“The ideas of economists and political philosophers, both when they are right and when they
are wrong, are more powerful than is commonly understood. Indeed the world is ruled
by little else. Practical men, who believe themselves to be quite exempt from any
intellectual influence, are usually the slaves of some defunct economist…”
-John Maynard Keynes
I’ve never quite understood why the Prime Minister, John Boy Key, is considered some sort of economic guru. I’ve seen no evidence of it, despite his obvious predilection to meddle as if he knows what’s going on.
He’s certainly got no handle at all on what to do in the present crisis—allowing his deputy to keep borrowing and spending as the economy collapses and NZ’s second-largest city is allowed to die. (He was happy for example to boast about how flush EQC was straight after the quakes, $15 billion of good assets he said; turns out it only has $6 billion, and most of those in the form of IOUs from the government.)
Even in his supposed area of expertise for example, currency trading, I can remember him telling a business journo a while back that the New Zealand dollar would soon decline and “have a four in front of it” in relation to the US dollar—whereupon almost it began its climb to where it now has double that number against the American.
And yesterday he reinforced his credentials as a chap with about as few economic clues as that last big-time economic meddler, Robert Muldoon. Speaking to Newstalk ZB’s Mike Hosking about the minimum wage—the existence of which has driven an explosion in youth unemployment all round the world, not least in NZ—Smile and Wave told Hosking “cutting the minimum wage rate to what the market can bear would lead to some very low wage rates in New Zealand.”
"It's the classic neo-liberal [sic] economic theory that you pay what the market can bear, and I think you would see very low wage rates on that basis," Key said on Newstalk ZB when asked about his view on the ACT Policy.
"You would definitely see some companies that would say, well ok, I'll hire you at two bucks an hour," Key said.
This is ignorant on at least three fronts.
First, this is not “neo-liberal” economic theory, whatever that actually means. (I’ve only ever heard the term used by people forced to study under Jane Kelsey.) It is economic theory reinforced (as all good theory must be) by economic fact: Price things above what people are willing and able to pay for them, and you won’t sell as many as if you lower your price; and when you have a whole lot of things left on your shelf that you simply can’t sell, only a moron (or a Prime Minister) would raise the price.
Second, does he really think that NZ labour is so bad that two dollars per hour is all they’re worth? And if he does, how does he think producers manage to make any profit at all when they have to pay them six times that amount? [What an idiot!]
Third, and most fundamentally, this just flat-out Marxist nonsense. Yes, Marxist. The idea that in the absence of legislation saying otherwise, employers can gleefully exploit workers by paying them whatever they feel like, right down to the level they need to just stay barely alive—i.e., the Exploitation Theory of Wages—was widely promoted by Marx and his followers, even as it was being soundly debunked before that century was even out by that great economist Eugen von Bohm-Bawerk and his [see here and here].
Since the exploitation theory “is one of the most powerful factors that have been operating to lead the world down The Road to Serfdom” it is worse than disappointing to see a Prime Minister lauded (for some reason) for his economic intelligence peddling this particular poison pill.
Especially so since it is so easily debunked, as George Reisman does here in explaining the irrelevance of both worker need and employer greed in setting wages: essentially “the payment of higher wages in the face of a labor shortage is to the self-interest of employers because it is the necessary means of gaining and keeping the labor they want to employ.”
The Marxian doctrine of the alleged arbitrary power of employers over wages appears plausible because there are two obvious facts that it relies on, facts which do not actually support it, but which appear to support it. These facts can be described as “worker need” and “employer greed.” The average worker must work in order to live, and he must find work fairly quickly, because his savings cannot sustain him for long. And if necessary—if he had no alternative—he would be willing to work for as little as minimum physical subsistence. At the same time, self-interest makes employers, like any other buyers, prefer to pay less rather than more—to pay lower wages rather than higher wages.
People put these two facts together and conclude that if employers were free, wages would be driven down by the force of the employers’ self-interest—as though by a giant plunger pushing down in an empty cylinder—and that no resistance to the fall in wages would be encountered until the point of minimum subsistence was reached. At that point, it is held, workers would refuse to work because starvation without the strain of labor would be preferable to starvation with the strain of labor.
What must be realized is that while it is true that workers would be willing to work for minimum subsistence if necessary, and that self-interest makes employers prefer to pay less rather than more, both of these facts are irrelevant to the wages the workers actually have to accept in the labor market…
Read on here for the economic lesson that Smile and Wave never got. And then, in the name of every young person out of work and struggling to gain employment at the rates that have been set for them by the ignorance of this Prime Minister, send him a copy.
While we're talking youth unemployment, I'm going to be charitable and interpret John Key's assertion that, in the absence of minimum wages, youth pay rates would drop to a couple of dollars an hour as his just opening up room on the right for ACT. Employers do have to compete with each other for employees.
UPDATE 2: Since we’re talking about morons and the minimum wage, check out the shill for big government Obama’s just appointed as Chairman of his Council of Economics Advisor—a man who made his name faking minimum wage research.