's not because there was sort of or not it's because they can put people in the seats and people are interested in watching them there are other things that determine marginal revenue product beauty for example there have been studies that show that what they do is they get people to look at pictures of women beauty is much more for women height is more for men for every inch taller you are over the macro you make a thousand it's more per year what they do is they give hundreds of pictures to juries and they say make them put in this pile beautiful this one mediocre this one ugly and now you look at their salaries and the more beautiful women are making more money so this just means that part of productivity is beauty I mean if you want to hire a waitress there's somebody to attract to to your restaurant you won't want to her a beautiful woman pay or more because she'll attract more customers so marginal revenue product doesn't just mean how many widgets can you turn out it means how much revenue can you generate and that's the breaks beautiful women can turn out more productivity in that sense okay now for the minimum wage the argument in favor of the minimum and by the way you know where the minimum wage law is most popular it's most popular in college towns like an Auburn People's Republic of an opera Cambridge Mass wherever there are many many colleges or universities the minimum wage is most popular which shows that the marginal revenue product the public education is negative they're teaching them you know economic illiteracy mainly in you know sociology courses places like that hopefully we do better in economics but most people don't major in economics okay so the argument in favor of the minimum wage is like it's a floor under wages and the higher the floor and no one can get below the floor and the higher we raise the floor the higher wages are our and since we all want wages to be higher than they are we have to favor the minimum wage law and this is just totally wrong rather the minimum wage law is not a floor under with under wages and raising wages rather the minimum wage is a way to cut off employment and the way I like to illustrate this sometimes is here's an employment ladder and there are rungs in the ladder and when you put a minimum wage in there what you do is you cut off the bottom rungs of the ladder and the way sometimes you rise in the ladder is through schooling but another way is on-the-job training and if you knock off the bottom rungs of the ladder you're not going to be helping people at the bottom of the economic pyramid it's not a floor under wages this mechanical analogy is all wrong rather it's a barrier over which you have to jump in order to get a job so if the minimum wage law is $2 an hour you have to have a productivity higher than $2 an hour and if the minimum wage is five dollars an hour you have to have a / - these five an hour and if it's $100 an hour you have to have a productivity of $100 an hour the higher the minimum wage law is the higher you have to jump over in order to get a job in the first place you know with the world's high jumping record is like 8 feet each feet like this about that high people can actually jump over a bar eight feet now I used to illustrate the minimum wage law when I was very young you know I I've been at these Mises things for I don't know since 83 when it started and I used to be the youngest on the faculty now I'm the oldest I don't know what happened time goes fine the way I used to illustrate this is I would take a chair that you're sitting on and I would actually jump over the chair illustrate you have to jump over something in order to get a job then later when I got older and fatter I used to take this attache case and put it on its side and jump over it then a couple of years later and put it on inside and jump over it I'm now going to demonstrate but not I can't jump over that but I'll put it flat now I don't know if the people in the back can see this but I'm about to demonstrate by jumping over this thing and if I make it I want a round of applause for this I usually need more of a lead but I'm going to try to work it this is the way they do it in the Olympics they go like this yeah actually I've lost a few but okay so what's going on here the the the minimum wage law is a way of making people jump over it in order to get a job and there are some people who can jump over it and some people can't jump over it where it's harder for them to jump over it here is another illustration and what it does is it compares what why is it well what should I do with this thing to make it more clear maybe the focus a lot of nice buttons here can you see it okay um I can't see it too well but if you can see it we're okay what you have is teenage males over here and it's the unemployment rate here a years and here are gulp males and what it's saying is that teenage males have a higher unemployment rate two to three times higher then adult males because adult males are able to jump over the minimum wage law more easily than our teenage males because teenage males have lower productivity so this is one illustration of the idea of being able to jump over barriers now teenage males are able to physically jump higher distances but we're not talking about that well we're now talking about is not jumping over a chair or an attache case what we're talking about is jumping over a Productivity level and adults 4050 years old have higher productivity levels than 17 year old people because 17-year old people haven't had the experience or whatever it is to on average to be productive okay the next point I want to make is that if you know now it's the summer and in the summer you have a lot of high school kids and college kids out of school and a lot of them don't have jobs and people are saying you know the politicians the ones responsible for the unemployment in the first place through the minimum wage are asking employers to hire teenagers and it's very hard to get teenagers hard because their productivity is below the minimum wage so what they do sometimes is they have an exception they have a lower minimum wage I think the minimum wage law is something like seven ten or seven fifteen it keeps changing under Obama and Bush and what they'll do is they'll have like a lower minimum wage three or four dollars an hour but the point is that if if the minimum wage law is a flaw on their wages and the higher it raises the the the more wages go why should you have an exception need not have an exception the fact that you have an exception shows that even they realize that it's not a floor under wages rather it's a barrier over which you have the jump another example of this is the disabled disabled mentally physically disabled doesn't really matter if you're physically disabled it doesn't impact your productivity very much but mentally disabled the mentally handicapped people have very very low productivity levels and yet it's been decided by psychologists or whoever is in charge with these people that even they benefit from working and it used to be before the advent of the minimum wage law that they would work through very very low wages and then came the minimum wage law let me illustrate William when the minimum wage law came in this is sort of the history of the minimum wage law it started out in 1938 25 cents an hour and I've only got it 290 1997 where it went up to 515 so way back in the day in 1938 the minimum wage law was 25 cents an hour but mentally handicapped people didn't have a Productivity level of 25 cents an hour so all of a sudden nobody wanted to hire these people and the only way you could get a job for them was out of charity or the government hire them or something like that but they wanted private people are them so again they made an exemption they made a an exception for mentally handicapped people but again if what's this exceptions business if minimum wage law is such a great thing that raises wages why do you need exceptions for the the least than the loss that the teenagers and mentally handicapped people it just undercuts this thesis okay the way most economists illustrate oh here is a newspaper clipping that I took out in Paris plainclothes police arrest the young man after rioting broke out during a demonstration tens of thousands of workers marched in Paris of course consider yesterday to protest the jobs policy of premier Edwin ballade or specifically bowed to his plan to allow a below minimum wage for young people and during the labor force so what they found in Paris and by the way the reason they have all these problems in Paris where people can't get jobs is they have very high minimum wages and and the immigrants can't get jobs because they don't rise above that and they're confined to a life of idleness and when you're 18 years old and you can't get a job in your idle what is it doubles ends idleness something like that you know the people get into trouble one when they have forced idleness so the government of France try to have a an exception for teenage minimum wage and they was riding so you know go figure okay the usual way that economists illustrate this minimum wage is you have a supply and demand curve and in the supply and demand curve for labor what you would get is that here's the wage there's the quantity of Labor you would to go to point a where supply and demand equal then there'd be no unemployment but what they do is they raise the wage above point ay and at that higher level the minimum wage intersects with the demand curve at point B and only the workers instead of a workers where a is bigger than B are hired and you have a supply curve of Labor and more people are willing to work there so you have an unemployment rate between this point in that point the people from A to B lose their jobs the people from a to this point C would like to work but can't get jobs at that higher wage so you have higher unemployment and that's the way economists illustrate the minimum wage and I think that's all all to the good now what I want to do is complicate matters a little bit and give you the following example suppose we had the following example if the minimum if there were no minimum wage and workers had a marginal revenue product of five dollars an hour and the wage was five dollars an hour and a thousand workers were employed at five dollars an hour what would the wage bill be namely how much money with all the workers get and the answer is you multiply five dollars times a thousand workers you get five thousand bucks pretty straightforward now what we do is we raise the minimum wage to seven and at seven only nine hundred workers are employed and the wage bill is now 6,300 notice that the wage bill Rose the workers are now making more than they used to be they used to be making 5000 and now they're making 6300 now it's true that a hundred of the workers will be unemployed and only 900 will still be employed but the workers are filled with the milk of human kindness they're all great guys and what they decide to do is they decide to share the wage bill take turns being unemployed we're assuming that the workers are homogeneous they can be substituted for each other and what they do is they make a deal with each other and they say hey it's not fair that a hundred of us won't get anything and and 900 of us will get more let's just share it out so how much over the long haul how much would all the workers get instead of five dollars or seven dollars how much would they get how much on on an hourly basis six dollars and thirty cents when we divide sixty three hundred not by the non hundred workers who produce it but by a thousand workers because they are sharing it okay everyone with me on this so far so now this looks pretty good minimum wage well looks pretty good it's true that the that they're not getting seven dollars an hour but it's an increase from 5:00 to 6:30 and 6:30 is better than five so this seems to be an argument in favor of the minimum wage so I must have made a mistake what mistake did I make Kendriya sorry yeah hundred work but they'll be making more money than before because before they were making five dollars an hour now non-core none of them can make seven dollars an hour but a thousand of them can make I'm sorry the supply curve Schiff no yeah well the demand curve is such that they're making six 6,300 let me illustrate the the answer to you now that I've given you this puzzle it's too early in the morning to answer questions like this so let me answer it for you and the way I'm going to answer it is through baseball now you know it used to be that professional baseball players could throw the ball at around 100 miles an hour 90 miles an hour typically and now there are two or three pitchers who can throw it like at 105 miles now why do they throw it so fast duh because the faster they throw the ball the harder it is to adjust for the batter when they pitch batting practice in order to give the batter's confidence how faster the pitchers throw the ball forty or fifty miles an hour and then everyone bats it right out of the park the point is that when they throw it at 105 miles an hour at 95 miles an hour or one a tennis player serves the ball at 130 miles an hour the reason they do it is that the faster the ball goes the less time you have to adjust the slower the more time you have to adjust let me give you a different illustration here we go you remember I showed you that thing about minimum wage well the minimum wage rose the most in percentage terms from 1945 to 1950 it rose from 40 cents to 75 cents which is almost a doubling if you look at the other accretions if it's not quite that big a percentage increase right and nowadays the raise at 15 or 20 cents an hour which is a very small percentage well it was a time when the minimum wage law was 40 cents and if you had a thousand workers they were making $400 and if he rose at the 75 cents they would be making 750 if the demand curve was vertical now you people are most of you were too young to realize this but there was a day when you got on an elevator there was this guy standing there he wasn't a pervert he was the elevator operator there was such a thing as a manually operated elevator and you got on it you say 12th floor please and he would move this little thingy and he couldn't get exactly a good 12th floor but he'd get real close and then he'd say let me adjust it a little bit so you didn't have to go up or down to get onto the 12th floor and usually he couldn't get exactly so there was like an inch up or down the next day after the minimum wage floor went from 40 to 75 cents how many elevator operators got fired the effect zero none of them got fired the next day because if you start firing elevator operators the tenants are going to get snarky the tenants in a high-rise commercial building and they say look you know we're paying you a certain rent predicated on there being eight elevators operating in this building and now you're gonna fire two or three of them while you're going to lower our rent pen or we're gonna protest so the very next day they couldn't find any so the minimum wage will look really good people's wages were practically doubled they went from 40 cents an hour to 75 cents to 70 out of 40 to 75 almost the doubling nobody got fired everything was great but then they started bringing in automatic elevators see automatic elevators were not competitive with with manually operated elevators at 40 cents but it's 75 cents they started to become competitive so they started putting them in how many could they put in in the next day not how many could they put in the next month maybe one or two how about in the next year more and more the point is that it's not the supply curve you were very close it's rather the demand curve that keeps moving and it doesn't shift rather what it does is it pivots and divots means here is immediate short-run here was the short run the moderate run the long run now getting back to my baseball the more time you give the batter or the receiver of the tennis serve to adjust the more likely they are to be able to return it successfully in tennis in order to hit the ball in baseball well the more time you give people to adjust the more elastic is the demand the reason the mistake I made was I drew an inelastic demand curve you'll remember from your elasticity that when we move down a demand curve if the total revenue goes up the elasticity is greater than 1 so it's elastic if it's the same it's unitary if it's less it's inelastic well this is inelastic because when you go down this way total revenue Falls which means when you go up total revenue Rises ok so what I did here is I made an inelastic demand curve which was not unreasonable for the short-run so when the short-run the minimum wage law looks pretty good in the short-run people think yeah the wage law is great during that elevator operator thing it took three or four or five years before virtually all manually operated elevators became automatic elevators and people didn't put the zoo together they didn't say that the reason so many elevator operators are being fired is because of the minimum wage because it wasn't a constant conjunction it wasn't an immediate effect it was a long run as the manually operated elevators were led out to pasture and the automatic ones came in and people started getting fired but it took two or three used for many ll manually operated elevators to be fired or operators to be fired so they started talking well interest rate changed or technology change was something they didn't put it together they didn't say it was the minimum wage so that was the mistake I made here I purposely drew it in elastic and inelastic is ok in the short line but as time goes by and people have more and more time to adjust it's not short run anymore okay now you remember then at the very outset what I did is I drew a see if I can find that stupid thing you're not going to get organized I can't find it number the end the Venn diagram I drew I said I'm going to be doing stuff that is where the neoclassical x' and the Austrians agree well now I'm going to do something where the neoclassical and the Austrians diverge because this is after all an introduction Austrian economics so I want to illustrate a difference between the Austrians and the neoclassical and the difference has to do with these guys card and Krueger Princeton economists from the same place as Ben Bernanke boom and what's going on there here it is here is my Austrian and neoclassical thing so what I was doing before I was doing the B area where Austrians and neoclassical sort of agree now I'm going to move into this a area to show that there is a difference even though we agree we Austrians agree with the neoclassical sort of and I think if a neoclassical economists were to hear what I said so far he would pretty much say yeah block has got it that's the mainstream stuff that's what they teach in the micro texts and this is all very straightforward but then what happened is card and Krueger wrote this article in the most prestigious economics journal that is the most prestigious you know class the most prestigious Austrian economics journal is the quarterly Journal of Austrian economics edited by our Joe Salerno in any case the card and Krueger had this article and they took a case in Pennsylvania and in New Jersey I forget which one of them one of them raised the minimum wage law on the other didn't and the one that raised it according to the right-wing neoclassical economist which is the overwhelming majority of neoclassical economists the place that raised the minimum wage law should have had a fall-off in the number of workers back to this if you raise the minimum wage while you get less employment and you get more unemployment instead the very opposite occurred so let's suppose that New Jersey raised its minimum wage and instead of New Jersey having fewer workers they have more workers and card and Krueger said well this shows that all the neoclassical stuff that we've been talking about about minimum wage is wrong and minimum wage really is like a floor under wages it raises wages and all this other stuff is all wrong now one of the differences between Austrian economics and neoclassical economics is that neoclassical economics sees themselves on the on the basis of testing theory okay we have a they see themselves as modeled on physics or chemistry or any of the hard sciences so we have a theory now we have to go out and test it because if you don't go out and test it you're a religion or a cult or something like that whereas the Austrian economists don't see economics on as an empirical science or an empirical effort we see the economic science rather as analogous to logic or math or geometry you don't go out and test where the triangles have 180 degrees you don't go out and test whether I thank your in theorem is correct or not Pythagorean theorem is correct and the way we prove it is not by looking at triangles and the way we prove that triangles got 180 degrees is not by going out of the real world and measuring triangles and measuring the degrees but based on the pure logic of it so if the being strain neoclassical economists were really true to their scientistic what Hayek all scientists that go to the empirical science what they would have said is all card and Krueger came up with this reputation of the theory ah well that's okay the theory is mostly true but there are exceptions what they'd say well maybe economic law doesn't work in New Jersey or they would say well you know maybe economic lock you ordinarily works but in 1995 when they did this study it didn't work okay no big deal they didn't they didn't have that attitude at all my former mentor at Columbia Gary Becker and his cohorts they they started writing they really had fire in their eyes that they they said you know this is BS and one of the key elements of empirical sciences replicate ability knows if I do something in my chemistry lab and I find X Y Z and I tell you what I did in my journal article well then you in your chemistry laboratory have to be able to replicate what I did and if you can't it shows that I had a dirty test tube or I'm lying or something like that so what what they did is they went back to the to the data they Cardin Kruger got this data from from small firms in New Jersey in Pennsylvania so they started calling these small firms two or three years later and they couldn't replicate it probably what happened is carton Krueger called some guy and said well you know how many workers do you have and what do you pay and the guy was the I don't know the guy pushing the broom there and you know made up some numbers and on the basis of that carton proved data so Becker and other neoclassical economists try to replicate this couldn't replicate this and they said it was wrong but the interesting thing is that my point here is if you scratch a good neoclassical economist you're going to get an Austrian because they had Austrian ISM in their bones they knew that this was well they knew that this was nonsense and they went out there not with the attitude of oh you know let's just replicate it and you know we'll we'll show the Cardinal right they said this is absolutely wrong and we're going to show card and Krueger for the charlatans that they are so this is my own PhD dissertation with Gary Becker was on rent control and I had an economic equation model and usually I got good I got the right sign of my variables and I got statistical significance showing that the more rent control you had the lousy er housing was every once in a while I would come up with a long silence and sometimes very embarrassing ly the wrong science was sophistical a significant and what Gary Becker should have said is oh I've got this genius block who's gonna gonna turn economics on its ear is gonna show that rent control is really great instead what he said he was too kind to say this but what he really meant was he said what he really meant to say was blocky go out and do it again so he'd get it right so what's testing what is my empirical crap testing the insights that we know from the logic of rent control or is it the opposite it was the opposite namely the theory was showing that my statistics were wrong and the theory of minimum wage shows that court and Krueger along if the minimum wage law is so bad why do we have it if the minimum wage law is so bad why do we have it and the way we answer that as we say Cuomo know who benefits from you know in CSI when when there's a dead body what they do is you know first that they have forensics to test the blood and the hair follicles and the semen and whatever else is there but then what they do is they say well who benefits from this guy being dead they start looking at the spouse or the child who's going to inherit or something like that well it's the same thing here who benefits who benefits from lots of teenagers being unemployed well prison guards because more unemployed teenagers means more crime and more crime means more jobs for prisons psychologists maybe unions unions are the key and here what I want to do is illustrate what's going on with an thing called an isocline AIESEC wants an equal productivity curve and here I illustrate the isoquant with bushels of wheat and here you can make bushels of wheat with a lot of Labor and a little bit of land like in Japan or in the US with a lot of land in a little bit of labour isoquant you can make a hundred bushels in various ways everyone with me on AIESEC wants now ok well suppose what happens with this isoquant is that wages fall well since Japan is labor intensive and if wages fall will move toward Japanese ways of producing away will toward the suddenly cheaper factory production right ok well you can have an isoquant not with land in labor but with skilled and unskilled laborers and here are a hundred shoes and you can make it with a lot of skilled workers and very few unskilled workers or you can make it with a lot of unskilled workers and a few skilled workers and if you move the minimum wage let's start this way let's suppose that the Union goes into the manager and says hey we got to go from 20 to 25 well making twenty dollars an hour and we need twenty-five dollars what's the attitude of the employee earth the attitude of the employer as well let's move from A to B we want to move toward this suddenly relatively cheaper faster production and if the skilled workers are going from twenty to twenty five the unskilled are staying the same well what we'll do is we'll start firing some skill unionized workers and substituting for them unskilled workers go move down to the right from A to B does the Union like this no they don't want to have union members being fired just because they want a wage increase so in the old days when they were blue-collar types what they would do is call the unskilled workers scabs and beat them up and slash their tires and stuff like that but that's such you know the problem with it where the fight is even if you win you get blood on you and then sometimes the scabs fight back and it's awkward so what you do so what you do instead is you have this thing drum roll minimum wage what you do is you raise the minimum wage from five to seven which moves the employer back in the right direction from the union's point of view you see how vicious this is what the skilled workers are doing is picking on unskilled workers they're pricing them out of the market they're making it harder for the employer to hire unskilled workers they're making it harder for the employer to fire some of them and harness them unskilled workers so this is one of the big emphases for the minimum wage now look the Union wage rate is way down have the minimum wage minimum wage is like 7:15 or 7:35 it keeps changing the Union scale is much higher in Detroit where they had to bail them out they were making seventy five dollars an hour on the assembly line in Detroit so how do you account for the fact that the union wants to raise the minimum wage and they're adamant that the minimum wage must rise and Obama is big into this raise well 1 scuse me one hypothesis is that the highly skilled unionized workers just feel for their brethren at the lower end of the economic pyramid and if you believe that you know the old joke was I've got a bridge to sell you but I have a book out on privatizing bridges so it doesn't work out as well but the point is that one of the reasons for the minimum wage is who benefits who benefits from it is organized labor unions and it's a particularly nasty vicious sort of a thing it's let me talk a little bit about how unions whether they raise wages or not unions do raise wages sometimes temporarily for some workers and then what they do is they unemploy companies it's sort of like a parasite parasite gets fed but it eats up the host and that's why you have the Rust Belt unless valve is a product of unionization but they don't raise wages permanently because wages come from marginal revenue product or productivity so if you want to know what the effect of unionism is on wages you have to ask what is the effect of unionism on productivity and then you'll know what the effect on wages is and to ask what the effect of unionism on productivity is is very clear it reduces it they have strikes they have strife they have internecine debates and all sorts of stuff like that look there are wages that are high in countries that have no unions Singapore Hong Kong Japan has unions but their company unions they mainly teach the workers the company song and stuff like that they're not the kind of kind of unions that were used to here unions only came into effect in the late 20th century the 1900s no the late 19th century eighteen 1890 the Wobblies the Knights of Labor the AFL came in in the early 20th century in 1905 1910 later on the CIO came in but wages were rising since I don't know since the Year 1500 long before Union so you hardly need unions to raise wages because rage wages come from productivity and productivity was increasing with new technology you have wages that are high in industry with no unions computers banking insurance babysitter's house cleaners their wages have been rising and they're not unionized in the United States the high point of private unions was 1930s when 30 percent of the labor force was organized now it's in single digits in the private labor force what is happening instead is public sector unions are on the increase but public sector unions are sort of a logical abomination because it's not the whole point from the left the value nians the reason we need unions is because the employer is an exploiter the employer is an exploiter but the government is a good guy the government will help the working men so how do you justify organizing against the government which is supposed to be in favor of the people so public unions or a weird thing they they just had a thing in was at Wisconsin where the public sector unions were going berserk and and the state government was having deficits and all and most of the batarians would say well you know the unions are evil we have to support the government and I wrote it I wrote several articles on Rockwell comm saying oh yes we're against unions and I had to reiterate that I was yes against the unions however you know they're there picketing the government and the government is hardly the libertarian institution so you know it's sort of like the blood and the Crips are fighting whether the Nazis or the Nazis and the commies are fighting you know you don't just say well we're pro-nazi the commies aren't so good either so so it's a much more complicated thing you know look I am second to no one in my condemnation of unions but that doesn't mean that I always have to oppose unions especially when they're fighting other groups that are even more highly problematic is one more thing I wanted to do and this was an advanced class I'd spent a lot more time on it but I've only got two or three minutes and this is the issue of monopsony for those of you who are in graduate school monopsony is the only sophisticated argument in favor of the minimum wage and the idea here I'm not going to go through the diagram those of you who know of it will know of it and I'll explain the rest of it verbally the idea here is think Hershey Pennsylvania what do they produce in Hershey Pennsylvania chocolate the Hershey Pennsylvania he accounts for 95% of the the employment in Hershey Pennsylvania and you have this thing called monopsony it's not a misspelling its monopoly only a monopoly on the buyer side not on the seller side and the argument is that if you have a monopsony what they'll be able to do is lower the wage from with supply and demand is to this point over here because of marginal cost and marginal revenue meeting here and you go to this supply curve and when you have a minimum wage law they'll actually be able to go from A to C namely since the monopsonist supposedly exploits workers minimum wage can actually raise wages and not reduce employment but increase employment okay now there are several criticisms of this and I've only got another minute or two so fun with them quickly there are three neoclassical criticisms of this first of all Hershey Pennsylvania is very rare it's rare that you have monopsony secondly this could only work in the 15th century when transportation didn't work because if they were sporting workers in Hershey Pennsylvania the workers would go ten miles away and transportation would be good enough nowadays so that they wouldn't be exploited the third one is that there's a limited gap between point a and point D where the minimum wage law has to be and if it goes above that you'll have the usual unemployment effects and if it's below that it have any effect so there's only a narrow gap where it works the more serious criticism of this or the Austrian criticisms and I'll give you two of them first what's with this cost curves crap you know in the beginning of every microtext they said what does cost causes or alternative or opportunity costs forgone what are the costs of you people being here the fact that you're not doing something else you could have been out working or swimming or sleeping or whatever it is the alternative or opportunity cost of you being here is what you could have been doing were you not here but I don't know that you might not even know that so you can't draw cost curves the second problem is you have this interpersonal comparison of the utility business and I'm going to have to stop here because I'm out of time thanks to you

Channel: misesmedia

Views: 11,670

Rating: 4.8730159 out of 5

Keywords: Walter, Block, Labor, Unemployment, Interventionism, Ludwig, von, Mises, Institute, University, 2011, Austrian, Economics, Liberty, Property, Peace, economy, economic

Id: 2_iQFLserVY

Length: 61min 5sec (3665 seconds)

Published: Mon Aug 15 2011