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June 27, 2006 - Freedomain Radio - Stefan Molyneux
40:16
301 Price Controls and the Minimum Wage

Well, *something* is being controlled, brother, but it ain't price!

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Good morning, y'all!
It's Steph, I hope you're doing well.
Welcome to show 301.
Yes, yes, it's back to me, I'm afraid, given the dulcet tones of my wife and how...
Much more pleasant than they are than my pan-commonwealth semi-European rasp.
Sorry, we're just back to me.
I hope that you enjoyed Podcast 300.
We sure had a lot of fun doing it.
And one take, baby.
One take. That's the kind of professionalism you get from people who record their radio shows in their cars.
And the interesting thing is that the style of Q&A that went on in Podcast 300 actually continued pretty much for the rest of the weekend.
I feel that Christina probably had quite a bit to get off her chest, and so I'm very glad that she did.
And, you know, back to me interrupting everyone all over again.
So that was a lot of fun.
I hope you enjoyed it. Now, let's have a chat this morning about a fairly basic but very interesting topic in economics.
We haven't had a nice juicy little economics chat for a little while, although I'm very aware that we also haven't had any chats on philosophy for a little while, and so I think that it's well worth us finishing off this one.
I'll get back to a nice philosophical topic this afternoon.
But the topic that I'd like to talk about today, this morning, is price controls.
Price controls are a fascinating piece of state thuggery that have just enormous implications to what goes on in the world as a whole and cause enormous instabilities in the free market.
And this, of course, is always blamed on the free market.
The wonderful thing that governments have learned since the absolute autocracies of the 20th century is that you really do need to leave a little bit of the free market around.
This has been particularly learned by the communist leaders, because if you don't leave a little bit of the free market around, Then you don't have anyone to blame when things go wrong, right?
So the thing that happened with central planning, just so, I mean, I think just an interesting idea, and we'll get to the topic in just a second, it's zero to tangent in 35 seconds.
But in the 20th century, central planning was all the rage, and central planning was, in a sort of, in a kind of way, was supposed to be Making the world better than capitalism.
So even the Marxists recognized that capitalism was a big step forward from feudalism.
They just felt that it would be even better to have central planning, that all of the final inconsistencies of the marketplace would be smoothed out and everything would be hunky-dory and things would be better.
So, nobody who was living in the 19th century, Marx included, could look at the 19th century and say, well, this has been a real disaster for mankind, unless they just had no historical sense whatsoever about the conditions prior to the Industrial Revolution.
So, of course, when everybody's grindingly poor, there are few records, and very few people get all aflutter about the conditions of the poor, because it's not the conditions of the poor, it's kind of the conditions of mankind.
And I would rather be a homeless person in the 21st century than any king or emperor throughout history.
I'll give you two words, surgery and dentistry.
And that's all you need to know.
You will get those things if you're a homeless person in a civilized manner.
If you can't afford to pay for them, no problem, because all hospitals will treat people who come in through emergency, regardless of their ability to pay, which would not change in a free market system.
But everyone knew that The condition of mankind had been vastly improved through the Industrial Revolution.
And they assumed that when they had the sort of ups and downs that occur in the free market...
Now, I mean, a lot of those have to do with fiat money and government debt and inflation caused by overprinting of fiat money.
This, that, and the other. But some of it is not, right?
Some of it is not that way.
Some of it is simply the result of natural changes within the marketplace.
So when those evil robber barons managed to lower the price of oil, say, to the point where even poor people could afford oil lamps, which allowed them to study and read into the evening, which was an unimagined privilege back in the 19th century.
You can't imagine... Just how tied people were to sunlight and darkness when they were poor, because candles were too expensive and inefficient, and they finally got oil lamps, which allowed them to stay up, which had a lot to do with getting the poor out of poverty.
You stay up, you can read, and so on.
Otherwise, you've just got to go to bed and have more poor people, right?
So when those people were doing that, there was, of course, a lot of problems with the other oil companies that they were undercutting, overcompeting with.
And so what happened, of course, is those people got upset, and those people had to lay people off, and then they went and ran after the government, which we'll talk about in another podcast, just what a waste of human endeavor is involved in the existence of a government, because so many people waste their times and lives and energies in pursuit of power, which if the government wasn't there, they'd actually be doing something productive in the marketplace.
The basic fact is that the market is going to have these instabilities.
You could call them instabilities.
It's just changes, right?
I mean, it's like saying, you know, when I got married, it was a huge instability in my life.
It's like, no, it was just the result of your choice, and there were changes in your life based on that.
And so...
In the marketplace, there will always be these instabilities, but central planning was supposed to smooth it out and eliminate those inconsistencies and everything was just supposed to be.
So, you know, where economic growth was like 6% and then maybe 2% and then 4%, central planning was supposed to keep it at an even 6%, so that nobody ever had to worry about these kinds of instabilities.
And this, of course, was the root of Keynesianism.
Keynesianism is a complex thing, and the only thing I'll say about it here is that in the Keynesian philosophy, he was a rather fruity economist from the mid-20th century, very influential because he was a great excuser and supporter of state power.
So he was lauded, of course, as all such power fetishistic and corrupt intellectuals are.
He was fated as a grand gentleman and received many honorary degrees and so on because that's That's the icing they put on the grave of your corpse, right?
When you sell yourself a power, that's what you get, and it's very confusing to people.
It's like John Kenneth Galbraith, the tall, stentorian, lantern-jord, gray-haired, wise economist elder, who was another slave and whore to state power, and thus got fated and was a public intellectual of the Christopher Hitchens variety, gets all the goodies in the world, you just have to...
Give up your soul, right?
You just have to crucify your true self, and your false self gets all of the plaudits that it both loves and is enslaved by.
But Keynes was an economist who had lots of fights with Hayek early on, and there's a sort of slightly sad tale about this, which I'll mention briefly here, because I just can't control...
The Tangent Tempest.
When Keynes released his first book, Hayek spent about 6 to 12 months, a long time, it's a big book, went through the whole thing and pointed out all of the errors and problems that occurred within it.
But then when Hayek's review came out, Keynes said, well, I'm not even going to bother responding to this because I don't believe anything that I wrote in that book anymore.
I've changed my mind. Nothing annoying about that, right?
So then when his next book came out, Hayek read all of this stuff.
I think it was The General Theory of Employment or something like that.
But his next book came out. And his basic idea, Keynes' basic idea, was that the government should fund the economy, should spend into the economy during downtimes to maintain demand so that people didn't change jobs.
And then they would then cut back on that and pay it off.
Like the taxes would be higher, right?
Raise taxes.
And then spend the excess during a depression.
So raise people out of the depression so that you keep stimulating demand, blah, blah, blah.
And then when times are good, then you pay off the debt that you accumulated during the overspending in the downturn, right?
So, I mean, it was designed to smooth everything out.
And, of course, the government people heard, raise taxes, and after that it was like Charlie Brown's teacher, you know?
We don't care about the rest of it.
We get to raise taxes and call it sound policy.
Well, let's go for it, right?
More money, more power.
Yay! I mean, that's what these people live for.
Now, Keynes either had a complete moral idiocy with regards to power, that he had this bizarre fantasy that the government is composed of wise custodians of the general good, because that's all you want to do.
When you want to do good, right, you don't go and become a doctor, you don't go and become a philosopher, you don't go and become a teacher or a These kinds of people, you go and grab control of the military and the police because that's how you do good.
That's all we need to know about Keene's own parenting in his childhood, right?
I would be shocked if he didn't go to boarding school where violence is the source of moral improvement.
But Keene's had just this ridiculously silly approach to power.
Silly or corrupt.
I would probably go for corrupt because the man was an academic.
And so he knew a little bit about political infighting, which is endemic within the academic community.
And so... He simply could not be unaware that he was prescribing a massive increase in government power, but they loved having the theory which they could talk about endlessly and talk about how we're going to smooth out these.
Of course, this was after the Depression, so this was a hot topic, and so, ah, the wise custodians of government are going to spend, when demand is low, to stimulate demand, and then they're going to save and spend, pay off the debt, As all governments have done since the dawn of time.
I mean, he'd never read a book of economic history that government debt almost never gets paid off.
But anyway, this was sort of the debate.
And so when Keynes published this book, Hayek declined to review it because he said, yeah, it's full of the same nonsense and errors that were there originally.
But I'm not going to review it because the last time I spent a lot of energy reviewing one of Keen's books, he just turned around and said, well, I'm not going to respond to it because I don't believe that stuff anymore, so I don't want to go through the same level of effort to critique everything he's done and then find that he's going to disavow it anyway, so this book sailed on unopposed.
And a lot of people in the libertarian or freedom movement feel that this was, you know, a turning point and so on.
And it really doesn't matter.
If it hadn't been Keynes, it would have been somebody else.
It doesn't matter.
The whole sort of hinge of economic freedom did not come down to whether or not Hayek reviewed one book or not.
The expansion of state power is a process that has to run its course once it gets underway.
And once it's run its course, then maybe things can change, right?
So it's like rampant alcoholism.
Anybody who's dealt with an addict knows that you simply can't change the addict's mind, and you'll simply get lied to and deceived, and you'll get caught up in a particular kind of hell where all optimism that you have gets destroyed.
And this is what happens when you still have illusions about the state.
But what happens is that the alcoholism has to run its course.
And... This is not to say that some alcoholics...
I mean, there's still the mystery element.
Maybe it's free will. Maybe it's whatever, right?
But the alcoholic may change.
But generally, these things have to hit bottom.
And then they can change.
Now, if they hit bottom and they've never heard of, I don't know, like treatment facilities or...
I don't even know. I'm not sure. I think Alcoholics Anonymous is a little bit spiritual.
But that's not the end of the world, right?
You have to surrender to a power higher than yourself.
Sort of, in my view, that would be the unconscious.
But... Maybe they talk about it in terms of God, but if you've never heard of these treatment facilities, then you're going to hit bottom and then you're going to just keep drinking and end up dead.
But if you hit bottom and you sort of get this panic where the false self is exhausted, it's illogic, and the true self emerges briefly, which is what happens when the false self exhausts its capacities to lie and so on, then the true self at least has the knowledge of Alcoholics Anonymous or some sort of treatment program so that it can go and get treatment.
It's an option. Which if that option doesn't exist, then things just keep getting worse.
And sort of that's the idea behind what I'm doing here or what we're doing as a conversation.
Which is that, yeah, the state's going to crash.
As we talked about yesterday, I think it's probably sooner rather than later.
But when it does crash, people need to at least have an option.
People at least need to have an idea of an alternative to state power.
Otherwise, they'll just create another state and things will get even worse.
So we are in a process now where words cannot stop.
The growth of the government. Words cannot stop the growth of the government.
It's too far gone.
It's not going to reform itself.
It's not going to be minimized itself.
And the power of the government relative to the people is greater than it's ever been in human history.
And governments didn't reform themselves even in the past.
When 10,000 peasants could overwhelm 1,000 knights, which was the king's retinue, and kill them.
Whereas now, we can't take on the military because the hardware is simply too, and the biological and biochemical warfare agents are simply too powerful.
So there's no chance to do anything against the government, and words aren't going to stop it because it knows that it's invulnerable from a military standpoint.
So it's going to have to run its course, but what we do want is when it crashes for people to have correctly identified the cause and correctly identified the cure, it doesn't mean that we're going to end up more free.
When the government crashes, but it means that we have a shot, that the world has a shot to be more free, because it will have knowledge.
And that knowledge, this knowledge that we're putting out, is great because it will exist pretty much from now until MP3 is no longer a recognized format, in which case somebody will convert it to something else, so it's going to be out there.
And kind of in a way that books aren't, right?
I mean, this is sort of what the great thing is about podcasting, that I do a lot more audiobook listening now than I do physical book reading, because with audiobook listening, you can multitask.
You can't read a book and drive, or you can't read a book and do your laundry, but you can listen to an audiobook and do all these things that are sort of drudge work and get something out of it.
So it's going to be around.
If it's not this time, then it'll be the next time in a couple of generations when the new state crashes again.
And Eventually, people will figure it out, right?
I mean, they'll have the knowledge out there.
It will create possibilities that they didn't have before.
And so, at some point, when they hit rock bottom with the state, they'll sort of say, okay, well, I guess we've kind of figured this one out, that that doesn't work, and so maybe we'll look at this alternative, and we'll figure that out.
So, I think that's why I'm putting so much energy into the conversation at the moment.
A, because I enjoy it, and B, because I think that the time is fairly critical as far as getting the information out there.
Unfortunately, technology capitalism has created a venue for communicators wherein we can bypass all of the normal restrictions that occur with people who get licensed from the state and who have to deal with the state as far as news and all that goes, which we talked about before.
And of course, I'm unfettered by academia, wherein if I were putting these podcasts out from academia, it would be the end of my career, without a doubt.
And so this is a unique venue that has been created by capitalism that I think will save the best elements of capitalism and ditch the state of mercantilism.
But time is a little bit of the essence, which is why I put a lot of podcasts out, Let People Pick and Choose.
So the idea that Keynes put in place around overspending when there's a trough and then paying back the overspending debt when there's a boom is wrong on so many levels.
And it's wrong for the same reasons that price controls are wrong.
You see, we're looping around slowly.
You know, we're circling the supertanker of the topic in the little tugboat of elliptical chats.
But we are going to chat about what happens when you fix the free market in some sort of rigid manner.
And this is sort of an important thing to understand, that when you do fix the free market in a rigid manner through price controls or through this mechanism of keeping people employed in industries that are no longer viable, the great fallacy is that these things should not change.
This is a complicated topic, but we'll touch on it sort of briefly here.
And if you're more interested, send me emails or form mails through freedomainradio.com and I'll go into it in more detail.
Every single resource in the world, thought, action, capital, natural resources, you name it, can go to just about an infinite number of uses.
And the question is, of course, in the free market, what do people want to do with their time, energy, life, resources, ambitions, linguistic skills, intelligence, whatever it is you want to put down as a resource, what is it that people want to do with it?
So let's just take a simple example.
A tree that has been cut down in the forest, and people have not heard it because they weren't there, but the sound exists anyway.
But... A tree that is cut down in the forest can be used for toothpicks, building houses.
It can be used for building stocks in a medieval village.
It can be used for creating a deck.
It can be used for tunnel supports in an old-fashioned mine.
Anything you can think of.
And the question is, once it's used for one thing, it's not going to be used for anything else.
It's a little bit different from intellectual property, particularly podcasts and webpages where they can be reproduced without loss to the original owner, but you should still donate anyway.
But a tree, where should it go?
Where should it go? Well, if a central planner decides, then that's where it's going to go.
But that's called a push market.
A push market is where you have to go out and make things happen.
So an entrepreneurial startup company is in a push scenario.
You've got to push the product out to market.
SAP, or IBM, not so much in a push market.
Dell, not so much in a push market.
They've got lots of calls from people who want, so it's a pull market, and the market is pulling.
Now, with central planning, And with price controls, you get a push market, forcing the goods to go a particular direction.
So if you say that everyone who builds houses gets a subsidy of $10,000 per floor of the house, then you're going to push a lot of wood towards housing.
And the price of houses is going to change, and people are going to get more into housing because they go, wow, all these subsidies, that's great.
So you're going to draw all of these people into the housing market, house building market, and all the periphery deals that go along with house building, all the periphery markets like your window coverings, your landscaping, and all the stuff that goes along with new house building.
Which, of course, I'm fully aware of now.
Maybe a year and a half of a house owner or so.
So all of this stuff is going to go on in the realm of building houses, and it's going to become a pull market, right?
So you create this push, and you create a pull market.
And therefore, all of the uses that the trees that are now going into building houses, all of the uses they could have gone to anywhere else in the marketplace, they don't go, right?
So the price of toothpicks goes up a little because the toothpicks guys aren't getting the demand, sorry, aren't able to compete as easily with the demand for houses, the artificial demand for houses.
And so you end up with everybody else who's using wood is unable to compete without raising their prices.
So they have to bid more for wood, which raises the prices everywhere else.
So, I mean, basically you're shifting a whole load of costs to the consumers because you're artificially raising the demand in one area of the economy.
But the problem is you don't know.
You don't know where the wood is really wanted.
Where is the wood really wanted?
Well, once you create a push market through price controls or central planning or regulations or subsidies or tax breaks or whatever, well, you're forcing the wood to go in some particular area, or you're certainly creating a tendency for the wood to go in that particular area, but you have no idea fundamentally if that's where people want it to be.
Maybe everybody is suddenly absolutely keen on surfing.
I know probably surfboards aren't made of wood, but let's just pretend that I'm cool and know these things.
But everybody suddenly is really keen on surfing.
Then all the wood is going to flow towards the surfboard community, and they're going to use it to build surfboards that aren't very efficient, I'm sure.
I'm sure they're made of some other polystyrene or something.
But... There could be any number of things that people want wood for.
Maybe if he was really getting into carpentry and wants to finish their basement rather than build new houses, well, that's not going to happen, right?
The money's all going to the house builders.
The wood's all going to the house builders.
Now, with price controls, you get the same kind of thing.
Price controls fundamentally always create shortages.
I mean, that's an iron law of economics.
There's simply no way to get around it.
Price controls always create shortages.
So when you say, if somebody suddenly said, well, let's make the price of oil 50 cents a gallon, then all that would happen is people would start using a heck of a lot more oil or gasoline or whatever, the derivative substances, and there would be shortages, right?
This is what happened in the 1970s.
Nixon, our great conservative and free market kind of guy, when faced with the OPEC oil cartel's monopolistic restriction on the production of oil, he put price controls on goods and services around oil, and so you ended up with these lineups around the block where he put price controls on goods and services around oil, and so you ended up with these lineups around the block where you had to wait for three hours to fill your car, and half the time you got there
It was absolutely inevitable. There's no conceivable way around this.
You simply have no choice.
And so it doesn't matter.
Price controls don't matter at all.
They don't matter at all because...
You either pay for the good in price, in dollars, or you pay it in time.
Either you pay 50 cents more a gallon and there's no shortages, or you pay 50 cents less so it's cheaper for you but you've got to spend two hours lining up at the pump.
So it doesn't matter.
Fundamentally, you can't change the laws of reality.
I mean, obviously, right? And so if you start screwing around with the laws of supply and demand, it doesn't make any bit of difference.
It doesn't make one bit of difference in the end.
And so this lack of understanding of the dynamism of the market is one of the reasons why central planning always fails and why things like price controls always fail.
So to the uneducated person, Of course, the world looks flat, and the sun and the moon look the same size, and they both look like they go around a flat and stable earth.
That's the sort of uneducated view of the world, and the same thing is true of economics.
So if you look at the minimum wage and say, oh, we're going to add $2 to the minimum wage, and that's going to make the poor people richer, and they're going to have more purchasing power, and it's going to stimulate demand in the economy, and it's going to add more jobs.
It just sounds like the most brilliant thing in the world.
Because people love talking about stuff that they have no idea about.
Of course, the minimum wage, if you raise it by $2, it's a complete disaster for the poor.
It's a complete and total disaster for the poor.
And it's an unrecoverable, to a large degree, it's an unrecoverable disaster for the poor.
So let's take the example of floor sweepers being paid $5 an hour in a factory.
Well, if you're a floor sweeper and you're being paid five bucks an hour, well, that's really all it's worth for you, right?
Maybe it's some, hey, let's do the wood factory.
Okay, it's all coming together now like a reverse Big Bang.
The factory that creates toothpicks creates a lot of shavings, right?
They have to be swept up.
So you can't keep the shavings and people stumble over them on a fire hazard or whatever, and they're going to pile up, so you have to get rid of the shavings.
So the factory owner is going to hire someone to, you know, push a broom.
That song, two hours of pushing brooms gets a 9x13 broom.
I'm king of the road. That's the one.
So this guy is going to push the broom around for $5 an hour.
And he's getting a job.
He's getting exposure. Maybe he'll move into working...
A machine at some point.
Maybe he'll take a course on lathing and whatever, right?
But that's his entree, right?
He's self-sufficient. He's got a job.
He's got a relationship with an employer.
And if he's diligent and careful, then he'll move up because somebody will say, well, those aspects of his personality were something good, so let's get him on to something else.
So it's his tip of the sword for getting into the economic world.
And so it's a good thing.
Now, let's say that the guy is forced to raise the wage, and let's say he employs five of these guys.
And let's say that he now has to raise the minimum wage 20%.
It's like $5 to, I don't know, like $6.50.
This is $7, right? Well, it's not worth it to him economically to continue to pay people seven bucks an hour rather than to do something else, right?
So what he's going to do is he's going to get rid of a guy and just ask the other guys to sweep faster.
That's going to be his sort of first option, right?
So he's going to fire a guy.
Because he's got a fixed budget, which is valuable for him in terms of the value of floor sweeping.
And it's X amount of dollars, and now it's X amount plus 20%.
So he's just going to get rid of a guy.
He's not going to have a big pile of money sitting around that he's just going to pay these people for.
So the other guys are doing a little bit better, but the poor guy is now out of a job.
And this is happening to tens or hundreds of thousands of poor people So basically it's an income grab.
It's an absolute income grab.
One guy is forced to be fired by minimum wage laws, raising the minimum wage.
The other guys get an increase in it, but it's directly taken from this guy's paycheck.
So you're creating the kind of zero-sum infighting that state regulations always create, and usually it's not even zero-sum.
And what else occurs?
Well, there's cheating and so you have to have more regulations and you have to have more people going out and checking.
And the other thing that happens, of course, is that people go off the grid, right?
Minimum wages go up and suddenly these guys, like the boss sits them down and says, look, you know, you've been working here for a couple of years.
I like you guys. You do good work.
I can't afford you at the new wage.
So we got two choices. I can either lay one of you off or...
I can pay you guys, but we'll have to pay you under the table, so I'll let you go and I'll pay you cash.
So now, of course, they're operating without a contract.
They don't have severance benefits.
They don't have whatever.
I don't know if they have health coverage or whatever, but all of the benefits that would go on, they've now lost.
So now they're worse off than they were before, and they're sort of living off the grid, so that's not good for the poor either, right?
It's harder. And they don't have an employment history.
They don't want to go somewhere else. The boss might feel concerned about giving them a reference because they haven't worked there for a while.
They've got a hole in their employment history.
It's pretty bad all around.
Now, the other thing that might occur is the owner of the factory might say, oh, you know what?
This increase in floor sweepers is pretty expensive.
I'm going to pay a lot of money now to get these guys to sweep my floors.
But you know what? For like $20,000, I can invest in a sawdust catcher for my toothpick-making machine, which is going to eliminate sawdust.
So it really wasn't worth spending that money when the sweepers were real cheap.
But now that the sweepers have become more expensive, I'm going to buy some hood-catching sawdust-capturing device that's going to hoover up the sawdust as it comes out and neatly package it for sale to the sawdust guys who buy it to spread on the floor of butchers, shops, I don't know where the hell it goes.
So he's going to do that. So suddenly this becomes, because the price of labor has gone up, the price of automation has gone down relative to it.
So the value of automation may be such that the guy invests in, he says, okay, look, sorry guys, you don't want to go off the grid.
And so what I'm going to, and you guys don't want to work the extra, you know, fifth, which is all my budget for making it valuable for me to hire you.
So I'm going to invest 20 grand in this sawdust catching apparatus.
And so now, guess what?
I don't need any of you.
So they're all going to get fired.
This, of course, happens quite a bit in union shops.
So where there's not flexibility to fire people to make up for the increased wages forced in by legislation or by union-protected bargaining, well, what happens is people just automate.
They just automate or they'll ship the work overseas.
This has been the great disaster that has occurred for the lower middle classes over the past 20 years or 30 years in terms of manufacturing.
People have just shipped jobs overseas or automated or gotten rid of as many people as they can because if you're not allowed to fire people, then you really face a strong economic argument for going into automation.
And that's not reversible, right?
It's not reversible. So what happens is, these five guys who sweep floors need a toothpick factory, so they raise the minimum wage, and suddenly it becomes cost-effective for the guy to install the $20,000 wood chipper catcher thing that eliminates sawdust, and now he doesn't need these guys at all.
So they all get fired.
They all get laid off. And now this is happening all over the industry.
So their one skill, sweeping up, is now becoming that much less in demand.
Tons of people are getting laid off.
And of course the increase in demand for automation causes capital to divert itself towards improving and making cheaper automation.
So you start to get this vicious circle going on.
So the guys who make the sawdust catcher for the wood chipping machines face a huge increase in demand because the minimum wage has increased the price of the sweepers.
So what happens is they are able to invest a lot more into their capital equipment and their manufacturing processes.
And so they're able to produce these things for $10,000 rather than $20,000 because the increase in demand, it will initially raise the price, but as capital floods in to make it more efficient, it will start to lower the price.
So now, instead of it being $20,000, it's now $10,000 to buy this thing.
So now what's happened is, even the people who were economically efficient at $5 an hour, which is now $7 an hour because you've raised the minimum wage, Even the people who are working under the table or who've bypassed it somehow have been grandfathered in at $5 an hour, they are no longer economically effective because a lot of capital has been diverted into improving automation within their field.
And so it wasn't economically efficient to install the sawdust catcher at $20,000, but now, because there's such a high demand for it, capital's gone in and made the process more efficient.
By automating the automating machine, the labor replacing machine.
And so now you can get it for $10,000, which means that the value to the employer of the floor sweepers has now gone down.
Relative to the price decrease of the sawdust-catching machine.
There's a mouthful, eh?
Let me try that again. So, if the sawdust-catching machine, if the price of that goes down by 50%, then the value to the employer of the sawdust sweepers goes down by at least 50%, and maybe even more, right?
Because now you're in a situation where legislation has just bumped up the price of the minimum wage.
That could happen again.
Plus, the legislation around hiring people and firing people and so on makes people that much more dangerous to an employer in the future.
So, let's just say that next year a law is passed that says you have to give six months severance to everyone that you fire, even the floor sweepers.
Well, suddenly they become even like the threat of that or the possibility of that or the danger of that means that human capital is that much more expensive and dangerous for people to deal with.
And let's just say that it could happen that the guy's factory gets unionized next year, and suddenly all of his nice, friendly floor sweepers are part of a union, and he has that much more difficulty trying to fire them if he wants.
And so if you put all of these things together, then as the price of automation equipment goes down...
Then what happens is the value of employees goes down considerably, and as legislation continues to be a factor within the workplace, the price of those employees goes down that much further, because they could be a significant or horrible liability in the future.
You just can't tell. Maybe some law will get passed next year that you've got to double the minimum wage, and if you fire people, you'll get fined.
Well, that risk does not exist if you put in the sawdust-catching machine.
So the problem is very, very complicated in terms of minimum wage, but I absolutely guarantee you that as minimum wage goes up, except for a very few people, it's a complete disaster for the poor.
A complete disaster for the poor because the guy buys the sawdust-catching equipment, and what happens?
Well, He installs it.
He fires off the five guys who all they know how to do right now is sweep floors.
And so they're let go.
And they can't come back.
They're not coming back. Because if you reduce the minimum wage again and say, oh, wow, that was a real disaster.
We really shouldn't have done that.
Now we've got hundreds of thousands of people with virtually no skills who've been tossed out on the street and everybody's switching over to this automated stuff and where are these people going to go?
It wasn't like they had a chance to graduate out, right?
It wasn't like, well, their wage demand slowly went up so there was a trend that you could see coming that automation was going on so they had time to retrain.
No. Boom! It's one fell swoop.
The wages have gone up through legislation, which means that the automation occurs way too quickly for anybody to adjust in terms of education or switching fields or something like that.
And so this is a total disaster that's unrecoverable, right?
So you raise the minimum wage, people go into automation or something like it, right?
Or they find ways of avoiding having to have so many laborers at the minimum wage level.
If you lower the minimum wage again, it's not like people are going to get rid of their automation and hire people again.
It's a one-way street, and this is what always goes on in central planning, is that you have now fundamentally changed the economy in a way that's not going to be recoverable.
So let's just say you raise the minimum wage, lots of poor people get thrown out of work.
They get thrown out of work because people put a lot of automated equipment in.
Well, what's going to happen if you lower the minimum wage back down to a dollar, let's just say, or you get rid of the minimum wage completely?
Doesn't matter. The floor sweepers have been replaced by automation.
They're not going to rip out their automation machines and go back to floor sweepers because they've already paid for the automation machines.
Now they have to amortize that.
And they can't amortize that by hiring people back to be floor sweepers.
Plus they would have to pay to have it de-installed.
They have to pay to have it taken away.
And also, they have to take the risk that they go back to hiring everyone at five bucks an hour, and the next time the government changes hands, you get some lefty-lefty in who's going to raise the minimum wage back to seven bucks.
With capital equipment, you don't have any of those risks.
It just sits there and pays for itself.
It doesn't get unionized. There's no minimum wage legislation.
Because capital equipment doesn't vote, you're not going to get all these people who are out there saying, you should oil your capital equipment.
Well, look at these. Look at these rusted joints.
It's inhumane. We have to have legislation about oiling your capital equipment.
All that kind of stuff. You don't have that kind of nonsense going on.
So, I mean, this is the sort of fundamental problem with Keynesianism, right?
That if there's a trough in the marketplace, if it's created by government manipulation, then overspending isn't going to help it, right?
It's just going to reinforce it. But if it's a natural trend within the marketplace, some new automation machine has gone in and a bunch of people have been laid off.
Let's just say it's not anything to do with minimum wage or a government.
But you decide to spend money in the economy to keep demand artificially up.
Well, the problem is you're trying to freeze in time something which is no longer viable.
Basically, the cars come along and it's efficient and people want it.
And you are subsidizing the horse and buggy manufacturers.
And the problem is you're staving off the inevitable and you're making it worse.
Because cars come in gradually.
Transitions occur within a free market in a gradual manner.
Because there's the early adopters, and then there's the people who are a little bit more mainstream, and then there's the laggards.
It's a bell curve in terms of the adoption of a new technology, and it takes years and years for this to occur, sometimes decades.
And so people then have time, I mean, the horse and buggy man, in fact, they'll try to compete, they'll try to do this, they'll reduce the prices, they'll subsidize as much as they can, but at some point they're going to say, okay, well, this is, you know, we're done, right?
We're done, we're Netscape, and we're history.
But they're going to have a lot of time to make that transition.
And people are going to get laid off a little bit by little bit at the same time as the car manufacturers are really wanting skilled and experienced labor with good references.
So you're going to get a shot as an ex-horse and buggy employee to go and work for the car manufacturers.
And this transition, there's going to be individual cases where there's a problem, but overall this transition is going to be relatively seamless.
But if you dive in and start subsidizing the existing horse and buggy manufacturers, you're totally blowing that whole process.
You're totally destroying that whole transition process.
So what's going to happen is you're going to have these horse and buggy manufacturers who continue to exist long after, long after the car manufacturers have gained ascendancy.
The jobs in the car manufacturing industry have already been filled.
There's already now a whole group of skilled workers who are knowledgeable within the car manufacturing industry.
And so when the subsidies finally give up the ghost and you suddenly have 20,000 horse and buggy manufacturers all out on the street looking for work, and it's 10 years after the car has gained ascendancy, then they're out there competing with people just changing jobs in the car industry who are already skilled in that field.
You have 20,000 people all looking for work at the same time rather than 100 a month or whatever would be happening in the normal transition process.
And so it's a complete disaster.
And so, of course, what the government does is it says, look, we subsidized, we had to get rid of these subsidies, but look what a disaster it is.
Can you imagine what would have happened if we didn't subsidize, right?
Which is like that old joke in communism where two Russian women are lining up for bread, and they say, oh, it's freezing.
Oh, this is terrible. Oh, my God, it's gold out.
And they say, yes, but, you know, it's even worse in the capital.
I mean, can you imagine? In the capitalist countries, the government doesn't even distribute the bread at all.
And that's pretty much the case, right?
So I hope this has been helpful.
Thank you so much for a kind donation that I got this morning and a very nice email, which I'll put on the boards.
Thank you so much. Very kind words.
Somebody who's made it through all 300 podcasts sent me a donation for $150, which is fantastic.
And actually you get, I guess, over 200 hours of podcasts for $150, whereas for one hour of Christina's time, it's $100.
So I think you get a fairly good deal with this stuff.
So thank you so much for listening.
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