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It’s one thing not to know economics, but it’s another to lecture the world while not knowing it.
Hence this Elizabeth Warren supporter on Twitter:
This is what the progressive left believes — and to add insult to injury, they actually think it’s “Economics 101.”
Let’s dig in.
For today, I’ll leave out all the arguments against forcibly raising wages, and I’ll leave out the true way wages rise. Let’s focus just on the pure economic claim that taking money from some people to give it to “people with less” results in great stimulus for the economy.
If it’s “good for the economy” for unskilled labor to be given an arbitrary, coercively levied wage increase, would it also be good for the economy if employers quit shopping around for low prices for steel and just paid more for steel? After all, everyone in the steel industry would now have more money to spend, and wouldn’t this “invigorate each sector of the economy from the ground up”?
Would it be even better if employers went out of their way to pay more than the going price for lumber? Then the lumber people would have more to spend, and wouldn’t this “invigorate each sector of the economy from the ground up”?
In other words, if it’s “good for the economy” for business firms to pay artificially high wages, why not demand that they pay artificially high prices for everything? Then the economy would be super!
You see the problem. The firm becomes less and less profitable, and less able to support employment, the more it needs to pay for inputs. And the more it pays for some inputs, the less it has on hand to pay for others. Extra money paid in wages over here means less spent on intermediate goods — and thus lower wages for other workers — over there. And the firm is less able to invest in capital equipment, which is what makes all of society wealthier.
Then there’s the idea that “consumption” is what an economy is all about: as if just using things up could make us rich.
If all we did was consume, and no one saved and productively expended any resources, the entire structure of production would grind to a halt. Just to maintain the structure of production involves saving enough to support the existing capital structure: all the stages and production processes from raw materials down to the finished product that constitute the intermediate stages of production that are left out of GDP.
Rich people do not just “sit on” or “hide” their money. They are the people whose savings maintain and expand the capital structure, without which we would return to a hand-to-mouth existence.
That small detail didn’t make it into this fellow’s Economics 101 class.
If we were determined to “stimulate consumption,” thinking it would make us rich, we should be happy at the following outcome:
Suppose we have a lucky unskilled laborer (lucky because the doubling of his wages did not force him out of a job through layoffs or through the suddenly hastened automation of his job, or did not force him to do extra work, or did not take away his fringe benefits, etc). Then this happens:
(1) This lucky person takes some of his extra pay and buys five gallons of milk.
(2) The milk seller takes the money he earns from this sale and buys a new shirt.
(3) The shirt seller takes the money from selling the shirt and buys a few gallons of gas.
And so on. All consumption. Nothing is saved or productively expended.
(1) No wages are paid (since making payroll is not consumption).
(2) No business-related bills are paid (again, not consumption).
(3) No intermediate goods are ordered by later-stage production (again, not consumption).
The result of all this spending: inventories of consumer goods dwindle, and, the gross saving necessary to keep the production structure up and running not having occurred, the productive capacity of the economy collapses. There’s your utopia of consumption.
Obviously, then, “the economy” is more than just money passing from hand to hand in exchange for consumer goods. To say that “consumption” needs artificial stimulus is a morally and economically arbitrary value judgment. Only the voluntary decisions of all market actors, based on their own preferences and coupled with a market price system, can give rise to a structure of production that balances our desires to consume with the enormously complex latticework of capital and stages of production that make our preferred level of consumption possible in the first place.
It is the wicked “rich” and their saving and investing — not “hoarding,” obviously — that make our abundance possible. Labor plays an important role of its own, but labor unaided by capital equipment could perform a tiny fraction of the work that labor aided by capital goods can.
And those capital goods come from people who save and invest large amounts of money. That is what the rich do.
Now let’s say the rich really did hoard cash. Their demand for money (which is a more neutral, less loaded way of describing “hoarding”) has the result of increasing the purchasing power of everyone else’s money.
If they “hoard” the money, do not enter the market with it and just roll around in it, that money is therefore not bidding up prices. Prices fall, which makes everyone else’s real incomes rise. So no problem!
But of course people are not hoarding cash. Talk about uncomprehending. That money is saved and invested.
In an economy lacking capital goods, you can protest your employer all you like but there is zero chance you will ever, ever earn $15 per hour. The economy is not physically productive enough to generate that kind of abundance, and your unaided, bare-hands labor doesn’t produce enough to make a wage like that anything but a losing proposition.
But if you think prosperity comes from consumer spending, where would these capital goods come from? How do they factor into the picture the original Tweet is painting?
Now I’ll bet you run into people like this all the time.
You know they’re wrong, but only sometimes do you feel confident enough to take them on.
There’s a place — a special place — where very smart, congenial people gather, and when one of them needs help dismantling a bad guy, why, we’re all too happy to help.
It’s a place where you, loyal reader and listener, know in your heart you belong.
It’s the Tom Woods Show Elite.
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