A few months ago, the New Republic reported on a conference, the Third Modern Monetary Theory Conference, of which it was a sponsor (Osita Nwanevu, “Spreading the Gospel of Modern Monetary Theory,” October 3, 2019). One of the participants, affiliated with the Real Progressives website, declared:
Wages are the way they are because corporations have control.
She probably did not mean to opine that wages are too high. But then, if corporations set wages, why aren’t they setting them at subsistence level, or at most, in order to avoid jail, at the government-imposed minimum wages. In America, 2.1% of all hourly-paid workers are paid the federal minimum wage or less (according to the Bureau of Labor Statistics). Adding the higher state and local minimum wages, the proportion of workers getting no more than the minimum wage clearly exceeds 2.1%, but there is no readily available estimate about how many. Even if we make the exaggerated assumption that the proportion is 13%—which was the proportion of workers paid at or below the federal minimum wage in 1979, when nobody in the land was competing with the feds’ wage-setting power—we still face the mystery of why corporations pay 87% of hourly workers more than what they are legally forced to.
Moreover, people, including employers and workers, are not plants who just remain prisoners of their roots when they have incentives to move, that is, to engage in new exchanges. One has to look at incentives to understand the market.
Our activist did not help her case by adding:
Because of money going into politics and deregulation and all that crap.
But then, who among us has never made youth errors (especially in the roaring sixties, when not being a leftist was the ultimate social sin) or said anything imprudent that went farther than his thoughts? And, of course, as John Stuart Mill argued in On Liberty, the free circulation of all ideas, including those that look false, is indispensable for discovering the truth.
Perhaps that person is right on the wage issue. Perhaps there exists, or will exist, a serious theory backed by credible empirical evidence to the effect that corporations, properly defined, control wages in America. We should not assume that we are in possession of some revealed economic truth. Perhaps I am the one who is not being rational? We should always keep that sort of question in mind and stay alert for other explanations that could account for a puzzling statement. Perhaps we should read or reread 19th-century socialists and John Kenneth Galbraith.
Assuming that these doubts are not justified in the case under consideration, the question becomes, why could our Real Progressives representative utter such a non-sensical statement? Economic theory suggests at least four answers or hypotheses.
First, there is the answer from behavioral economics: the poor thing is subject to cognitive limitations—for example, the availability bias, which leads her to consider only what she hears in her ideological silo. Rough translation: she’s an idiot. But a rational-choice economist will want to dig deeper.
Second hypothesis, this one within the purview of rational choice: “rational ignorance.” The probability that her vote will flip the outcome of any election is zero for all practical purposes, so she has zero incentive to spend time and other resources gathering and analyzing information about public issues. She thus remains rationally ignorant. She votes blind. Moreover, because her own participation in Real Progressives’ activities has only a tiny likelihood of influencing political results, she also thinks blank—and makes statements like the first one quoted above (the second one too).
A third answer, also within rational-choice economics, relates to signaling. By suggesting that employers control wages and exploit their plants (sorry, I meant “their employees”) to the stem (“to the bone”), she is simply signaling to her environment, perhaps as a matter of social survival among her peers, that she shares their opinions and sentiments. “I am one of us, not one of them.”
A fourth hypothesis is the one developed by Roland Bénabou and Jean Tirole in their article “Mindful Economics: The Production, Consumption, and Value of Beliefs” (Journal of Economic Perspectives 30:3 [2016], 141-164). Our progressive friend produced (or borrowed ready-made) and consumed her belief about corporations and wages because it makes her feel good about herself and her identity, giving her more utility than adopting a true belief would. She trades-off a better cognition against the affective or functional value of a distorted belief. In a sense, we could say that she is stupid by choice.
The fact that many people hold the political opinions they hold just to feel good is a potent argument for preventing them from imposing their beliefs on other people by force, that is, a potent argument for limiting government power. The three other hypotheses point to the same conclusion.
READER COMMENTS
Thaomas
Feb 1 2020 at 7:38am
How do very much mistaken views being extant show that government should be “limited” and how?
Jon Murphy
Feb 1 2020 at 7:51am
You’re confusing a positive question (“do corporations control wages?”) with a normative one (“what is the proper role of government?”)
Thaomas
Feb 1 2020 at 10:16am
No, I’m just trying to prevent Pierre from committing his Z fallacy
X imposes great costs on some people;
Z would reduce the occurrence of X;
Therefore, Z must be done.
P1. Acting on X1, X2, Xn views would be harmful
P2. Limiting government would prevent the harmful actions
Therefore, limit government.
Jon Murphy
Feb 1 2020 at 11:59am
Ah I see what you are saying. My mistake
Pierre Lemieux
Feb 1 2020 at 12:33pm
This is a good point, @Thaomas (and keep good points coming). And I don’t dislike your source. The answer, as I argued there, is that “Therefore Z (limiting government power) must be done” requires a value judgment. My value judgment, in line with classical liberalism and libertarianism, is that equal individual liberty is better than its absence. Or, to rephrase this in Buchanan’s (perhaps less controversial) terms, individual consent is the ultimate moral-political criterion. Alternatively, as he puts it in The Limits of Liberty, “each man counts for one, and that is that.” This does not close all discussion, but I think it sets the right terms in which it should proceed. See my Econlib review of The Limits of Liberty.
Thaomas
Feb 1 2020 at 4:28pm
There is an argument for the establishment/preservation of a constitutional order as cited (surprisingly Rawlsian in flavor) and I’ll stipulate that it would prevent certain “bad” policies from being carried out. But preventing those policies from being carried out is not logically an argument for the establishment/preservation of that order.
robc
Feb 1 2020 at 9:12am
To prevent the government from applying them.
Pierre Lemieux
Feb 1 2020 at 1:00pm
Yes.
Grant Gould
Feb 1 2020 at 8:02am
I think it is worth taking the strongest rather than the straw-manniest version of the argument before ridiculing it. With the understanding that this is not quite my view, but my attempt to steel-man the discourse a bit:
The canonical less-ignorant anticapitalist version of this is that corporations induce the state to create laws that remove labor’s outside, non-wage options — home production is limited by IP laws, licensing, and zoning, for instance; cooperative and collective systems by tax and accounting laws; finance of informal businesses by banking and AML/KYC laws that give the big formal banks a near-monopoly on credit, and so forth.
In this view it is not specific corporations or even groups of corporations that control policy but the phenomenon of corporations generally, which create a public-choice dynamic wherein politicians can “segment the market” for policy and serve a more concentrated interest by supporting wage labor as an institution and corporations generally. By creating regulatory structures like IP but not regulating the use of those structures by corporations to force people into wage labor, “deregulation” is really just a word for regulation-of-everyone-else.
Of course the obvious silver-bullet response to this is that is to tear down the state and deregulate everything thereby. But the left can remain safely confident that libertarians will not take that last step into anarchism — that libertarians will always support just enough government for public choice dynamics to operate and corporations and wage labor to maintain their privilege. Thereby providing the fuel for the next round of anti-corporate Marxism (AKA, “give that sweet profitable public choice problem to meee!”) for ever and ever amen.
Jon Murphy
Feb 3 2020 at 9:56am
While it is certainly true there are public choice issues at play, as I explain to Mr. Platts below, and elaborate in my subsequent standalone comment, the explanation that firms lobby for certain protections does not justify nor explain the claim highlighted. Firms lobby for certain protections, but so do unions (eg minimum wage, immigration restrictions, mandatory benefits, etc). Firms are still facing competition, just that the competition is moved partly to the political, as opposed to economic, sphere. Thus, even then they cannot merely dictate wages.
Mark Z
Feb 4 2020 at 11:42pm
But how much of these are actually the result of corporate lobbying? Zoning is more a product of lobbying by ‘common people’ than corporations, which actually suffer from it, as it drives up their labor costs. Occupational licensing is most supported by middle class professionals, not big corporations. And in the US, if anything, tax law actually favors co-ops.
Overall, I don’t think there’s a strong case that big corporations have imposed anywhere near the bulk of the public choice problems that burden the system, and the ones that most benefit them – industry-wide regulations – are usually supported by the public, often, ironically, in the name countering said big corporations (in fact if I were a CEO of a big bank who wanted Dodd-Frank to pass because I thought it would help secure my bank’s market share, I’d probably be more inclined to publicly oppose it). To me, the regulatory environment is far better explained by Director’s Law than by Marx. There is no shortage of infamous examples of corporate cronyism, but I don’t think it amounts to near as much a problem in sum as all the laws, subsidies, etc. tailored to benefit home-owners, doctors, lawyers, realtors, teachers, professors, restaurateurs, auto workers, etc. But those aren’t viable targets of political animosity, and besides, most of us probably belong to some group that has lobbied for privileges at everyone else’s expense.
Now, I, not being a particularly good libertarian, am not convinced that we should tear down the state entirely, but I suspect that doing so may actually work to the disadvantage of the ‘little guy.’ The state enforcement of private property probably helps him the most. Big corporations would be best able to protect themselves, and could survive on their brand names; I am more willing to shop at a small business I’ve never heard of in a world where it’s illegal for it to defraud me, but otherwise, a big company’s brand recognition would carry more weight. I guess I just don’t find the general notion – conventional wisdom a this point – that the state is principally an organ of the big corporations or the ultra-wealthy to be particularly compelling. It seems largely based on paying selective attention to things or is supposed to be so self-evident that if you don’t already ‘get it,’ you never will.
Phil H
Feb 1 2020 at 11:05am
A couple of obvious points, and then my main point:
Obvious point (1): In some ways, she’s right. Have you ever been paid by a corporation? Have you ever been paid by an individual? If you’ve spent time as a freelancer, you’ll know that these two situations are different. I’m not claiming either one is better, but they’re not the same. (Think incentives, payment cycles, benefits, etc.) To that extent, it’s true that wages are “the way they are” because of corporations.
Obvious point (2): Relative levels of pay for unionised jobs was higher at some points in recent history.
Main point: “behavioral economics…cognitive limitations…she’s an idiot.” Thanks for being a patronising git, but more importantly, this is a real cognitive deficit on the part of some economists. Anything that doesn’t fit the mould of homo economicus is idiotic, is it? Heaven forfend that ordinary folk who don’t calculate the dollar value of every last part of our lives should hope the economists who claim to model us should actually understand the way we think, rather than just sneer down their models at the “idiots”. You’re like a walking advertisement for why libertarians have a bad name.
Jon Murphy
Feb 3 2020 at 8:32am
Re: Obvious Point #1:
I don’t see your point. I work both as a paid employee and freelance and the only difference is the tax form I get from the government. Neither my employers (George Mason University and Frederick Community College) determine my wages anymore or less than my freelance work does. In both cases, we agree to a given wage that is acceptable to both parties. If it is not, we walk away. I choose to work for my employers because they offer an acceptable wage, and they choose to work with me because I am willing to take an acceptable wage.
Re: Obvious Point #2:
Yeah. So?
Your obvious points are not that obvious.
Philo
Feb 1 2020 at 11:30am
Why would “believing” that corporations control wages make one feel better about oneself?
(I put ‘believing’ in scare-quotes because it seems to me questionable to apply the word ‘belief’ to a state of mind reached otherwise than with the intention to find the truth.)
Pierre Lemieux
Feb 1 2020 at 12:59pm
@philo: Because, according to this model, it maintains the previously built self-identity (the equivalent of a capital). Two quotes from Bénabou and Tirole:
This ties in with the other hypotheses of rational choice.
In reply to your second point, we are aiming at positive (not normative) analysis here. To quote Bénabou and Tirole again:
Craig
Feb 1 2020 at 2:29pm
At the end of the day, no matter how you slice it, being an ’employee’ typically means ‘being in business’ with ‘one customer’ (the employer) and that’s just a bad business plan.
Pierre Lemieux
Feb 1 2020 at 5:32pm
@Craig: Yes, for somebody who likes to be an independent business and is a risk seeker (even in the short run). When you slice, remember that preferences differ between individuals.
Jon Murphy
Feb 3 2020 at 8:40am
Then why are both parties engaged in bad business? If being an employee means being in business with one customer, consequently being an employer means being in business with one seller as well.
My point is not obvious, but I contend is true, so let me explain:
An employee is not just a mindless replaceable drone, just like an employer is not a mindless replaceable firm. They are both, ultimately, people. When an employer and employee first initially begin their relationship, it may be akin to a “perfectly competitive” model, that is the employee just hired is no different from the employee not hired except for his wage, and the firm is no different from then ext except for the wage he is paying. But as the two work together more and more, we move away from that model. The employee gains all sorts of tacit knowledge about how the firm works and how they do their job. Likewise, the employer gains all sorts of knowledge about how the employee works and what they like about the job. This, in turn, grants both the employee and employer a semblance of monopoly/monopsony power. In other words, the longer the relationship persists, the more it becomes “one buyer/one seller,” which would imply that both the employee and employer are engaging in “bad practices.”
Now, it seems to me absurd to assume that everyone routinely practices “bad practices.” We’d need some explanation why.
Geoffrey Ryan
Feb 2 2020 at 8:18pm
Craig, being an employee is being in the business of selling your services on a repeated basis. You don’t commit to selling your entire working lifetime to a single employer just as your employer makes no commitment to buy your working lifetime of services. Instead, as an employee you need to evaluate on a reasonably continual basis if you are satisfied with both the current wages and benefits offered by your current employer but also your best guess at your future prospects, in comparison to what you think you might get elsewhere now and in the future. So, you are not really in business with only one employer but are choosing among a wide variety of competing employers over time and your employer is doing very much the same thing (choosing employees based on the value of their current and estimated future services). It doesn’t seem correct to characterize this as being stuck with a single service buyer.
Warren Platts
Feb 3 2020 at 6:51am
ZOMG. Why is this even an issue for discussion of its truth-value?
The cynical theory of “Public Choice” perfectly explains why the above assertion must be true. A: it is possible that supply and demand curves can be affected by lobbying efforts (cf. tariffs, right?) B: corporations with the wherewithal will literally calculate that the lobbying costs required to suppress wages is much less than the savings that will result from lower wages.
So what you do is you spend (a few) millions to lobby for policies for freedom: free immigration that increases the supply of labor, and free trade that reduces the domestic demand for labor. The laws of economics then take over. The “free” market will then set the wage level, courtesy of corporations, like, say, Koch Industries, that have done the math, and have spent the money to implement the policy.
It is that simple. She is completely right. Corporations do control the wage level.
And yes, I know all about global deadweight trillion dollar bills laying on the sidewalk. That is why it is called economic nationalism as opposed to economic globalism. We will see you guys at the next election. lol….
Jon Murphy
Feb 3 2020 at 8:50am
Be careful here: you’re shifting back and forth between movement of supply and demand curves and movement along supply and demand curves. Oftentimes, lobbying efforts are not so much about shifting the curves but moving along the curves (eg tariffs generally do not shift curves, minimum wages do not shift curves, “optimal” taxes/tariffs do not shift curves). This is merely a technical point.
But, let’s take your broader argument and explain why it is incorrect according to basic economic thoery:
Just because someone can influence curves doesn’t mean they are the only ones. Remember thy Chicago Price Theory: the curves are the result of people’s behavior. They are not merely imposed from the outside. They do not merely exist, waiting to be discovered like the Sun or the Moon. To quote Chicago-trained economist James Buchanan “Order is defined in the process of its emergence.” Firms try to lobby to get to a preferred price level because the market level is undesirable for whatever reason. But they must contend with other market forces as well (remember thy Public Choice Theory you invoke: politicians face incentives, too). Sometimes, the lobbying scheming backfires (like the steel tariffs. They were supposed to raise the price of steel in the US but have actually caused the demand for steel to fall as people shifted away from higher-priced steel to substitutes. Trump’s tariffs were supposed to “make America great again” and bring back manufacturing to the US, but all it has done is shift manufacturing to other places).
So yes, corporations do indeed try to “set” wages in the same way that consumers try to “set” prices. But, as economic theory explains, there are unintended consequences. So, we cannot really say with any theoretical or empirical evidence that “wages are what corporations say they are.”
Pierre Lemieux
Feb 3 2020 at 11:11am
With due respect, @Warren, I think one could apply to both your approach and our Real Progressive’s approach, what I once said about another great nationalist, socialist, populist, and protectionist–that he
Pierre Lemieux
Feb 3 2020 at 11:15am
One technical point, @Jon: possibilities of substitution are already included in a demand curve–and so along the demand curve. A change in demand represents new substitution possibilities, but it is not necessary for substitution.
Jon Murphy
Feb 3 2020 at 12:22pm
You are, of course, correct. Rather, I mean to invoke the second law of demand, where the elasticity of the demand curve changes as the price remains relatively high.
Jon Murphy
Feb 3 2020 at 9:43am
One thing I think Mr. Nwanevu and some of the commenters here are missing is Pillar Number 10 of David Henderson’s 10 Pillars of Economic Wisdom:
Mr. Nwanevu treats “corporations” as a single monolith with a single goal in mind. In reality, though, firms compete against one another for workers. If Firm A is underpaying workers, their rival Firm B can come along and “poach” those employees away. This is true not only within industries but between industries as well. If, for example, academia starts offering better wages (both monetary and non-monetary) to workers than consulting, then folks will shift from consulting to academia and require consulting to offer better wages consulting firms want to retain their employees.
Even if one wants to argue that “corporations have control” means that they have monopoly power in the market and thus are price makers as opposed to price takers, that still doesn’t mean they can arbitrarily set and control prices. They are still bound by a downward-slopping demand curve.
This competition can, and often does, come from unexpected sources. Consider how the Internet ended up destroying Sears because of Amazon (the firm that mastered mail-order shopping couldn’t compete against e-mail order shopping). Or the pressure Uber/Lyft are putting on taxi companies. Or Youtube’s pressure on traditional cable. Indeed as Don Boudreaux and Burt Folsom show in their 1999 Antitrust Bulletin article “Microsoft and Standard Oil: Radical Lessons for Antitrust Reform,” firms that appear to be in monopoly markets still tend to act as though they face competition. They do not fully capitalize on all their monopoly gains.
Economic theory predicts that wages will be tied to productivity because of competition, and lo and behold that is just about what happens. If it is true that “[w]ages are the way they are because corporations have control,” one would need to answer the question “why do corporations want wages to be equal to productivity?”
It is very hard to squash competition even with government protection.
robc
Feb 3 2020 at 11:10am
Sears was in trouble while Amazon was only selling books (source: Sears was a major client of the company I worked for in the 90s).
Jon Murphy
Feb 3 2020 at 11:16am
Oh yes, absolutely. They had a lot more problems than just the one I mentioned. I just like the irony
robc
Feb 3 2020 at 11:56am
Agreed. All they had to do was throw their catalog up on the internet in 1995 and they would have been solid.
robc
Feb 3 2020 at 11:57am
Well, that, and develop new delivery techniques. But, then again, their shareholders wouldn’t have put up with the losses.
Mark Z
Feb 5 2020 at 12:05am
Yeah, I think this is pretty big issue with the pseudo-Marxian model of interests here. Why would an entity’s legal classification impose on it a sense of common interest with similarly classified entities? Why are corporations supposed to ‘like’ other corporations? Competition principally occurs within each factor of production rather than between factors of production. It’s not clear why the workers vs. corporations/investors conflict of interests should be (or, in my opinion, is) particularly salient. Where corporations do game the system, it seems to me they usually do so either individually (such as demanding a special tax cut for building a big office somewhere, benefiting its own investors and employees at the expense of those of other corporations as well as taxpayers) or as industries (such as lobbying for or a subsidy or bailout), which is usually done in conjunction with its workers (e.g., the UAW and the auto companies jointly seeking a bailout for their industry).
Pierre Lemieux
Feb 13 2020 at 10:52am
Mark Z: That’s a good point.
Thaomas
Feb 4 2020 at 1:03pm
OK, let’s suppose “Wages are the way they are because corporations have control” and you want to change that by say, raising the wages of all except the highest x% of workers. What follows? And what if anything would it have to do with monetary theory?
Warren Platts
Feb 4 2020 at 6:59pm
Answer: It is very simple, rather than continuing the past policy of managing for a slack labor market where the suppression of wages is the specific, explicit goal, manage instead for a tight labor market. And for the sake of an honest discussion, let us leave aside the Libertarian hocus pocus that policies and laws and treaties passed by elected officials in the supposed name of “individual freedom” are not really policies and laws and treaties because, hey, it’s–by definition–“individual freedom.” It is Leviathan either way exerting his inchoate might. The only question is who shall pull the strings.
And yeah, I get it: “competitive workers bid down wages until all can find jobs. But it is also true … that competitive employers bid up wages until exploitation is reduced to zero.” I get it: there are two lines drawn on the chart and where they make the “X,” that is the market clearing wage rate.
And yes, “A change in demand represents new substitution possibilities.” That is the WHOLE POINT of “free” trade. Wall Street quants have a technical term to describe the concept: they call it “labor arbitrage.”
So it is obvious that labor supply & demand curves can be manipulated by policies, laws, and treaties. So the only question worth asking is how & who shall do the manipulating. And please stow the Libertarian sanctimony. There is no question of manipulation versus not manipulation. There is only manipulation versus manipulation.
This is your theory–not mine! James Buchanan’s “Public Choice” remember? The rehash of Machiavellianism that he got a Nobel Prize for? And thus it cannot be the case that only barbarians and protectionists engage in self-dealing. Everybody does it. So if billionaires are spending millions on lobbying efforts, then, according the the Libertarian Public Choice theory, they must not be doing it for altruistic purposes. They are self-dealing.
Thus given that billionaires and the academic economists they hire to do their bidding are a tiny minority of the population, then why should they be the one’s doing the manipulating? After all, ordinary workers make up the vast majority of the electorate. And as David Ricardo himself said, a tight labor market is a happy labor market. And managing for a tight labor market is not a hard thing to do: all you have to do is move that supply curve to the left, and move that demand curve to the right using the same sorts of policies, laws, and treaties that the billionaires and their “free market” academic advisers constantly lobby for. And if we really must insist on bring ethics into it, is it not the case that maximizing human happiness is the ethical thing to do?
This is about where a Jon Murphy will leave a comment or a Bryan Caplan will write an entire book stating that illegal immigrants and foreign factory workers count just as much as U.S. workers. This move is of course supremely disingenuous. Right? Public Choice! If people are lobbying for the interests of non-citizen workers, that must simply be because they–the lobbyists and their paymasters–are self-dealing.
Wait a minute Warren. You are proposing that U.S. workers–aka voters–use whatever political levers they have in order to self-deal. And in the process screw over workers in other countries, and perhaps even a few billionaires here. Well, yep. Pretty much. That is what economic nationalism is. It rejects the ethical equivalence of non-citizens. We make no apologies for that. It is not the job of a nation-state to make all other nation-states happy. Indeed, the very legitimacy of a nation-state depends on its ability to make its Home citizens happy. That blue passport is your patrimony. It belongs to you–you are under no ethical obligation to give that away.
Pierre Lemieux
Feb 13 2020 at 11:06am
(1) To understand “demand” and how it can change, one has to recall how a demand curve is built: from choices between different goods on the basis of an individual preferences and prices. Exercise: What can you say is similar and different about a supply curve of labor? A business supply curve? (2) I think the scenarios you presented unwittingly support the argument that an unconstrained Leviathan is the problem, not the solution. (Think of Southern nationalism around 1860: was it so good? What about Southerners who did not share it? Where was the “nation”?)
Jon Murphy
Feb 5 2020 at 9:29am
I don’t think there’s anything in MMT that allows it to be this precise with monetary policy. Generally, they want a combination of monetary stimulus and taxation as a way to build the welfare/centrally planned state.
Comments are closed.