One of the largest things that keeps libertarians from “taking over” or advancing our ideas further is that those who aren’t libertarian are under the assumption (to paraphrase Bastiat) that libertarians opposing something being done by the State is equivalent to libertarians not wanting it done at all. This position is very common amongst the “statist” left who would like to claim being champions of the disadvantaged because the policies they advocate, such as the minimum wage or universal healthcare (UHC), are intended to help. Libertarians have a couple of ways of critiquing these positions. The first is by arguing from a moral position , for instance, that government doesn’t have the right to force X firm to do Y on deontological grounds. The other is to argue from an economic position where everything it does produces worse results than those which would occur had there been no state to begin with. While the second one definitely has its merits, I would urge the libertarian to be a student of economics and take this latter approach. Through economics your counterpart may be more amenable to the idea that there might be some underlying moral principles involved. This is as opposed to being accused for not caring when you start with “government is force.” As I have done in previous articles, I will be looking at a couple positions and analyze them from an economic position. Bear in mind, these analyses will be rather basic and more debate may be needed, but my goal is for you to be able to plant the seed in your opponent’s mind, plus see the value in learning economics and do more.

 

Minimum wage
Some theories never die, and this is one that doesn’t seem to want to. While there are a few arguments that are in favor of raising the minimum wage, there are two that come up rather frequently that I will help the new student of economics address which are:

  1. If a company can afford to pay below the minimum wage then they can afford the minimum wage.
  2. Increasing the minimum wage allows workers to buy back the product.

Lets look at the first assumption, which is the easiest to deal with. As many know, the minimum wage law is a regulation imposed by the State which is the lowest rate at which labor may legally be employed. The minimum wage law outlaws an employer hiring anyone else below a certain amount of dollars an hour. As Rothbard argues,

“The law says: it is illegal, and therefore criminal, for anyone to hire anyone else below the level of X dollars an hour. This means, plainly and simply, that a large number of free and voluntary wage contracts are now outlawed and hence that there will be a large amount of unemployment.”

So, if there is a worker who is willing to work for less than the minimum wage, the law forbids them from doing so. An inevitable objection to this is that if the person is willing to work for, say, $5/hr, then the company can afford to pay the minimum wage; if the employer can hire an employee at $5/hour then the employer can the employee at minimum wage (but don’t because “exploitation” and “greed”) .The typical leftist takeaway is that pretty much all businesses, especially larger ones, can afford (and “ought”) to raise the wages of their employees to cover their basic needs. However, that’s not how labor works. You aren’t just worth any arbitrary amount. If the employee would only bring in $6/hr, then he/she would make the business money working at $5/hr, and lose it money working at minimum wage. And businesses do not last long (and thus neither do they maintain labor forces) if they are losing money on their employees. If what you can do for my company is worth $5/hr, it doesn’t follow that it’s also worth $7.25. I could profitably hire you at one price and incur losses at the other. People don’t start and run businesses to see how much they can afford to give people. If I start a business and it doesn’t make money, it’s a massive waste of my time and resources and I’ll shut it down. If my business does anything that costs more than it brings in, it’s a threat to the viability of my business. That includes hiring people I don’t need, or paying them more than their productivity can justify. In that case, the business struggles or goes under and both the employer and employee are worse off.

This may lead to your counterpart asking why anyone would want to work for that little as it would be difficult to live on that amount. First of all, what is the alternative? Second, a solution is to get rid of this compulsory non-productivity, allowing the dollar to buy more. It is rather simple. The more production, the greater the supply, thus the lower the prices of goods.

The second position we will address is that if we raise the minimum wage then workers can buy back the product which will help the economy and the business they are employed by. First of all, a firm’s strategy for raising wages is not to ensure that the employee can afford the product, that is merely incidental. It’s a pretty standard leftist argument that all the employer needs to do is pay the employee enough to “buy the product back” they are making off the line or off the shelf, etc. Hazlitt answers this argument well in Economics in One Lesson:

“How are we to know, however, precisely when labor does have “enough to buy back the product”? Or when it has more than enough? How are we to determine just what the right sum is? As the champions of the doctrine do not seem to have made any real effort to answer such questions, we are obliged to try to find the answers for ourselves.

Some sponsors of the theory seem to imply that the workers in each industry should receive enough to buy back the particular product they make. But they surely cannot mean that the makers of cheap dresses should get enough to buy back cheap dresses and the makers of mink coats enough to buy back mink coats; or that the men in the Ford plant should receive enough to buy Fords and the men in the Cadillac plant enough to buy Cadillacs.”

There is the example famously trotted out by this crowd about how Henry Ford paid his people considerably more than the industry average on the grounds that they’d be able to buy Fords. This is ridiculous on the face of it, but by this logic every employee would have had to buy several Fords per year for the revenues to justify the expense. This claim is a lie, Ford paid more than the competition because his employees were far more productive, thanks to his manufacturing innovations. This is a lot like plugging a power strip into itself. In the modern sense, there is no way it can be enough for a barista at Starbucks to make enough to buy a $2 cup of coffee. The employee would want to have something more. The only way this train of thought works is for everyone to work in industries that produce expensive goods, plus it is actually saying that by doubling labor costs, a firm is able to sell more of that good.

The result of the minimum wage is fewer people getting paid at all. The remaining employees are getting more than previously, but there are fewer of them. Price floors like the minimum wage create surpluses (surplus labor = unemployment). That is, labor whose “owners” would like to sell it, but can’t legally do so at the market price. Unhampered prices harmonize supply and demand. If demand (of employers, but ultimately consumers) goes up and supply (labor) stays the same, either the price moves or a shortage occurs. If supply goes up and demand stays the same, either the price moves or a wasteful and harmful surplus emerges. The minimum wage means the price of labor (wages) can only move so far. Jobs like gas station attendant, movie theater usher, etc. vanish as they’re not productive enough to justify paying the legal minimum wage. As the minimum wage continues to rise, more and more productive jobs begin to vanish — any that are not productive enough to justify the new minimum. A minimum wage leads to a reduction in the demand for labor plus an increase in the supply of labor in the relevant market — which is typically the market for low-skill workers. It eliminates the ability of some workers to compete by accepting lower wages and eliminates them from the labor force. As a result, it reduces job opportunities for these workers. Many are teenagers, or spouses of breadwinners out trying to make some extra Christmas money, retirees supplementing their pensions or just staving off boredom. One problem is that those who do need to earn enough to raise a family are competing with all these people for the same jobs, because the minimum wage has eradicated the kinds of jobs teenagers, retirees etc. used to go for. With the minimum high enough, there are no more movie theater ushers, gas station attendants, rickshaw runners, elevator operators, etc, unless they can suddenly increase their productivity enough to justify such a raise. Thousands of jobs have simply vanished, going the way of the dodo, and so now we have 16 year olds and single moms competing for the same scarce lousy jobs, and simultaneously we’re trying to get rid of even those by raising the minimum wage further. And how many would-be entrepreneurs decide not to start up a new business because of concerns about taking on more labor?

The proponent of the minimum wage would like to boast that they are the champion of the poor since the intention of the minimum wage is to reduce poverty, create more jobs, and so on. Thus, if you are against the minimum wage, you are against the working class. Obviously. Yet, as can be seen, the minimum wage law provides no jobs; as per economics, those jobs are outlawed and done away with. The proponent is hurting the same worker they are trying to help.

 

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“Right to Free Healthcare

Every libertarian knows this position. The gist is that if you are not for UHC, then you must be for the corporate insurance companies and want people to die; that since the constitution guarantees a right to life, everyone has a right to free healthcare; that healthy people are more productive so it is good for the economy, etc.

Before getting to the crucial point, let’s first take a look at one of the elephants in the room. That is the “right to healthcare”. Since my aim is to address things economically, I am hesitant to argue on philosophical grounds, but this can be addressed from an economic standpoint.

If you ever encounter an advocate of big government (in this case it is usually a leftist) demanding that health care be a right, ask that person to define “healthcare.” The “best” definition of healthcare is a number of heterogeneous actions, goods, and services. Exercising is health care. Eating certain foods could be considered health care. Gastric Bypass, open heart surgery, Insulin, Acetaminophen, the list goes on.

So what is being stated when we argue that healthcare is a right? Does that mean a baby ought to have weekly gastric bypass surgery performed? Does it mean that you need to take insulin right now? By now your counterpart is probably moving goal posts and admitting something important: we still need to decide how much of each good and service is necessary, and whether or not we need to factor in a person’s individual needs.

So before we finish off this fallacy, let’s move to another: “housing is a right.”

What does this mean, exactly? Does it mean we all deserve a mansion? I will provide an obviously ridiculous definition of “housing”: every person deserves this house. This house right here. Impossible? Fine. Every person deserves a mansion on this street. And I mean everybody on the planet each deserves a mansion on this street. Just like everyone deserves X doctor, the one that graduated from Y school, and works at Z hospital.

See the problems we’re quickly facing? Scarcity is an immediate factor whenever anybody is foolish enough to employ the “rights” argument to any commodity or service. There are only so many doctors, hospitals, and other resources available. There are no solutions that can be provided by a central planner to address this. None. Scarcity is a crucial point and stares the central planner in the face, forcing him to adopt a solution that does not fulfill his fanciful promises.

Any attempt to engineer universal health care necessarily means either being prepared to pay any price to doctors, hospitals, pharmaceutical companies etc., or establishing price ceilings to prevent costs from going out of control. If you do the former, it becomes more and more expensive because demand is inelastic. If you do the latter, shortages occur. Shortages ultimately occur either way, as rising prices must be in addressed some way — a legal price ceiling or a ceiling on the price the state is willing or able to pay. The State doesn’t bring health care into existence, they just take your money to pay its producers. And since consumers are paying for it whether or not they receive it, their demand is inelastic and their incentive is to overconsume. Even if you assume “universal health care” automatically results somehow in “more health care,” it doesn’t even follow that more health care means healthier people. For example if you get a cold or a bad flu or something you know damn well a doctor can’t help with, you’re much more likely to visit him anyway if it’s “free,” misallocating resources that could have been spent on people who are actually sick and can actually be helped. Some questions that would need to be answered if the state took over and monopolized healthcare are: How much does it pay doctors? Does it depend on their specialty? Their seniority? Reputation? If it needs to buy an MRI machine, how are those prices formed? Things like that, we could go on. The basic answer to all these questions must be one of two things: prices skyrocket because demand has become inelastic, or the state tries to solve this with price controls and shortages ensue.

In a market system, doctors’ wages are established by supply and demand. If there aren’t enough doctors in a given specialty, for example, the pay for that specialty goes up, impelling more people to specialize where it’s most needed. Good doctors make more than shitty doctors because they have more patients because they have a better reputation. Doctors who have more experience tend to make more than those with less for the same reason. Prices emerge and bring supply and demand into harmony. So how fees are established once prices are eliminated is a crucial concern. If they’re dictated, there will be shortages. If they’re allowed to emerge and the payors have inelastic demand because they have their promised UHC, it will become impossibly expensive.

These issues not only apply to doctors, but also to resources such as equipment . Imagine a price control is put into place here. Say the price is set by fiat to $30 an X-ray. What will be the effects? Given only this information an economist might say, “I don’t know – what is the market price of an X-ray?” If the market price is $100, this tells us something about the supply and demand situation. It tells us that more people will want X-rays at $30 than at $100, so fixing the price downward will put upward pressure on demand. It tells us that more people are willing to spend their time as X-ray techs and radiologists at $100 per X-ray than at $30 per X-ray, so it will simultaneously put downward pressure on supply. We can also say that more providers are willing to spend the money for an X-ray machine at $100 per use than $30 per use, putting further downward pressure on supply. The latter condition also means the prices of the machines themselves will be bid down, which relieves one source of this pressure in the short term, but in the long term will put downward pressure on the manufacturer of X-ray machines, even further restricting supply.

So we will have a shortage. What will this look like? Well, it won’t look like, “Sorry you can’t have an X-ray, we have a shortage of that.” It may look like, “We don’t have one of those machines”, or “We can give you an X-ray but it will take a week to get the results because we don’t have a radiologist on staff because all the radiologists are leaving the field.” It may look like, “You need an X-ray, we have a slot open a week from Tuesday but don’t be late or you’ll have to reschedule”. Which of these things would you expect to find in a list of statistics, that would compel you to conclude a shortage has emerged?

To simplify further, consider an MRI instead of an X-ray. Let’s say the machine costs a million bucks (this is obviously not the cost but price is irrelevant) and a typical scan is $5,000. At these prices people will try hard to economize, and there are many ways to do this. Some things can be found or inferred from an X-ray, a CT scan, an endoscopy, or diagnostic techniques that don’t involve imaging at all, so the price acts as both an incentive and a signal to avoid the use of an MRI if possible. Which is good, because the machines are very scarce and accordingly expensive, relatively few facilities have one available, the skills to operate them and interpret the results are highly specialized, and so on.

But now say some politician sees that some people who in his infinite wisdom “should” be getting MRIs, aren’t, because of the high cost and “greed,” so the politician mandates that from now on an MRI scan shall cost $50 instead of $5,000. What will happen? Well, the MRI suddenly becomes the go-to diagnostic technique, because it’s far superior to any alternative and doesn’t cost any more. Now what? Well, the people who presently make a good living operating the machines find that it’s not so lucrative, and they’re smart people who can do better elsewhere, so we lose a lot of techs, and the same will be true of the specialists who interpret the results, so hospitals can’t offer the service 24/7. The machines cost $n amount, so by the time one of them pays for itself it will be obsolete and/or broken down, so it no longer makes sense to buy them, which means it no longer makes sense to manufacture them and there’s no reason to continue to innovate to improve them. The machines themselves become even scarcer, so even fewer hospitals will have them. We have a shortage.

Now you might object that cutting the price from $5,000 to $50 is unrealistically drastic, of course that will cause a shortage, but cutting it to $4,000 should be just fine. And it’s true that the effects of that will be less drastic — possibly even difficult to detect statistically. And that’s just the sort of intervention we usually get, a little at a time, adding up over decades, such that current high prices and long waits can’t (by typical economic methods) be tied to any specific intervention which can be identified as needing to be rolled back. But there may be a cumulative effect for all these admittedly smaller, less drastic interventions, and so it all gets blamed on whatever is left of the free market according to whatever cockamamy economic theory, for which the obvious solution is more regulation. The problem gets worse instead of better, but nobody recognizes why, so the answer is the same again, and with the same results, and on and on forever, all because we’re looking for statistical inferences without regard to any causal relationship among the bits of data, which then are necessarily assumed and then deployed as a justification for some new, bad solution. So unless you have a very sudden and drastic intervention followed by a sudden and drastic unintended consequence, most people will completely misdiagnose the problem.

Case in point, minimum wage (since it was discussed earlier) in American Samoa. Usually you don’t triple the minimum wage overnight, you do it in small increments, so you get small incremental effects which nobody recognizes and which may even be, for a time, overcome by trends in the opposite direction. But in American Samoa the minimum wage was roughly tripled overnight, sort of by accident when Congress decided that U.S. minimum wage laws should be enforced there too. Almost instantly unemployment there skyrocketed into the neighborhood of 60%, when the tuna canning plants there closed up shop and switched to robots in more modern plants elsewhere.

Another objection might be that politicians can patch over those problems with additional interventions. For example maybe they set the price of an MRI scan to $50, but have enough foresight to also begin subsidizing the supply by throwing money at techs, compelling insurance companies to contribute $4,000, etc. But then we no longer have a price control, we just have a gap between what the consumer pays and what the provider receives, and so the unintended consequences are merely different and somewhat more complex.

And this is one of the great benefits of economics. It allows you to understand the actual impact of actions, including policies, so that you can actually direct your efforts towards helping people in a successful way. This is one of the objectives of economics, to describe the world as it really is, or more specifically, the world as it can only be due to basic laws, just as physics does. If the laws of physics say that a ball will roll down a hill, and you push it up the hill, you haven’t changed the laws of physics, you’ve only changed the outcome through the use of force.

Similarly, if the laws of economics say that the price of a good will increase if you increase demand, and you regulate that good with a price control, you haven’t changed the laws of economics, you’ve only changed the outcome through the use of force. The effects of changing them cannot be ignored, because they’ll happen whether we like it or not.

A new student to economics may be hesitant to learn because when discussing economics their counterpart may be more well versed, or the student may write economics off as a “difference in opinion,” so what to do? If it were simple and straightforward there wouldn’t be any Keynesians or Marxists and the world would be a very different place. Educating people on economics can be an uphill battle. But it has to be done. And the details depend on the situation. Do you point out the flaws in your opponent’s proposition, or offer up the irrefutable logic of your own position? Either one is going to require careful planning and execution, not to mention very solid knowledge of what you’re talking about. I have a constant suspicion when talking to advocates of the State when discussing policies like these that when they seem to be talking about economics, and even if they are talking about it, they’re not so much doing analysis as simply justifying their ideology. Without economics, good intentions rarely translate into good results. Most people don’t even know they’re making or dealing with economic arguments. People think the state is necessary to solve problem X. Using economics, you show that the state doesn’t solve for X, but makes X worse than it would otherwise be, and here’s how markets would solve it. Milton Friedman said, “One of the great mistakes is to judge policies and programs by their intentions rather than their results.” You don’t start with a goal and try to build economic models to produce the desired results, resisting any understanding that fails to conform to your ideological preferences. No. Our sole pursuit is an understanding of the market, and our political advocacy comes from the results of this analysis, not the other way around.