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Tag Archives: Finance

Thomas Sowell: The Obvious Problem with a “Living Wage”

28 Tuesday Apr 2015

Posted by jrbenjamin in Political Philosophy

≈ Comments Off on Thomas Sowell: The Obvious Problem with a “Living Wage”

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Basic Economics, Capitalism, Conservativism, economics, Fair Wage, Finance, Free Market, Hoover Institution, Living Wage, Macroeconomics, Microeconomics, Peter Robinson, Salaries, Thomas Sowell, Wages

Thomas Sowell

“Wages and salaries serve the same economic purposes as other prices — that is, they guide the utilization of scarce resources which have alternative uses, so that each resource gets used where it’s most valued. Yet because these scarce resources are human beings, we tend to look on wages and salaries differently. Often we ask questions that are quite emotionally powerful, even if they are logically meaningless. For example: Are the wages ‘fair’? Are the workers ‘exploited’? Is this ‘a living wage’?

Such questions seldom get asked about the prices of inanimate things, such as a can of peas or a share of stock in General Motors. But people are believed to be entitled to pay that is ‘fair,’ even if no one can define what that means. ‘Exploitation’ and ‘a living wage’ are likewise emotionally powerful expressions without concrete meanings. If a worker is living, how can he be receiving less than ‘a living wage’ unless he is, as some have said thoughtlessly, ‘living below subsistence’?

No one likes to see fellow human beings living in poverty and squalor, and many are prepared to do something about it, as shown by the vast billions of dollars that are donated to a wide range of charities every year, on top of the additional billions spent by governments in an attempt to better the condition of less fortunate people. These socially important activities occur alongside an economy coordinated by prices, but the two things serve different purposes. Attempts to make prices, including the prices of people’s labor and talents, be something other than signals to guide resources to their most valued uses, make those prices less effective for their basic purpose, on which the prosperity of the whole society depends. Ultimately, it is economic prosperity that makes it possible for billions of dollars to be devoted to helping the less fortunate.

Nothing is more straightforward and easy to understand than the fact that some people earn more than others, for a variety of reasons. Some people are simply older than others, for example, and their additional years have given them opportunities to acquire more experience, skills, formal education and on-the-job training — all of which allows them to do a given job more efficiently or to take on more complicated jobs that would be overwhelming for a beginner or for someone with only limited experience or training. It is hardly surprising that this leads to higher incomes. With the passing years, older individuals may also become more knowledgable about job opportunities, while increasing numbers of other people become more aware of them and their individual abilities, leading to offers of new jobs or promotions. It is not uncommon for most of the people in the top 5 percent of income-earners to be 45 years old and up. […]

These and other common sense reasons for income differences among individuals are often lost sight of in abstract discussions of the ambiguous term ‘income distribution.’ Although people in the top income brackets and the bottom income brackets — ‘the rich’ and ‘the poor,’ as they are often called — may be discussed as if they were different classes of people, often they are the very same people at different stages of their lives. An absolute majority of those Americans who were in the bottom 20 percent in income in 1975 were also in the top 20 percent at some point over the next 16 years. This is not surprising.”

__________

Excerpted from Thomas Sowell’s Basic Economics, a modern conservative’s primer on money and the market economy.

Below, watch the affable 84-year-old discussing the release of the fifth edition of Basic Economics with the Hoover Institution’s Peter Robinson last December.

And there’s more:

  • How Jefferson fostered compromise on the national debt
  • David Ricardo outlines the principle of comparative advantage
  • Arthur Brooks on earning money versus creating value

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Thomas Piketty: Did Inequality Contribute to the Financial Crisis?

21 Monday Apr 2014

Posted by jrbenjamin in Political Philosophy

≈ 3 Comments

Tags

American Society, Arthur Goldhammer, Capital, Capital in the Twenty-First Century, economics, Finance, Inequality, Political Economy, The One Percent, Thomas Piketty

Thomas Piketty

“In my view, there is absolutely no doubt that the increase of inequality in the United States contributed to the nation’s financial instability. The reason is simple: one consequence of increasing inequality was virtual stagnation of the purchasing power of the lower and middle classes in the United States, which inevitably made it more likely that modest households would take on debt, especially since unscrupulous banks and financial intermediaries, freed from regulation and eager to earn good yields on the enormous savings injected into the system by the well-to-do, offered credit on increasingly generous terms.

In support of this thesis, it is important to note the considerable transfer of US national income—on the order of 15 points—from the poorest 90 percent to the richest 10 percent since 1980. Specifically, if we consider the total growth of the US economy in the thirty years prior to the crisis, that is, from 1977 to 2007, we find that the richest 10 percent appropriated three-quarters of the growth. The richest 1 percent alone absorbed nearly 60 percent of the total increase of US national income in this period. Hence for the bottom 90 percent, the rate of income growth was less than 0.5 percent per year. These figures are incontestable, and they are striking: whatever one thinks about the fundamental legitimacy of income inequality, the numbers deserve close scrutiny. It is hard to imagine an economy and society that can continue functioning indefinitely with such extreme divergence between social groups.

Quite obviously, if the increase in inequality had been accompanied by exceptionally strong growth of the US economy, things would look quite different. Unfortunately, this was not the case: the economy grew rather more slowly than in previous decades, so that the increase in inequality led to virtual stagnation of low and medium incomes.”

__________

From the book that reviewers are calling “watershed,” “magisterial,” “a bulldozer of a book,” and at least a few economists are already crowning as the best economics book of the last decade: Capital in the Twenty-First Century by Thomas Piketty.

Though I’ve only been flipping around its 700-plus pages — and my economics-minded friends have expressed to me some qualms with the methodology and approach of its author — I can confidently recommend Capital. I’ve been engrossed by not only chart after chart of Piketty’s rigorous and wide-ranging data analysis, but also his refreshingly light and fluid (though translated, by Arthur Goldhammer) exposition and writing. The book is long, especially for a bestseller, but as you tread through its pages you’ll be surprised by how rarely you have to slog through the dense weeds of pedagogical jargon. Even for dilettante economists and laymen looking to understand the state of the economy today, the book is not just comprehensible and illuminating — it’s fun to read.

More economics:

  • David Ricardo’s famous description of comparative advantage
  • Robert Nozick compares taxes to enslavement
  • Calvin Coolidge warns against excessive and unnecessary taxation

Chart: US Income Inequality

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