Friday, November 27, 2015

Economics Is About Scarcity, Property, and Relationships | Mises Daily

A fantastic essay on the simplicity of Economics.

Economics Is About Scarcity, Property, and Relationships | Mises Daily

$15/Hr Minimum Wage?

The Minimum Wage debate has gone to another level. Many fast food restaurant workers are making a push to have a "living wage" pushed to $15/hr. to gain more wealth. Is this an economic efficient objective?  This analysis will explore the answer to this question.

What is the Wage? 

The first step in the analysis that must be completed of the minimum wage rate, is defining the notion of the Wage rate. What is it?  The Wage rate is simply the price of labor between both parties of labor and the business owner. For example, the Business owner creates a position for his enterprise. Prospective laborers see the job posting, as the business owner provides a wage rate for prospective employees. The employee applies, and if he is offered the job, the employee is accepting the terms of the position at that respective wage rate. This is no different that someone purchasing an item at the local grocery store at the sales price. So, in short, the Wage rate is tantamount to a price.

What is Price Fixing?

When the Government, enforces a price fixing mandate, depending on how it is structured, several things can occur. In all of these scenarios, they are based on the Law of Demand. A quick review in layman's terms: If the price of the item is increased, the demand falls, if the price is lowered, the demand increases.

If the price fixing scheme is set above the agreed upon market price, a surplus can occur. This means that the price of the good or service is priced so high, that the market participants will not purchase the said good, thus leaving excess items of that good.  However, in the case of a shortage, this means that price is fixed well below the market price, and the demand has increased to the point that there is more demand than there are goods available to sell.

Price Fixing and Minimum Wage

With regards to minimum wage, government mandated price fixing, or wage fixing, simply raises the labor price above the agreed upon market price. As previously mentioned, as per the law of demand, as prices rise, and demand remains constant, a surplus is created. In this case of labor, a surplus of labor is created. This translates into higher unemployment for that specific labor class that is impacted by the minimum wage increase.

Why are these individuals pushing for the potential elimination of their positions? They assume that the business owner has an unlimited supply of capital and profits to pay the employees at the desired wage rate. However, this is not true. We are all restricted with the condition of scarcity.  The more the wage rate is increased, the larger the unemployment rate for that market segment.  Another consideration: The Business owner may lay off those higher wage employees. Or, the business owner may purchase capital equipment to do the same sort of output as these higher wage employees.


Raising minimum wage acts as a price surplus on the "price" of labor, or wages. It creates a surplus of labor, as that surplus of labor translates into higher unemployment numbers for that said labor segment. Workers pushing for higher minimum wages will not benefit from this increase, as they could potentially be unemployed.

More Links on this topic of minimum wage:

From Ludwig von Mises, "Minimum Wage Rates"

Thursday, November 19, 2015

What will the Paris Attacks means for markets? | World Finance

Is an Interest Rate Hike Overdue? | Mises Wire

Is an Interest Rate Hike Overdue? | Mises Wire

"The conventional wisdom is that lower interest rates boost stock prices, and that one of the drivers of the healthy stock market since 2009 has been the Fed’s low interest rate policy. I don’t disagree with the conventional wisdom in general. Lower interest rates tend to raise asset prices. But in this case investors seem to believe the Fed maintained that low interest rate policy too long."

Wednesday, November 18, 2015

Democracy moves towards an Oligarchy

Many politicians remark that how "we must save our democracy", or "our democracy is the ideal".  In this analysis, I will demonstrate logically how it actually works against the citizens. In fact, democracy simply transfers the power of the individual to a dictatorship or an oligarchy.  Using logical economic analysis, I shall show why this is the case.

The Notion of Rational Ignorance

All of us have 24 hours in one day. We are busy with making a living, rearing our children, and enjoying life. Political issues, while important, do not rank high on our value scale. The average person does not have greater Economic benefit to pay a higher economic cost to deeply engage into the labyrinth of politics. In this case, these individuals are rationally ignorant.  Soccer moms find it more important on a daily basis to make sure their kids are in soccer practice, staying safe and the like. Fathers are focused on earning a living. Since we all live in a world with the scarcity of time, we prioritize our daily activities on an ordinal ranking that will give us the highest benefit to lowest benefit. Most of us obtain our insight on political matters from sound bites from the daily news. 

On the other hand, special interest groups are heavily invested in the political process. They study what bills are being proposed to be passed into laws. Many of these bills have a huge impact on these special interest groups' business. For example, sugar farmers are heavily invested in the political process. Their operations, investment and profits are directly impacted by the political process. In this case, they are rationally informed and involved. They will factor the economic cost of lobbying or "rent seeking" Law makers to ensure the best interest of their operation is considered when laws are being made.

Out of these two distinct groups, the former has a higher probability to not vote and get informed in all or most issues, as compared to the latter group.

Transfer votes to a Dictatorship or Oligarchy

Since many voters are "rationally ignorant", yet they still vote, the power of those votes are simply transferred to the politicians. As previously stated, the voter is not fully aware of the details of the pertinent issues, where as the special interest groups are. This leaves the power of the political process with political class and the special interest. This is a costly proposition, as theses two groups will pass laws that will benefit them, yet the rest of society covers the cost for these laws.  In short, the voters will pay for the costs of these laws, and the aforementioned groups, political class and special interest groups, will reap the benefits.  Via the voting both, the power is successfully transferred to the former group(s).

Going back to the farmers example: Farmers are subsidized by the Federal Government to support their operations, in exchange for the financial support and political support of those politicians who continue the various subsidies for the farmers. Who pays the cost of the subsidization? The citizens that are not vested in the process.  In economics, this is viewed as an inefficient transaction, and "Dead weight" losses are created. In short, the costs are dispersed throughout society and the market place: Concentrated benefits and dispersed costs. This aggregates the power to those who are in a position to distribute the benefits, at the expense of the tax payers.

The Tax payers vote for politicians that simply work for the special interest groups. Why? The politicians are seeking to stay in power, as this process requires money. The special interest groups are willing actors to pay the politicians provided the politicians pass laws that benefit the special interest groups. The transfer of Democracy to a dictatorship or oligarchy is complete.


Many politicians run on the notion of "getting the money out of politics", as this is an illusion. Politics is a business, as it requires the same factors of production, land, labor and capital, as any other business enterprise. The distinct difference is that it must use the rational ignorance of the average voter to vote into law things that benefit the political class and special interest, at the cost of the voters. This process also demonstrates how the Federal budget will never be balanced. What incentive is there for those who benefit directly to balance the budget? This process turns the democracy into a dictatorship or oligarchy.