How can a market properly deal with the issue of wage fixing and illegal collusion among businesses to keep wages down? Who is overpaid? Who is underpaid? How do you raise your wages in a free market? Does Brad Pitt make too much money?
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| Hi everybody, Stefan Molyneux from Free Domain Radio. | |
| Question from Alan. | |
| Hope you're doing well, Alan. | |
| Thank you for mailing in. | |
| How, oh how, can a market properly deal with the issue of wage fixing and illegal collusion among businesses to keep wages down? | |
| Well... | |
| I'm going to assume that you've not been an entrepreneur. | |
| So many questions about the free market get answered if you're an entrepreneur. | |
| And I have a... | |
| I could be impatient, could be mildly dickish, but I do have sort of an impatience with people who talk about the free market while never having really been an actor in the freest part of the free market, which is to be an entrepreneur. | |
| The question is, how do you keep wages from being artificially suppressed by business? | |
| Well, the first thing to understand is what wages are. | |
| Wages are not an overhead. | |
| Wages are not an expense for a business. | |
| I mean, if you get needlessly sued and baselessly sued and then you end up settling, that's an overhead. | |
| But wages are not an overhead. | |
| So, to take an example, if I want to make a movie and I want Brad Pitt or Matt Damon or some other big name, Celebrity to be in the movie, that celebrity is going to cost a lot of money. | |
| And why wouldn't you save the $10 or $15 or $20 million you have to pay that person to be in the movie? | |
| I mean, there's lots of people who want to be actors, and I'm sure lots of people who are fine actors. | |
| Why, oh why, would you pay that money? | |
| Say, look, this movie is going to cost us $100 million. | |
| But we can save 20% of that, almost, by getting a no-name actor. | |
| Well, why don't people make that argument more often? | |
| Well, there's a variety of reasons. | |
| First and foremost, it costs a lot of money to make a movie. | |
| And one of the ways that you get investors interested in your movie is you say, oh, and Brad Pitt is attached to Star. | |
| Because then they know the movie can open, right? | |
| People will go and see a movie just because Brad Pitt's in it. | |
| So Brad Pitt's salary for the movie is not an overhead, right? | |
| It's an important thing to really, really fundamentally grasp. | |
| He adds more value than he subtracts. | |
| So the salary that you pay Brad Pitt is an investment, right? | |
| It's an investment. | |
| You could save money in a fashion magazine by having plain people model the clothes or overweight people or people with acne or whatever, right? | |
| They'll be, you know, they'd probably do it for free as opposed to paying Linda Evangelista $10,000. | |
| She doesn't even get out of bed for less than $10,000 a day or something like that, as she says. | |
| So models, relatively expensive. | |
| Supermodels, very expensive. | |
| Why would you get Leonardo DiCaprio to model your watch or Cameron Diaz to model? | |
| Why would you? | |
| Because they're expensive, right? | |
| Why would you have a celebrity spokesman? | |
| Right? | |
| So I don't want to sort of belabor the point, but it's important to understand that it's not overhead to pay someone a salary. | |
| Right? | |
| It is an investment. | |
| I mean, if you give me a dollar and I give you two dollars, would you call that dollar overhead? | |
| No. | |
| You'd call it an investment. | |
| So that's really important to understand. | |
| Now, when you're on the receiving end of minimum wage jobs and so on, it really doesn't feel that way. | |
| But that's the reality of wages. | |
| And People get raises because they're providing more economic value and people get fired when they're providing consistently negative economic value. | |
| Mind if I pay you $20 an hour and you're making $10 an hour for me? | |
| That is not sustainable. | |
| I have made a miscalculation with regards to the allocation of salary. | |
| Like, if you give me $2 and I only give you $1 back, well, that's not good, right? | |
| So, like, once we understand what salary actually is, then we recognize... | |
| That the way that you make more money is you create more money. | |
| That's how you make more money. | |
| Why does Brad Pitt get paid $10 or $20 million a film? | |
| Well, because he will add $40 to $60 million worth of value to the movie. | |
| In fact, the movie probably won't even exist if he's or someone like him is not attached to it. | |
| So you are paid a portion of the economic value that you create for your employer. | |
| The more economic value you create, the more you will get paid, assuming a free market, assuming competition. | |
| Everybody wants to hire Brad Pitt for a dollar, right? | |
| I mean, that's a basic reality of, I mean, if you could hire Brad Pitt for a dollar, you'd do it even if you had nothing to do with the movies because then you could resell his time and make a huge amount of money. | |
| In fact, everybody wants Brad Pitt to pay them $20 million to make a movie with them anyway. | |
| You have to understand, right? | |
| Now, you can underpay your employees, of course, right? | |
| And the danger of you underpaying your employees is that somebody else will offer them more. | |
| So, many years ago, before FDR, or maybe just when FDR, I was just starting to do podcasting, I was chief marketing, I can't remember her title, basically head of IT. And the employees came to me and said, listen, we've done some research and we find that we are, you know, pretty substantially underpaid. | |
| So I did my research. | |
| I bought a book of average salaries broken down by zip code or Canadian postal code. | |
| And I made the case to, like I found out that they were in fact underpaid. | |
| And so I made the case to the board that we should increase the salary of these employees. | |
| And in making that case, I did, of course I knew all this stuff, but it was good to get some hard numbers behind it, that, you know, with hundreds of thousands of lines or millions of lines of code, it takes a new employee three to six months to get up to speed as a coder to become sort of really valuable. | |
| Also, when you have a really good coder, they're not like twice as productive as an average coder. | |
| They are like 10 or 20 times as productive as an average coder. | |
| And so I made an economic case and said, look, if we assume that one-fifth of the programming staff will leave for higher salaries over the next year, here's how much it's going to cost us to hire and retrain. | |
| Because not everyone you hire works out, right? | |
| So, they are now aware that they're underpaid, which means that they believe that they can get a better offer. | |
| The fact that they're coming to us and saying we would like more money is a very good sign. | |
| It means that they like working here and they want to keep working here. | |
| And I went through the presentation. | |
| I made the case. | |
| And it was pretty irrefutable, even with the most conservative estimates. | |
| And so I secured the raises for the employees who stayed. | |
| So that's an example. | |
| And basically, my case was purely utilitarian. | |
| I mean, I said also, you know, it'll make people loyal and they'll... | |
| But a business relationship is a business relationship. | |
| It's not a, you know... | |
| Some people always refer to their business as, at the Disney family, you're not a family. | |
| You're a business. | |
| So the relationship is numbers. | |
| And I mean, that doesn't mean there can be... | |
| There's lots of other fun stuff you can include in that, but... | |
| So the case I had to make was utilitarian. | |
| If we increase these wages, it will save us X amount of dollars over two to four years. | |
| If these people lose, it's going to cost us blah-de-blah-de-blah. | |
| Hiring people is intensely time-consumptive and risky. | |
| So that's an example of sort of what happens in a free market. | |
| Of course, programmers are fairly subject to the free market. | |
| A technical field is one of the most free market fields left around. | |
| And this, of course, is why there's so much progress in software and hardware. | |
| Software, I think, a little bit more than hardware. | |
| So a wage is an investment. | |
| And you get your money back. | |
| Now, if I have a winning lottery ticket, lots of people are going to want that, right? | |
| There's going to be competition for it. | |
| Right? | |
| So, Charlie and the Chocolate Factory, Charlie, spoiler, it's in the first 10 pages, Charlie gets a rapper, right? | |
| One of Willy Wonka's golden rappers. | |
| And then people immediately start offering him money for it, right? | |
| I'll give you 50 pounds and a bicycle. | |
| And all people are like, hey, hey, hey, don't give this thing up. | |
| Just take it home right away. | |
| So that is an example. | |
| If you have something that has value, people will give you money for it. | |
| I mean, there's stamps, coins, all kinds, Diana memorabilia. | |
| I mean, all kinds of useless crap in the world. | |
| That people will pay for. | |
| Rare electric trains. | |
| You name it, right? | |
| So if you have something of value, and there's a bidding war. | |
| Where there's a bidding war, the price tends to get driven up. | |
| And so when you put forward the proposition or the theory that somehow businesses can conspire To keep prices down, what you're saying is that if you list your house, somehow there can be a conspiracy to keep your house price low. | |
| Like if you list it and you have open houses and so on, there can be a conspiracy to keep your house price low. | |
| Now, there are incentives for house prices that sometimes aren't matched. | |
| Sorry, so in Freakonomics, Levitt and whoever else wrote it talk about how when real estate agents sell their own houses they tend to get a couple of points more and they leave them on the market longer and so on because they keep a hundred percent of those profits whereas they only keep four or five or six percent of the profits of your house so they have an incentive to sell it quicker and all that kind of stuff. | |
| But in general If you have something of value and you have a free market then people will bid it up. | |
| So the question again is framed I think a little bit from the wrong side of the equation. | |
| If you want to raise your salary you raise your value. | |
| I think we all fundamentally understand that. | |
| Now if you raise your value in a free market Then your salary will certainly rise. | |
| Right? | |
| I mean, if you start off your life as a newspaper delivery boy or working in a bookstore or, you know, all the other things that I did when I was a kid, well, there's not a lot of skill in that and you're pretty replaceable and so on. | |
| If you decide to become a board-certified heart surgeon, well, then... | |
| You're going to make a lot of money, right? | |
| You're adding to your value, adding to the demand. | |
| And you're becoming scarcer in terms of commodity, right? | |
| Brad Pitt has a monopoly on Brad Pitt. | |
| So the question isn't how will people collude to keep wages down? | |
| The question is why would wages be high or low to begin with? | |
| And the reason that a hospital will pay a surgeon more than a janitor is they can resell The price of a surgeon at a much higher rate than they can, quote, resell the skills of a janitor. | |
| So people like clean toilets and clean floors and so on, but they're not willing to pay a huge amount of money for those things, or at least the number of people who can do it will keep those wages low. | |
| However, people value having functional hearts, right? | |
| I mean, assuming you're not in politics. | |
| And so if you... | |
| If you can resell someone's services at a higher rate, then you can pay them more. | |
| And you know you have to pay them more because everybody will be able to resell those services at a higher rate. | |
| So if I have a million-dollar winning lottery ticket, then people know they can sell that for pretty much almost a million dollars. | |
| No, actually, no. | |
| They pretty much sell it for a million dollars. | |
| I was thinking like tax-free, but then you've got to get the money to pay for it when you're taxed on that. | |
| Whereas if I have a $50 winning lottery ticket, people can sell it for whatever. | |
| Certainly not a million dollars. | |
| So if you think of the lottery ticket as somebody's skills, then the higher the value of the lottery ticket, the more people will pay to get it. | |
| The higher the value of the skills you can bring to the table, the more. | |
| So, businesses in general... | |
| We want to pay less just like we all do, right? | |
| Just like when I shop for a computer, it's ridiculous. | |
| I roam around and roam around and look at the dusty back shelves of the stores hoping to find some weird deal. | |
| Like, no way. | |
| And actually, it does actually happen. | |
| Last computer I bought, I specced out a system. | |
| It's $2,700. | |
| You know, like $3,200 with tax. | |
| I couldn't do it. | |
| I just can't do it. | |
| I just can't spend that much. | |
| And so I kept looking around, kept looking around, kept looking around, and finally found a machine that was pretty close, pretty great specs for like $1,400. | |
| And that I could handle. | |
| And it's, you know, still a lot less time than explaining to my wife why I need another computer. | |
| Anyway. | |
| So, yeah, businesses want to pay their employees less, but businesses want to make money. | |
| You obviously want to pay me a dollar for my million dollar lottery ticket. | |
| But you know that if you do that, you get nothing. | |
| And in fact, you've lost because you've wasted time bidding on something that you can't make money off. | |
| You'd like to pay a dollar for a mansion. | |
| But, right, you understand. | |
| So wages are pushed up By the energy of the employees, by the economic value of the employees. | |
| That is what drives wages. | |
| Not the choices of the employers, but the value of the employees is what determines the wages. | |
| And even more fundamentally, To state it most accurately, what drives an employee's wages is the perception of the employee's value by the customer. | |
| Because value is subjective. | |
| No matter how much commonality there is among people's preferences and choices, value is subjective. | |
| So, the value of your wages is determined by the customer's valuation of your contributions. | |
| Because you have to, in order to generate the money to pay salaries, you have to get the customer to cough up money to cover them. | |
| So, when you say colluding to keep wages low... | |
| Let's take a scenario, right? | |
| Sorry for that lengthy background, but it's really, really important to understand what wages and salaries are. | |
| They're not something doled out by employers. | |
| They're something paid for by customers. | |
| So, let's look at a scenario. | |
| So, let's say that... | |
| There are 10 software companies in a town, and all those software company executives get together and meet, and they say, the minions, let us keep them at near starvation levels, all of us, I say, right? | |
| And they decide they're only going to pay their software programmers $20,000 a year. | |
| Let's say this is North America, so that's a fairly low salary. | |
| So, that's what, five bucks an hour? | |
| Something like that. | |
| No, that's ten bucks an hour. | |
| Sorry. | |
| It's double and add three zeros. | |
| Four zeros. | |
| Anyway. | |
| So, we're going to pay our software twice as ten of them, right? | |
| Now, they already have employees. | |
| And there are already expectations in the industry, right? | |
| So if they have employees, and let's say they're paying their employees $50,000, and they decide to drop them down to $20,000, well, what's going to happen? | |
| Everybody's going to start looking for a job, right? | |
| What do you mean you're cutting my salary? | |
| More than half? | |
| Forget it. | |
| You're going to work somewhere else. | |
| So if all of these software executives decide to cut the salaries of their existing workers, everyone is going to know what that means. | |
| That means that there's going to be a huge glut of software programmers looking for work. | |
| And so whoever breaks that deal is going to make quite a lot of money, right? | |
| This is the There's a massive financial incentive to break ranks whenever you price fix. | |
| Right? | |
| There's a massive incentive to break ranks whenever you price fix. | |
| Because if somehow you're able to magically get everyone to reduce their salaries from $50,000 to $20,000, then lots of people start looking for work. | |
| And you can probably get them for 40. | |
| Maybe even 30. | |
| 30 is still 50% better than 20, right? | |
| So there's going to be a glut of people and you can snap them up. | |
| And instead of paying 50, you're now paying 40, which is a big benefit to you. | |
| So the first person to break ranks and hire above the 20 is going to do pretty well. | |
| They're going to get a lot of talent, a lot of experience, some really great programmers, and they're going to end up paying less than they used to. | |
| Right? | |
| And the thing is, you don't even want to wait for that to happen, right? | |
| Because once that's already happening, it's kind of too late, right? | |
| So this could be a great way, like if I was a son of a bitch in business, then you could say to all the 10 software companies, let's conspire to low wages and as soon as everyone lowers their wages, you just start offering more and then you snag all the best talent. | |
| And everyone's perfectly aware of this and this is why collusion never works without a government. | |
| Without a government. | |
| This is why all associations want to have government price fixing. | |
| They want to have government barriers to entry. | |
| They want to have government sponsored and enforced unions. | |
| They want to have, you name it, right? | |
| Tariffs, taxes, everything that can be enforced on everyone. | |
| Because otherwise, people will chat. | |
| It's the fog of war. | |
| You don't know who's being genuine and who's playing you, right? | |
| Now... | |
| That's not going to last. | |
| And historically, there is, to my fairly extensive knowledge, there is no history of a collusion association that has lasted without the state, which is why they always want to run to the state, right? | |
| So, let's say though, and this is also assuming that people are just going to go get jobs out of the town, right? | |
| I mean, if you attend software companies in a town and you conspire to lower wages, well, then everyone leaves town and then you attend software companies in a town with no software programmers anymore. | |
| Well, that's a problem, right? | |
| I mean, that's no good. | |
| Plus, everyone will be going and blogging and talking about it and saying, I can't believe these bastards cut my salary from 50 to 20. | |
| It's terrible. | |
| I never worked for these guys. | |
| You can't trust them. | |
| And then good luck trying to find new programmers to come and work for you, right? | |
| I mean, there's no way. | |
| There's just, I mean, it would be terrible. | |
| Terrible. | |
| You'd be written up about in the industry magazines. | |
| There'd be 60-minute specials on you. | |
| I mean, you'd do toast, right? | |
| Because it's a free market, not a free market in the town. | |
| This isn't like that Stephen King story where there's that dome. | |
| I can't get out. | |
| Okay, I guess I'll accept 20. | |
| All right, but let's... | |
| Well, if the argument is bad, you can accept it as much as you want and it's still bad. | |
| So let's accept the premise that somehow... | |
| In this town, they're able to lower salaries. | |
| Now, you could say, well, look, they're not going to lower the salaries of the existing employees. | |
| They are going to lower the salaries of new hires, right? | |
| Well, that's a problem because people do research on what they're worth and if you go in and offer someone 20 who's worth 50 or who can get 50 elsewhere, that's a big problem because people don't just look in their own town, right? | |
| So that's going to be a problem. | |
| Even if you hire someone for much less, it's not going to take long for them to figure out how underpaid they are. | |
| Which is little science, right? | |
| Like the fact that everyone else drives in in a nice car and they have to come in on a motorized scooter or the back of a yak or hitchhiking on the back of a truck or something like that. | |
| So it won't take them long to figure out, whoa, I'm underpaid. | |
| It's like, hey, let's go for lunch at a nice restaurant. | |
| I can't. | |
| Can you? | |
| Oh, yeah. | |
| We go every week, right? | |
| Wait a minute. | |
| How much are these people making? | |
| So it won't take long. | |
| And then they'll realize that they've been had and scammed and all that. | |
| Be really upset. | |
| And then the existing employees know that you're willing to shaft employees, which is going to uproot their loyalty to you. | |
| And then what will happen is the person who realizes he's being underpaid will quit and go and get more money elsewhere. | |
| And then you've spent a huge amount of time and energy hiring and training someone who's not going to stay. | |
| Which is, again, it's very expensive and very time-consuming and very risky to hire people. | |
| And the people who are the least risky to hire are the ones who command the most salaries, right? | |
| Again, nobody auditions Brad Pitt. | |
| So, I mean, I don't know, maybe they do, but I wouldn't. | |
| But let's say that all of this is somehow possible and somehow valuable to the company. | |
| So let's just say they're able to magically convert their employees from 50,000 to 20,000. | |
| And it really doesn't matter if it's 50,000 to 40,000 or 45 or 25. | |
| It doesn't really matter. | |
| But let's just say they're able to successfully convert their employees to below market rates. | |
| It won't do them any good. | |
| Even if there's no issues with employee retention, even if there's no negative press that comes out of this behavior, even if there's no resentment, nothing. | |
| Let's say everything trundles on just as it was before. | |
| Not possible, but let's assume that it does. | |
| Well, what happens? | |
| Well, now there becomes price competition, right? | |
| If you get 10 software companies who are able to drop the costs of their workforce by, let's say, half... | |
| Well, now there's going to be undercutting in terms of price because their cost of doing business has gone down. | |
| I know I said it was an investment, but just for the moment, we'll just use the standard terminology. | |
| So their cost of doing business has gone down. | |
| Instead of having a salary payroll of $4 million, it's now $2 million or less. | |
| Given that they're all in fierce competition with each other for the provision of, let's just say, software customization or websites or whatever, well, they're going to start driving down price. | |
| I mean, they kind of have to, right? | |
| So let's say it's a bunch of web hosting companies and instead of it being $10 a month to host your website, now it's only $5 a month because they've saved all this money on salary so they can now afford to compete more on price. | |
| And of course, everybody wants the salaries of their employees to go down and they want a price to remain high but that's not how you get business, right? | |
| In a free market. | |
| I mean, competition drives down profits. | |
| So even if you were somehow magically able to keep and retain your workforce at less than half their current salary, you really wouldn't end up making a whole lot more money. | |
| because you'd end up having to compete on the price of whatever these people were producing and then there'd be a downwards set of pressures on price. | |
| Which is why whenever there's wage controls, there tends to be price controls. | |
| It kind of has to be because if you control wage prices, you end up not making any more or less money in the long run because you simply have to then compete on the effect of those wages on price. | |
| So I hope that helps. | |
| Thanks a lot for your question. | |
| It's really not possible in a free market to do any of that stuff. | |
| And again, if you want to make more money, don't focus on what the employee gives you. | |
| Focus on what you give to the customers through the employer. |