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Thought To Ponder
F. A. Hayek said that “the curious task of economics is to demonstrate to men how little they really know about what they imagine they can design.” It would be good to recognize our limits about what we imagine we can design. We cannot steer the economy. Or the labor market. Recognizing our limitations is a step in the right direction.
[ Economy ]
Socrates and the Minimum Wage
2 February 2007
Lawrence W. Reed
The ancient sage Socrates, a giant in the foundation of Western philosophy, was known for a teaching style by which he aggressively questioned his students. He employed his "Socratic Method" as a way to stimulate logical, analytical thought in place of emotive or superficial pronouncement. Rather than lecture or pontificate, he would essentially interrogate. The result was to force his Greek pupils to see the full implications of their conclusions or to realize that what they had accepted as solid was nothing more than the intellectual equivalent of crumbled feta cheese.
The U.S. Congress is moving to enact a hike in the hourly minimum wage from $5.15 to $7.25, with the increase phased in during the next two years. Economists have long argued that raising the cost of labor, especially for small and start-up businesses, reduces the demand for labor (as with anything else).
But Congress will likely do it anyway - and probably with the usual, over-sized measure of self-righteous breast-beating about helping workers. Maybe what members of Congress need is not another lecture on the minimum wage from an economist, but rather an old-fashioned Socratic inquisition. If the old man himself were with us, here's how I imagine one such dialogue might go.
Socrates: So you want to raise the minimum wage. Why?
Congressman: Because as Sen. Ted Kennedy pointed out, minimum wage workers haven't had a raise in 10 years.
Socrates: Can you name one single worker who was making $5.15 an hour a decade ago and who is still making $5.15 today? And if you can't, then please tell me what caused their wage to rise if Congress didn't do it. Come on, can you name just one?
Congressman: Well, no, but they must be out there somewhere. In any event, $5.15 just isn't enough for anybody to live on. Workers must have more to meet their basic needs.
Socrates: An employer doesn't have anything to pay an employee except what he first gets from paying customers. I wonder, whose "needs" do you consider when you decide to buy or not to buy - the workers' or your own? Have you ever offered to pay more than the asking price just to help out the guy who made the product?
Congressman: That's not a fair question. My intent here is purely to help.
Socrates: Sounds to me like the answer is "no," but let's move on. Why do you assume your intentions mean more to a worker than those of his employer? It's the employer who's taking the risk to offer him a job, not you. You're only making speeches about it.
Congressman: Employers are interested only in profits.
Socrates: Are you saying employees are not? Are they more interested in working for companies that lose money, and if so, then why don't they all line up for government jobs?
Congressman: Look, $7.25 isn't much.
Socrates: I'd like to know how you arrived at that figure. Was it some sophisticated equation, divine revelation or toss of the dice? Why didn't you choose $20.00, which is not only a nice round number but also a lot more generous?
Congressman: Well, $20 would be too high, for sure. Too much of a jump at once.
Socrates: It sounds like you think the cost of labor might indeed affect the demand for it. Good! That's progress. You're not as oblivious about market forces as I thought. What I want to know is why you apparently don't think higher labor costs matter when you raise the minimum wage from $5.15 to $7.25.
Do you think everyone, regardless of skill level or experience, is automatically worth what Congress decrees?
Congressman: Now hold on a minute. I'm for the worker here.
Socrates: Then why on earth would you favor a law that says if a worker can't find a job that pays at least $7.25 per hour, he's not allowed to work?
Congressman: I'm not saying he can't work! I'm saying he can't be paid less than $7.25!
Socrates: I thought we were making progress, but perhaps not. Can you tell me, if your scheme becomes law, what happens to a worker who is worth only $6.00 because of his low skills, lack of education, scant experience or a low demand for the work itself? Will employers happily employ him anyway and take a $1.25 loss for every hour he's on the job?
Congressman: Businesses need workers and $1.25 isn't much, so common sense and decency would suggest that of course they would.
Socrates: So employers who employ people are too greedy to pay $7.25 unless they're ordered to, but then when Congress acts, they suddenly become generous enough to hire people at a loss. Who was your logic instructor?
Congressman: Can we hurry this up? I've got other plans for other people I have to think about.
Socrates: I give up. You congressmen are incorrigible. You're the only people on whom my teaching method has no discernible impact.
Congressman: You ask too many questions.
At this point, in utter frustration, Socrates drinks the hemlock. The congressman votes to price many of the nation's most vulnerable employees out of work and gets re-elected.
Whoever warned us to beware of Greeks bearing gifts apparently never met a congressman.
The views expressed are those of the author, and not necessarily those of the Nassau Institute (which has no corporate view), or its Advisers or Directors.