Economies are Made of People

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No, not like that.

Update 2/22/20: After reading several articles by Nick Hanauer, I have reconsidered my stance on an across-the-board minimum wage. If a minimum wage is raised in one location, there may be some incentive for companies to move to another location, but if it is raised everywhere (accounting for cost of living), then it may have positive secondary effects of revitalizing the economy that outweigh any negative effects, if it does discourage hiring. However, I think that a universal basic income (UBI) would be a better policy because it would allow people to engage in activity that is beneficial to society but difficult to monetize.

Furthermore, I no longer believe that the wages that corporations pay to their workers will reliably reflect the value that the workers provide, even accounting for labor competition and the opportunity cost of paying those wages. The wages seem to reflect the balance (or lack thereof) between the bargaining power of the corporation and that of each individual worker. Unless the workers are unionized, the negotiation is skewed heavily towards the corporation because it has more money, power, authority, time, information, and individuals working in coordination.

Building on this concept, I realized that extremely wealthy people make vastly more money than others not because they make vastly better decisions or provide vastly more useful services, but because they have developed the knack for being the people asked to make those decisions and provide those services. They have cultivated a reputation and permit their employees to borrow that reputation by working for them, under certain standards and conditions. This is all well and good.

The problem is that these reputations are very difficult to compete with or hold accountable for maintaining quality. Instead, money and power accumulates to a few key points of concentration (companies and their reputations) in greater and greater proportions. There seems to be some tendency in large societies for control over resources, and decision-making power in general, to “optimize”, which usually means that a plurality of it ends up in the hands of a tiny minority, which is efficient for the purposes of churning out mass-produced comforts but which denies regular people the ability to choose the terms on which they participate in the economy: what role they want to play in helping the world function. Meanwhile, people are too busy maintaining the market dominance of their chosen points (and fighting for control over them) to bother ensuring that the power they wield is used for good purposes, or reinvested in these regular people.

I’ll eventually co-opt this update for a future article, but just for the record, I have an updated and more nuanced picture of the economy, the problems with the status quo, and what will be necessary to solve them than I had when I wrote this article.

End of update.

One of the most popular economic debates in the modern world is the minimum wage, and I’m very confused as to why. The proposal under discussion is that there be a minimum amount that a person is allowed to pay a full-time employee. Paying a full-time employee a smaller salary is a violation of the law. The proposed alternative is… not to have a such a restriction.

The false dichotomy here is almost palpable. Let’s think like engineers here: What is the problem that we’re actually trying to solve? As far as I can tell, we’re trying to make it more likely that people can support themselves and their families, most likely by getting jobs that pay enough for that. It doesn’t take much thought (but still more than most people bother to spend) to see that a minimum wage will work against that goal, so I’ll only spend one paragraph on that before moving on to better alternatives.

By way of example, if the government decided that ice cream trucks “deserved” to make more money, and so enforced a minimum price they could charge that was more than the usual price, fewer people would think that having ice cream at a moment’s notice was worth it. Some would even stop being able to afford it. It’s like an electrical circuit; for any given voltage (demand), a component (worker) with a tiny resistance (price) will have a very low power output (income) despite having a high current (number of customers). Raising the resistance (price) will raise the power output (income), at the same time lowering the current (customers). But with too high a resistance (price), the power output (income) starts to drop back down because the current (customers) drops too far. There’s an optimum resistance (price) for maximum power (income) for a given voltage (demand). The law can’t know the optimum price for ice cream to maximize income, though, especially when it varies by location. Bottom line: A rule that says, “If people pay you, they must pay you more,” has the gaping loophole of people just deciding to not pay you in the first place, and it is foolish to think that they won’t exercise that right. You don’t have a right to make people buy what you’re selling (unless you’re the government, but that’s another topic).

The reason people try to confabulate that minimum wage is good is because they seem to think it is the only option. Alternatively, they think that by definition anything contributing their ideology must be good, and admitting anything about it is wrong would create cognitive dissonance and lose ground. I do agree that one point in favor of minimum wage versus simple unemployment assistance is the job experience provided by actually working, but it doesn’t make up for the minimum wage putting more people out of work in the first place. There are other ways to get people job experience and keep them paid, such as a mandatory minimum per-person income provided by the government. That may turn out not to be the best option; I haven’t investigated it thoroughly. However, the fact that it hasn’t even entered the national conversation, let alone supplanted the minimum wage in it, despite the latter being self-defeating (in theory and practice) and the former not, reflects badly on human society.

You want to solve poverty? Start off with an intellectual exercise: when talking about the economy, do not mention money. Money is a useful mechanism for keeping the economy efficient, but labeling people and things with prices leads people to overlook their important qualities. People get money by doing favors for other people. They want money because they can trade it for other favors from other people. The other people accept the money in trade because they want to call in favors, too. The power of money is that it acts as a fungible favor: in theory, a favor that anyone can do for anyone else, that you can earn no matter what type of favor you can offer (as long as it’s accepted), and that can likewise be traded for many favors, depending on how much of it you have. Money rewards cooperation and establishes consistency, which generates confidence. In this way, it leads to a more productive economy.

However, the concept of money also lets you forget that it’s not “getting money” you want—you don’t get use out of money by keeping it. What you want is “the ability to call in favors”: getting people to give you things and do things for you. Money lets you forget that society is a network of interdependent people, that in order for others to want to do you favors, you generally need to do favors for others in turn. People think money can measure the health of an economy, but economic health cannot be represented by an average income; that’s just a number. An economy’s health is reflected by how reliably people get what they want, how much they can do that other people want, and how much they are increasing what they can do. That’s because the economy isn’t made of money. It’s made of people.

You want people to have a higher income? No, you want them to get more of what they want. The best way to accomplish that equip them to do other people favors, so they can get favors in turn. No matter how much money there is in the economy, people who don’t do very good favors won’t get much of it, unless we either set up institutions to provide them with favors anyway (not a bad idea), or twist incentives by fiat to pretend people are more useful than they really are, causing them to be rejected by the system.

What socialists notice about the economy that is disturbing, though I doubt they can articulate it, is that even though only a tiny portion of the population needs to work in the “life-sustaining” sector of the economy, the part that helps people survive and stay safe, in some ways that actually makes things harder. The capitalist system of resource distribution means that you can only call in the favors you need to survive if you can convince people to want the favors you can provide. Much of the “life-affirming” sector of the economy (the part that fulfills desires for mental stimulation and comfort) has become parasitic, designed to lead people to desire things that are harmful (e.g. cigarettes) or gratuitous (e.g. mass-produced collectible toys), simply because the people selling those products fear they can’t provide any other favors. Thus we find ourselves watching the situation of a person who is trying to earn favors in the form of food for their family by designing a commercial that convinces people that a product that causes cancer will make them more attractive. That’s not only sad, that’s ironic, considering that as far as humanity has come from subsistence farming, people are still sabotaging each other to survive. Society has grown, but individuals haven’t, because they don’t realize they can.

People impose limitations on themselves out of ignorance and fear, forming a fixed mentality, a stagnant self-image. The way to break out of that is growth mindset, the mentality of actively looking for opportunities to develop your skills. In order for the economy to become healthier and more prosperous as a whole, we must create institutions that can help people defeat their fear and develop their ability to do favors, by teaching them to apply growth mindset to continue overcoming their limitations. With humans’ current productivity and their even greater potential, there is no reason so many people should be afraid they can’t earn a living.