A case against the minimum wage

What determines the level of productivity and hence the wages? asks the writer. 

By Medecci Lineil, FMT

I was very pleased to read last week’s headlines all carried a variant of minimum wage and its logic that are usually ignored in mainstream discussions.

However, the discussion has become for the most part, ignoble. It is obvious that the minimum wage advocates including the Prime Minister Najib Tun Razak and Human Resource Minister Richard Riot do not pursue their own logic.

There is more emotion in the discussion because it is a bit more personal experience. To apply the faculty of reason requires understand; to experience emotion does not.

Ludwig von Mises puts forth an account of economic laws based in logic not experience. To understand the reality requires looking beyond the data and into the core of the complex structure of production and its overall health.

It requires thinking about the money wage, real saving, productivity, subjectivism and human labourer. None of these can be obtained by simply watching data and numbers appear at the bottom of your LCD Samsung TV screen and pretty economic research papers.

Sadly, it is the emotions and the notion of “letting the facts speak for themselves” that appeal are now made. When we engage in poor reasoning and faulty economic logic in support of a noble cause, we can end up doing much more harm than good in the pursuit of liberty and economic freedom.

In seeking solutions, the logic of economic and the dynamics of human history are largely neglected. As a result, many government attempt to solve these problems by means that will not accomplish the desired ends.

People are not familiar with the rules of logic. It is one of those subjects that people shy away from, feeling that it’s too complex to understand. What people do not realize is that they employ logic every day. Logic is often applied to human problem in an attempt to determine truth and since truth is the foundation of liberty, free men must apply the rules of logic rigorously.

But first, what is logic? From one of the most widely used text of Copi and Cohen in Introduction of Logic (1994) “Logic is the study of the methods and principles used to distinguish good (correct) from bad (incorrect) reasoning”

While famous British economist and logician, William Stanley Jevon viewed logic is the method of thinking.

He described logic as “briefly defined as the Science of Reasoning” he went far argued “The laws of thought are natural laws with which we have no power to interfere and which are of course not to be in any way confused with the artificial laws of a country, which are invented by men and can be altered by them”

Correct reasoning, fundamental propositions are grasped intellectually, true knowledge, self-evident about reality and not empirically, therefore known to be a true a priori; foundational truths of praxeology such as the action principle.

For example, Mises points out that when we see a person trade one good for another, we simply have to assume that they value the received good more than the one given away. We do not have to run millions of experiments to see that people value the good received in an exchange over the good given away.

We do not have to run any at all because the good received in exchange is valued more than the good given away is something that is true. Like Prussian philosopher Immanuel Kant argues that “Every event has cause under constant laws” is a claim we know to be true because it is a condition for knowledge.

For Mises and Austrian school, human action takes the acting person in whatever surroundings he finds himself as its most crucial starting point, in this regard, the subject of individualism, productivity and money wages.

Defining problems logically

In Malaysia, the minimum wage policy is implemented to ensure that the basic needs of workers and their families are met, to reward and protect them from exploitation and to incentivise firms to move up the value chain by investing in technology and boosting productivity.

Let us define this problem logically. First, wages received have been termed very low compare to national productivity rate over years, the wages are the amount of money earned by a labourer within a given time period excluding any reference to the goods and services which that money would purchase. This is the most popular premise I believe.

Second, wages are very low according to the quantity and quality of the goods and services obtained by the labourer. The labourer then bought two packets of sugar now buys only one. To be more specific, it is the falling of purchasing power with his money wages.

Third, wages have recorded slower growth compared to labour productivity growth. The main reason why the minimum wage is adopted in Malaysia and leading the labourer and capitalist are always directly opposed to one another.

And fourth, wages are low and very labour intensive (unskilled labourers). Minimum wage encourages firms to invest in automation and newer technologies that can enhance productivity capacity rather than relying on low cost foreign workers.

Let me also start deducing the problems here; for the first and second problem, understanding of money and its value is very important.

I encourage the readers to read my previous articles on this matter. Remember, it is important that knowledge of money starts from the view if individual and not of society. For it is the subjective value of individuals that determine all human actions and in market transactions.

It is not the money men want; it is the money’s purchasing power that greatly affected by the quantity of money available and the demand for it.

When the government and Bank Negara increase the quantity of paper money, the result is that the purchasing power of the monetary unit begins to drop and so prices rise. This is called inflation.

The essence of inflation is not a general rise in prices but an increase in the supply of money which in turns sets in motion a general increase in the prices of goods and services. Real wages fall, undermining production of real wealth, eroding money’s purchasing power, eroding real savings and causes a misallocation of scarce resources.

There has never been any serious argument against the economic interpretation of the relationship between prices and the quantity of money, or the exchange between money and other goods and services.

The root of inflation has been camouflage and utterly confused by special interests and government to preserve the culture of political dependency. They then pride themselves on being the only true friends of labourers, social justice and logic.

The productivity of labour

I also read a number of news items where mainstream economists say an increase in economic activity is almost always seen as trigger for general rise in prices which they erroneously label inflation. But why should an increase in the production of goods and services lead to general increase in prices?

If the money stock is intact, then we will have a situation of less money per unit of a good – a fall in prices.

Effective policy to help poor people, don’t you think? The solution is to leave the money to the market regulated by profit and loss. Do not leave the money regulated by Bank Negara and Putrajaya.

Here is another explanation; government budget deficits divert funds from the purchase of capital goods and the payment of wages by business firms, their effect is sooner or later to reduce the total costs of production in the economic system and equivalently to increase the aggregate amount of profit in the economic system.

Those costs of production, of course must be deducted from sales revenues in calculating profits. So government budget deficits are part of the explanation of profits rising relative to wages. This is not a joy we should celebrate. That is an illustration of the dichotomy identified by David Ricardo that often exists between monetary value and physical wealth.

Money profits up, capital goods expenditure being down that will reduce in the supply of capital goods for use in further production.

In real life, tools, machines, and other capital goods wear out or become obsolete one by one. Real wages in the future will suffer from less production and prices being higher than they otherwise would have been.

Let me proceed with deducing the third problem. A lot of people think that when labour productivity increases or is expected to increase, say 3%, wage rates should also be raised by 3%. Most unions argue about the productivity of labour and they demand increases of the wages to the extent of labour productivity. I have problem with this concept.

Every human being is different and has a different work quality in working hours. To some extent, they are connected to all the occupations on the job market.

They are different types of labour in a production process with different degree of exertion undergone in different employment / industries in the same country during working hours.

Employer has no power to set wages

The established annual holidays in Malaysia are 50 national, school and state and ranks in the top 10 countries with the most public holidays in the world. These holidays are confined to a certain portion of the Malaysian population like the labour, Christians, Muslims, Buddhists, Sikhs, Dayak, Orang Ulu and others.

Again the productivity is limited to the unpredictable weather like rain, flood, draught, haze and natural disasters.

No common measure of the toils undergone by a miner and a tailor or those of a shop man and an iron founder – vary indefinitely in intensity. So it is obvious that the rate of wages given all these differences.

The increased wage rates (real money wage) in the expanding economy are not primarily due to the workers themselves but the capitalist entrepreneurs who have invested in capital goods.

It is also not necessarily mean that the increases of wages over the years caused by his own improvement. It is primarily due to the increasing of capital goods provided by the capitalists.

If wages were really set by employers, why is it that employees such as Cristiano Ronaldo, Mesut Ozil, Gareth Bale, Brad Pitt, Liam Neeson, Bradley Coopers, Kim Hyuna and Korean pop stars all earn mega money?

No, the reason they do is because their productivity enhanced by capital goods (stadium, stage decorations, Dolby sound surround movie theatres, concerts, high definition equipment). The employer has no power to set wages.

What determines the level of productivity and hence the wages? Given the explanations above, this is based on how intelligently people work and the amount of and sophistication of the tools and capital equipment they are given by their employer to work with.

We have examined the money and its purchasing power and productivity based on deductive logic in favour of raising real money wage.

Now let us deducing the last one, minimum wage often substitute machinery of unskilled workers or foreign workers.

Actually, David Ricardo, the most influential British classical economist is the author of the proposition that a rise in wages (increased cost of workers) will encourage capitalists to substitute the machinery for workers and vice versa.

It generates technological improvement and raises the productivity of workers. In forcing the reluctant employers to raise wages, the policy makers become the pioneers of progress and prosperity.

However, the interpretation of Ricardo’s proposition that machinery is substituted for workers is purely misleading.