These notes are from the lecture Interventionism: Rent Control, Wage Laws, Trade, Unions, given at the Mises University. Any errors are mine, feel free to point them out so that I can correct them. This lecture was given by Prof. Block.
Interventionism: Rent Control, Wage Laws, Trade, Unions (lecture 9 of 32)
These notes are from the lecture Interventionism: Rent Control, Wage Laws, Trade, Unions, given at the Mises University. Any errors are mine, feel free to point them out so that I can correct them. This lecture was given by Prof. Block.
Rent Control
- False start: WWI.
- Really started in WWII. As hired army workers and sent them to a certain area, this caused prices to rise. So, they slapped on rent control.
- The price control artificially lowered prices; thus, the quantity demanded exceeded the quantity supplied (marginal suppliers could no longer afford to supply housing).
- Hence, there was a shortage of housing.
- The price control artificially lowered prices; thus, the quantity demanded exceeded the quantity supplied (marginal suppliers could no longer afford to supply housing).
- Rent controls caused shortage:
- Shortage.
- No signal to entrepreneurs to build new homes.
- No incentive to maintain existing ones.
- Shortage.
- By 1946, most cities had abolished rent controls, except for New York City:
- NYC changed rent controls slightly, so that the free market rate applied to new buildings, while existing buildings were under rent- control.
- NYC also allowed free market prices for vacated buildings.
- Thus, the way to profit was not by serving tenants, but by finding ways to get tenants to leave. Getting people to leave requires a different skill-set than enticing them to stay.
- NYC decided to make zoning laws so that if you built a new foundation, you could use 90% of land, not just 75%. So, entrepreneurs built tons of new buildings, and rent was low; but, 6 years later, after the boom, rents rose to double and triple their former rates.
- NYC had promised not to institute rent controls, and they didn’t. They renamed rent-controls “rent stabilization” and instituted “rent stabilization”.
- Rent stabilization — buildings were insured at lower rates, for the new high amounts. This resulted in many buildings being burned down to collect on insurance policies.
- NYC changed rent controls slightly, so that the free market rate applied to new buildings, while existing buildings were under rent- control.
Wage Laws
- The reason we have to get jobs is because we have scarcity and we want more than we have.
- How much we get depends on how hard we work, how much capital there is, how free the market is.
- So, if Block cures tooth-decay, dentists use services elsewhere, etc.
- Proof that wages will always be above subsistinence:
- Wages = discounted marginal revenue product (DMRP)
- Thus, if DMRP is greater than subsistence, wages will also be greater than subsistence.
- No-one would hire a worker if the DMRP £ subsistence, because he can’t even produce enough to feed himself, let alone help the entrepreneur.
- W = DMRP > subsistence
- If the worker is paid less than his DMRP, competitors will bid away his service.
- Wages = discounted marginal revenue product (DMRP)
- The compensatory ability that low-productivity people have is their ability to work for very low wages — minimum wage laws take that away from them.
- The higher the minimum wage, the more people suffer with unemployment who are unskilled.
- Objections:
- It is argued that, yes, there is less employment, but those employed are making more money as an aggregate. Yet, in the long run, the demand curve shifts, so there is much less employment, as employers shift away from low-wage workers to alternatives.
- Also, there are monopsomy analysis criticisms of Block’s theory; these criticisms are absurd, because they ignore the fact that costs are subjective.
- Another objection is that we are richer with minimum wage and no welfare, as opposed to without minimum wage and welfare. The response is that this analysis violates cerebus paubis; they are not holding all else constant, thus are not getting at the truth.
Welfare No Welfare
Min. wage 0 + 100 = 100 0 + 0 = 0
No min. wage 80 + 100 = 180 80 + 0 = 80
- It is argued that, yes, there is less employment, but those employed are making more money as an aggregate. Yet, in the long run, the demand curve shifts, so there is much less employment, as employers shift away from low-wage workers to alternatives.
Labor Unions
- Lets say that labor union demands increase; employers then anturally look to hire cheaper factors of production.
- Unions want to make it expensive for employees to hire cheaper workers:
- Violence.
- Government regulations: “fair negotiations”.
- Violence.
- Wages don’t increase because of unions; they increase because of increasing MRP, which increases because of capital investments.
- Unionization rates have gone from 34% to 14%, and wealth has increased.
- Many non-unionized industries are experiencing increases in wages.
- Rust Belt — raised wages above MRP because of unions so that jobs could be exported elsewhere.
- Unions are partially illegitimate, partially legitimate:
- Voluntary strikes, so long as the strikers aren’t violating property rights, are fine.
- Beating up replacement workers, and employer laws, are not fine, and constitute the initiation of aggression.
- Voluntary strikes, so long as the strikers aren’t violating property rights, are fine.
World Trade
- Apodictically, we know that free trade is good, because both parties think they’ll benefit from trade ex-anti.
- It doesn’t matter whether the trade is local or world-wide.
- Absolute advantage — when one person/area can produce something absolutely better, another something else better, so each specializes in their absolute advantage. They then trade, and are both better off.
- Comparative advantage — each country specializes in that in which it has a comparative advantage, because of the scarcity of time. Even if one country has an absolute advantage in everything, it is beneficial to specialize in that in which you have a comparative advantage, because you do that which you are best at.
{ 10 comments }
David,
This one is 10 of 32 by my count.
Regards, Don
Excellent lecture on this topic from the Mises Media archive from Dr. Reisman: http://mm.mises.org/?/mp3/MU2003/Interventionism.mp3
On the topic of world trade, I think there is a point that (almost) absolutely destroys the case for protectionism. I haven’t seen any economists write about it, but I’ve only read around a dozen books on economics and I may be wrong about this point.
The point of a tariff is to raise the price of a foreign good so people will buy less of it. But, isn’t a tariff simply a sales tax? If this is so, and I think it is, then a tariff couldn’t possibly raise the price of the good. To quote Rothbard’s Power & Market:
Walt: Whether or not the tariff raises the price of a good it still reduces the competitiveness of the foreign firm.
Consider a case of two domestic firms that both sell tires: firm A and firm B. Let’s say firm A has to charge a 10% tax on each tire, firm B not. Firm A which has to charge the 10% tax only has two options: raise prices to reflect the tax(pass it on to the consumer) or keep prices the same. If firm A passes the tax on to the consumer, those consumers will be less likely to shop at firm A because they will be able to get a better deal at firm B, this will reduce sales and revenue. If firm A keeps prices the same, the 10% simply comes out of its revenue as well. In either case firm B will benefit, but at the expense of consumers at large.
I believe this is analogous to tariffs. If you have an imported product competing with a domestic product and all things about the products are equal except the imported product has a tariff, the foreign firm will be disadvantaged. Therefore, it is the foreign firm who bears the cost of tariffs which reduces its profitability on each unit sold and its incentive to sell its product in the country with the tariff, relative to other non-taxed or less-taxed sales outlets.
It is my contention that domestic firms that receive these protections “benefit” at the expense of consumers. I put benefit in quotations because suppose all protectionist policies were done away with and some domestic firms went out of business due to the overwhelming comparative advantages of the foreign firms. In this case the employees of such domestic firms would simply be re-absorbed in the economy into firms that have greater comparative advantages than foreign firms. After this occurred, these displaced employees would themselves be in a position to take advantage of the cheaper prices on the foreign products and everyone would end up wealthier.
Suppose the politicians in favor of tariffs aren’t motivated by revenue and special interests (this is of course a HIGHLY hypothetical situation) and the real reason they want tariffs and other protectionist policies is to avoid recession. Essentially what they are doing is avoiding temporary recession at the cost of imposing a permanent situation of unrealized wealth and prosperity.
I think we can rule out this option. The firm has to pay 10% of its revenues to the government. The revenues are already set at maximum net revenue, if they raise prices, they will lower revenue. Hence, they are choosing between collecting 90% of a higher amount or 90% of a lower amount.
But firm B only benefits in an indirect manner. Firm A’s products are no less attractive to consumer’s than firm B’s. The only way firm B is rendered less competitive is if the loss of revenue renders them incapable of producing.
This is an even more indirect manner of defeating the other firm when looked at in the historical context of protectionism. People point towards the beginning days of the Industrial Revolution in the U.S. and the infant industries argument.
However, I’m willing to bet that sales to the U.S. were but a small fraction of total revenues of,say,british manufacturers (I could be wrong). Their impovershment by the tariff would seem to be largely ineffectual.
Another thing to keep in mind is that many proponents of tariffs actually do believe they will directly raise prices.
“But firm B only benefits in an indirect manner. Firm A’s products are no less attractive to consumer’s than firm B’s. The only way firm B is rendered less competitive is if the loss of revenue renders them incapable of producing.”
Walt, I am going to have to disagree with you here. Even assuming firm A’s ability to produce is unhindered, there is much more to a business than producing, mainly there is advertising, expanding and innovating. The 10% out of firm A’s revenue is going to diminish their competitiveness by diminishing their ability to advertise, expand and innovate.
Meanwhile, firm B is not going to have any hinderances in this regard and they will be able to continue advertise, expand and innovate. Therefore, they will open new stores, advertise on TV and in other mediums, and innovate new services to offer their customers or upgrade technology and improve efficiency. On the other hand, if business is rough, they will simply have more means to stay alive.
This effect will be very real, and very noticeable by firm A.
When it comes to foreign firms, they simply have less incentive to sell units in a country with tariffs. If they do sell in a country with tariffs, the tariffs will diminish their competitiveness by diverting a portion of their revenue away from advertising, expansion and innovation (assuming that production is kept intact). This is not to say that this cannot be overcome by their comparative advantage, but everytime the tariff is ratcheted up the effect becomes greater. For instance, if the tariff was 100%, the firm is simply going to sell elsewhere, 0 units will be sold, and you can take it down from there.
In some—if not many cases—the cost of tariffs on foreign firms may actually put domestic firms at a long term disadvantage as well.
Consider the 10% tariff levied on foreign widgets, and the average margin of revenue over expenses for foreign widget makers is around 25%, while the margin of revenue over expenses (profit margin) is likewise 25% for domestic widget makers.
Once the 10% tax is levied, the foreign makers must either adjust their market price to make up for this lost revenue, which is unlikely because market share will take a hit because higher prices are usually less competitive, or they must lower their only other controllable factor—which would be operating expenses.
So, in essence, to remain as competitive as they were in the tariff-nation’s market, they generally have to restructure their production schedules so that new efficiencies accommodate the lower artificially created profit margin (or lack-of profit margin) in that market. This can come about in various ways—mergers for economies of scale advantages, technological innovation, etc.—but regardless of the actual form of the adjustment, the tariff creates exogenously created incentives (if not imperatives) for foreign firms to increase efficiency, while domestic widget makers are able to rest on their current production, which will eventually hurt their market competitiveness. (See the US Steel industry.)
You make a mistake by comparing the tariff to a general sales tax. A tariff would be akin to a partial sales tax. The tariff on foreign goods raises the marginal cost on each unit produced by the foreign firm. The increase in the marginal cost on each unit causes the supply of the good to be reduced. The reduction in supply causes an increase in the price. The tariff affects the cost, but it is the reduction in supply that causes the price to rise.
The general sales tax is levied on all goods. Rothbard argues that the supply of goods is not reduced due to a general sales tax because there are no untaxed areas for firm to move to. And because the supply is not reduced the price does not rise. Rothbard does say however that to the extent that factors of production become unemployed because of the general sales tax, supply will be reduced and prices will rise.
Price is determined by supply and demand, not by cost.
I understand that, but the firm selling toa idfferent area is a more circuitous and indirect (and hence, less likely to happen) way of raising the price than is usually thought.
However,the only way to resolve this is to make a quantitative judgement, which would require empirical observation.
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