Tuesday, February 21, 2012

What About The Law of Supply?

For the first ten pages of this chapter, I was more or less on board. He wasn't straw-manning the right. He was actually using sound economic ideas. Things were going well. Then he repeated what in my mind is Frank's biggest oversight. He applies economic principles of demand more or less accurately but then he completely forgets about supply. He does this whenever he talks about individuals bidding up the price of something. That price is signaling something. It is offering a higher reward to people willing to supply that good. Therefore, more will be provided. Frank seems to think the price will just get higher and higher and everyone will lose out. Granted, I'm over simplifying his point. But let's take a closer look. (And please, someone correct me if I'm wrong here.)

Frank argues in the first part of the chapter that individuals will determine for themselves which job offer is right for them. He first explains this very two dimensionally only considering two factors: risk and salary. In reality there are many factors that go into an individuals decision in the job market. Later he recognizes another one of these factors: how interesting the job is. Frank says it's fine for people to trade off risk for salary. In a perfect world everyone would have a job that was safe, interesting, and paid an infinite amount of money. (For some reason people still have to work in this utopia.) But because we live in a world of scarce resources, people must decide for themselves what is important to them. Frank more or less explains all this (though arguably not that well) and I take no real issues.

But now all of a sudden we introduce the fact that some individuals are parents and that just screws everything up. Now all these parents only want a high salary because they only want their kids to go to the best school. And the only way to have your kids go to the best school (apparently) is to buy a nice house in that area. So now all these self interested parents are taking dangerous high paying jobs and buying nice houses because they want their kids to go to the best school. And what a disaster that is, because this is bidding up the price of nice houses and no one is getting anywhere because these parents keep having to send their kids to nice schools so they keep taking dangerous jobs! And somehow the fact that every thing is relative makes this all true.

In reality, when there is an increased demand for something, price does increase. This does not, however, occur in a vacuum. That increased price leads to increased supply. Beautiful. Additionally, we can't say that all parents will sacrifice all reasonable safety precautions to earn higher wages. The need to pay for a nicer home so that their children will attend a better school may in fact influence certain individuals decisions one way or another. But isn't it also true that parents think about their own safety so that they can be around to provide for their children? Yes, many things are valued relative to other things. But at a certain point, parents will decide that a certain school is good enough. 

I don't believe Frank is introducing an earth shattering new concept when he talks about relative value scales. No one was denying or ignoring this before. People decide for themselves. How they decide isn't important. We just know that they do decide, and act, in their own self-interest. Economics already acknowledges that people compare things relative to other things. Taste and preferences are largely influenced by our expectations. That's inherently relative. So what? 

This example was so close to making Frank's idea real. But it still missed the mark. Still waiting for a good example...

Oh! and in response to this quote at the end:
"No one can dispute that, beyond some point, the ability to achieve many important goals in life depends on relative purchasing power. A direct consequence of that fact is that when someone acquires additional income, she not only enhances her ability to achieve those goals, she simultaneously makes others less able to attain them. Or, to put the same point in the economist's parlance, the same activities that put additional income into one person's pocket impose negative externalities on others.

Many movement libertarians will be content to either ignore the problem or to insist that they have a right to cause indirect harm to others as they please."

 I would never argue that I have to right to cause indirect harm to someone unless we are calling competing with others in the market indirect harm. (A facetious argument could be made that I'm doing them a benefit by holding them to a higher standard.) If I am causing someone indirect harm it is because I am not aware of my actions or because I am in a situation of moral hazard (the costs are externalities). In such cases I can only hope that those bearing the cost of my actions act in their own self interest by either speaking up to make me aware or billing me for my actions against them. If they do not do this for themselves than I don't think I can really be held accountable for things I am unaware of. 

But this isn't even what Frank is talking about. He seems to be claiming that everyone should agree to a lower salary because then things will be less expensive and more resources will be available to improve other areas of labor (safety, benefits, vacation time, etc). This relative income idea ignores the law of supply and it ignores the fact that money is not just a number. It represents real value. Would it make anyone any better off if we all decided that we were going to cut the value of the dollar in half? Imagine that this is somehow not achieved through inflation but instead everyone now magically has double the number of dollars in their bank account and all prices are twice as much. It wouldn't change anyone's position for the better or worse. 

So when I make money, I am not making anyone worse off unless we are to accuse me of taking a job someone else could have. What makes them better than me? I was chosen for the job, was I not? If they can take it, let them. The gains from trade actually indicate that I am creating wealth and making everyone else better off. So once again, Frank seems to be telling a fallacious argument and strawmanning libertarians.

Also, the hockey league imposing helmet regulations is nothing like government regulation. If you want to play hockey without a helmet. No one is stopping you. If you want to play in a league, you have to follow their rules. To argue that the league is like government is like saying that the rules of any game are infringing on personal freedom. 

Okay. I'm done.


  1. Is straw man the phrase of the day? I don't think you can call it straw manning because the terms he uses are pretty ambiguous generalizations. He draws a circle around a group of people and then pokes at what he says their values are. He could be right or wrong, but since he is arguing with a ghost who knows?


  3. Plus the rules of the game are infringing on your personal freedom. Just as having a government is infringing on your freedom by governing you. That is why a league governs over the rules of hockey.

  4. Agreeing to play by certain rules is not an infringement of personal freedom.

  5. Great Post Adam...I liked the way in which you discussed Frank's lack of consideration for the law of supply!