Bart Wilson  

Prices are Like Words

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The Learning of the Wise... Unz Debate Analysis...

People who are troubled by markets tend to treat prices as the problem in a market. Whether the price of labor or agricultural commodities is too low, or the price of housing or healthcare or payday loans is too high, prices are the problem in need of a solution. Prices, however, are not the problem. If there is a problem, prices are literally a symbol of it.

If low wages indicate that a person has a bad life, low wages do not indicate it because the dollar number per hour is low. What indicates that a life is bad is that low wages are not good enough to have a good life. The trouble with low wages is not that they are too low to have a good life. It is that a life of low wages is bad. "Not good enough to have a good life" is not equivalent to "too low to have a good life." "Too low" treats the wage as a sign that directly points to something known. "Good enough" treats the wage as a symbol that makes multiple indirect connections to the unknown. Prices are more like symbolic words than simple indicating traffic lights.

To understand how a price is a symbol, first consider how a word is a symbol. Take, for example, the word "cow." It is connected both to the animal cow.jpgand concept cow. The concept cow is associated with events and experiences with cows. As part of the symbolic system of language, the word "cow" indirectly refers to the object cow.jpgthrough ideas conveyed in a sentence. When a speaker uses the word "cow," he has a lifetime of experience to draw upon. He may have owned cows, delivered calves, and read Hoard's Dairyman. But the speaker cannot expect the receiver of the word to bring to his mind what is in the speaker's mind concerning the word "cow." The speaker must provide a context to the receiver to bring to his mind what the speaker wishes to excite in the receiver's mind. This is done by the abstruse linkages of the word "cow" to the other words in the sentence and to the entire language. The word "cow" is not a sign because "cow" does not point directly to a known object cow.jpg.

Now consider a wage of $7.25/hour. It is connected to both employees who receive it from employers and the concept of a wage. The concept of a wage is associated with the events and experiences with wages. As part of the market system for the product of work, the wage of $7.25/hour indirectly refers to an employee and employer through the circumstances that lead to an exchange. Indirectly? Indirectly, because the employer depends upon the customers who buy the product of the work. Indirectly, because the employee is contingently doing so based upon her alternatives. There are a myriad of unknowable linkages of a $7.25/hour wage to the larger market for labor, to all the other nearby wages and prices of time and place. The entire web of circumstances matters. The wage is not a sign because $7.25/hour does not point directly to a particular employee and employer.

How does the wage of $7.25/hour not point directly to a particular employee and employer? Does the employee not receive it and the employer not pay it? Yes, but that's not pointing in the sense of a sign that the wage is too low. Consider the prices from an experiment with my class.

ExcessSupplyContracts2.jpgThe red triangles are offers to work and blue triangles bids to hire. Where they meet is a voluntary transaction. The first transaction is at $4.00 and the last at a paltry 25¢, the minimum increment. The final offer to work is 25¢ and no employer accepts it. All we know as outside observers about the circumstances of this market is that the going rate of 25¢ exhausts the market. If we were to say that the low wage indicates the wage is not high enough for the workers to have a good life--it ought be higher, we distract ourselves from the real problem:ExcessSupplyContractsSandD2.jpgThere are twelve people willing to work for as little as nothing and only eight jobs. (The red step function is the supply of labor and the blue step function the demand for labor.) The last wage of 25¢ and the last offer of 25¢ are symbols of the problem.

If prices are like words, then good policy is listening to what the words say is the real problem, using the context of the entire sentence and language. Bad policy is reacting to one symbol. Forcing the meaning of a word to mean what you want it to mean, though it doesn't quite mean that, doesn't work. Ask my students who insert words from the thesaurus into their papers to sound more scholarly. A word like "pyretic" sounds good by itself and feels good to use, but it doesn't fit in any sentence we can imagine. The general use of language determines each word's fit, so leave the word alone and work on the meaning of the sentence.

Likewise, leave the price alone. Forcing a price by law to mean what you want it to mean fits even more poorly within the entire web of exchange. It invisibly prevents some people from improving their personal circumstances, their lives, with a voluntary exchange. Raising the minimum wage or capping rents sounds good and feels like we're doing good, but the mandated prices don't fit just because we can imagine they fit. Prices are to good economics as words are to good literature.



COMMENTS (8 to date)
Tom West writes:

The trouble is that there's a deep-seated feeling on the part of most of the population that one's wage should be proportional to your marginal product, and of course, it isn't, it's simply an upper bound.

The idea that in an ECO 101 model, your wage drops from your marginal product to subsistence (and presumably the owner pockets the difference) the moment there are more suppliers than demanders, simply seems wrong to many.

Forcing the meaning of a word to mean what you want it to mean, though it doesn't quite mean that, doesn't work.

The trouble is that a wage is NOT simply the result of negotiation over service and fee, no matter what economics 101 say. Because we're dealing with humans, a wage has been and still is also very much a symbol of a person's worth as a human being, including whether they are worthy of workplace safety, free from abusive by supervisors, whether they get training, whether they are worthy of police service, whether they deserve the franchise, and much, much more.

I'd argue is that treating wages as simply a price (and even price is fraught with meanings beyond economics) is ignoring major elements about what wages mean for most humans.

Sam Wilson writes:

Response piece here

Effem writes:

"Likewise, leave the price alone. Forcing a price by law to mean what you want it to mean fits even more poorly within the entire web of exchange."

Of course this doesn't apply to the most important price in the world...the price of US credit. Which we let the academics at the Fed determine. Why is it OK to manipulate some prices and not others?

Steve Horwitz writes:

On the analogy of prices and words, see this old piece of mine: http://myslu.stlawu.edu/~shorwitz/Papers/Monetary%20Exchange%20RSE%201992.pdf

Steve Horwitz writes:

Let's try that again.

Link is here.

Milton Recht writes:

Not far from where I live, there is a Starbucks and about a quarter mile away a Target. Starbucks' starting wage is less than Target's. Target's starting wage is about 20-25 percent higher. Both offer healthcare after 6 months. There are also more promotion opportunities at Target. Target has much easier and free parking without the need to pay the parking meter or chance getting a town parking ticket as where the Starbucks is located

The local Starbucks is overwhelmed with local applicants. The local Target draws many fewer workers from the immediate area and needs to draw more commuter workers from a much wider geographical area, even with a significantly higher wage.

The main difference is that the workforce at Starbuck' values the flexibility in scheduling that Target does not have. There are more workers at the Starbucks enrolled in local college courses whose schedule changes each semester and who get to keep working at Starbucks.

Last year, while traveling, I asked a Darden Group owned restaurant employee how it was working there. She said it was great and the staff liked working there because they were flexible in scheduling with all the employees who attended nearby colleges.

Wage alone never tells the complete story about the value received from a job.

ThomasH writes:

"People who are troubled by markets tend to treat prices as the problem in a market."

Maybe some do, but that does not seem like a good description of the views of many people.

Let's stick to the minimum wage issue [and I repeat my amazement that of all the departures from untaxed, unregulated markets THAT is the example that this blog seems to focus on].

I think that when people do not like the (low) wages that some workers receive, it's because they want them to have higher incomes. Therefore a wage subsidy like the EITC would, if politically feasible, be an alternative. If not, and a “minimum wage" is the only way they see to raise incomes of low paid workers, then there is a dilemma. The incomes of some workers will rise and those of others (those who lose their jobs) will fall and those who want to raise workers incomes will make a decision on the basis of the relative numbers of people and the magnitudes. But in neither case does it appear that "people who are troubled by markets tend to treat prices as the problem in a market."

JimB writes:

ThomasH:

I think that when people do not like the (low) wages that some workers receive, it's because they want them to have higher incomes. Therefore a wage subsidy like the EITC would, if politically feasible, be an alternative. If not, and a “minimum wage" is the only way they see to raise incomes of low paid workers, then there is a dilemma. The incomes of some workers will rise and those of others (those who lose their jobs) will fall and those who want to raise workers incomes will make a decision on the basis of the relative numbers of people and the magnitudes. But in neither case does it appear that "people who are troubled by markets tend to treat prices as the problem in a market."
I confess confusion. The U.S. has an EITC, it has proven politically feasible. We can certainly argue that it should be expanded or increased. I don't think that affects the argument in Wilson's piece.

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