May 11, 2005
Basic Income Guarantee: Response to Ginivan
By Timothy Carter
My recent article in The Free Liberal advocating a basic income as a replacement for current regulatory labor protections such as the minimum wag has attracted two responses to which I would like to reply. The first predicted that my plan would have a more limited impact than article suggested, and the second purported to prove that my plan would raise unemployment with no effect on wages. I will address them in reverse order.
Matt Ginivan, a major in political economy at Princeton University who blogs at www.princetonlibertarians.org, claims to prove my plan is logically impossible. He shares some of the benefits of his Ivy League education, teaching us some neat new (to me) formulas, and then does some algebra to show that my plan cannot have any long-term effect on wages.
Matt’s first flawed premise is to treat the power to walk away provided by a basic income separately from unemployment. My article described how the ability to walk away empowers workers on the micro level, but on the macro level it plays itself out through unemployment. First, a basic income reduces unemployment by removing from the workforce those who do not want to work for wages, such as students, primary caretakers for children, the elderly and the disabled, those who wish to spend their time in artistic or intellectual pursuits, and the lazy. A basic income will also reduce the negative effect on wages of any given level of unemployment, as the unemployed will not need to take just any job offered.
Matt’s worst flawed premise is the claim that the markup that employers add to the cost of labor when calculating prices, which he labels x, is a constant affected only by the market power of the firm. Since he uses this as an asserted premise without argument, evidence, or citation, it makes his entire article an example of the logical fallacy of begging the question. This is because if x is a constant value determined only by market power, my theory is already wrong and the rest of Matt’s argument is superfluous.
I argued that the labor-capital exchange is a positive-sum game that creates an increase in value equal to the deference between the amount the employer values the labor and the amount the worker values the labor. I further argued that how that increased value is split between the employer and the worker is a zero sum game. I concluded that the power to walk away created by a basic income would allow the worker to capture more of that increased value from the employer.
Now relate this to my theory. Since I am discussing labor-capital exchanges rather than direct labor-consumer exchanges, and capital only values labor as a commodity to be sold, we can say that the amount that the employer values the labor is equal to the price. Since the worker will not work unless she receives more than the amount she values her labor, we can say that wages are greater than the amount the worker values her labor. Subtracting wages from the price, we see that the markup is capital’s share of the increased value. Since I claimed that negotiations over the increased value are a zero-sum game, that means that according to my theory, if wages increase, the markup must decease.
So if x is a constant, then I am wrong. Maybe I am, but if so, Matt needs to argue that, not assume it as the premise of his argument.
I would appreciate being educated by Matt about this, since I assume he was taught that x is a constant in his Princeton political economy courses, and since I went to third-rate schools and have not formally studied political economy, I do not understand how x can be a constant. After all, if x is a constant, why wouldn’t an employer pay all employees a million dollars per hour, since it would both make the employees happy and earn the employer more return?
My (limited) understanding was that price was determined by something called “The Law of Supply and Demand”. Under this law, the “price setting relation” formula that Matt provided does not set prices as Matt claims, but is rather an accurate description of the relationship between wages and capital return once prices have been set by Supply and Demand.
To see how these two concepts differ, we can see what each predicts will happen to prices when there is a wage increase. Under Princeton economics, x is a constant, so the markup will increase as well, and the new Princeton price will be higher by both the amount of the wage increase and the amount of the markup increase.
Under old-fashioned Supply and Demand, an increase in costs shifts the Supply line to the right, causing prices to rise, but by less than the amount of the cost increase. (See Figure 1) If the cost increase comes from rising wages, the difference must be made up through a decrease in the employer’s markup. Therefore, according to the Law of Supply and Demand, as wages increase, x must decrease. Since Princeton economic theory claims (according to Matt) that x is a constant independent of wages, this means that Princeton economic theory conflicts with the Law of Supply and Demand. Matt can update us if Princeton economists have disproved the Law of Supply and Demand.
As a slight tangent, I should acknowledge that this explanation seems to show that the Law of Supply Demand conflicts with my theory. My theory predicts a zero-sum relationship between wage increases and capital’s share of the increased value of the labor-capital exchange. But the above explanation appears to show that the decrease of capital return would be less than the increase to wages, which seems to indicate that the increases in wages are positive sum. This did not arise in my original article, which focused on the microeconomic level, where the employer cannot raise wages in response to higher costs if competitors’ costs are assumed constant. At the macro level, each employer knows they can raise prices if their competitors’ costs are rising too.
However, this does not disprove my theory, but it forces me to alter the terminology on the macro level. Since the positive-sum outcome is generated through price increases, the change in buying power remains zero-sum.
Robert Capozzi’s remarks were much more on-point. He was skeptical, but suggested that a basic income would empower worker’s more at the margin, stating, “Those at the very bottom of the pay scale have fewer, or possibly no, options to meet their most basic needs.” He was even skeptical about that, but I think it s broadly correct, although I suspect that I would probably estimate the margin to be larger than Robert would. I would think the margin goes fairly high up the pay scale - maybe even to the median - for people with families to support. Even Johnny Paycheck did not feel he could tell his boss to “Take this job and shove it,” until after his woman done left and took all the reasons he was a-working for.
Indeed, it is possible that a basic income will have a downward effect on high-wage jobs. High-wage jobs tend to be professional positions that require greater flexibility, creativity, and autonomy on the part of the workers. These jobs, such as engineer, CPA, heart surgeon, airline pilot, etc., are the sort of jobs that more people want to do, more so than lower-wage work such as janitorial positions or assembly-line workers. A basic income might make it possible for more people to take the time necessary to gain the skills and education needed to do high-end jobs, and make it easier to leave dull and repetitive work. With a basic income, the wages of professionals will likely decrease while the wages of those who enjoy cleaning toilets will likely skyrocket. I am not an egalitarian, so I welcome this outcome only to the extent that it is the natural result of a truly free labor market. However, such a result can be used to show egalitarians how today’s inequalities are the result of too little freedom in the economy, not too much.
Robert also commented that evidence for my thesis can be found in the fact that capital markets are clearly more liquid than labor markets. This is a good point, and it should be noted that capital liquidity, which is good for the economy in general and very good for owners of capital in particular, is primarily the result of what is probably the most massive government intervention into the economy. The creation of the legal fiction known as the corporation allows investors to shift their investments quickly and often without fear of potential liabilities in contract or tort. This demonstrates how government interventions can be wondrously effective when they empower people without dictating how that power should be used. Libertarians who appreciate the government intervention of the corporation on behalf of capital should be able to similarly appreciate the intervention of a basic income on behalf of labor.
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