Sunday, April 15, 2012

Narration: Economics in One Lesson

By Aravis

There is a curious proposal known as “buying back the product” which unions and “amateur economists” (Hazlitt’s words, not mine) like to wave around.

The idea is that the workers in each industry should be paid enough to buy the products they are making. But then the people who make Fords will not be paid as much as the people who make Cadillacs, and the unions won’t have that. (This is a special case of the “purchasing power” fallacy, which we have looked at before. In order to give the employees 30% more purchasing power, the employers raise wages by 30%. But now there is a discrepancy in their bookkeeping, so they raise prices by 30% and the employees have just the same purchasing power as before.)

The biggest issue with this is that the employers do not fund the product. All the people who buy the product fund it, and all the people who contribute towards its creation: the people who make the supplies, the gas stations that fuel its transport, the automotive technicians who make the trucks to carry it, and the architects who design the stores to sell it. So any price-fixing must be done by all who have contributed – not by the employer alone. This is clearly an impossible task, which is why it is best to leave the economy alone.

“If we try to run the economy for the benefit of a single group or class, we shall injure or destroy all groups, including the members of the very class for whose benefit we have been trying to run it. We must run the economy for everybody.”  --Henry Hazlitt

1 comment:

Anonymous said...

In "A Connecticut Yankee in King Arthur's Court" Mark Twain does a wonderfully satirical parody of the principle you discuss. In it he discusses economics with a smug and pompous fellow who earns higher wages than the Citizens of then modern day Connecticut. The rub is the fellow is paying more for everything and has less money at the end of the day than do Twains' characters' fellow citizens.