Best of the Week
Most Popular
1. Gold vs Cash in a Financial Crisis - Richard_Mills
2.Current Stock Market Rally Similarities To 1999 - Chris_Vermeulen
3.America See You On The Dark Side Of The Moon - Part2 - James_Quinn
4.Stock Market Trend Forecast Outlook for 2020 - Nadeem_Walayat
5.Who Said Stock Market Traders and Investor are Emotional Right Now? - Chris_Vermeulen
6.Gold Upswing and Lessons from Gold Tops - P_Radomski_CFA
7.Economic Tribulation is Coming, and Here is Why - Michael_Pento
8.What to Expect in Our Next Recession/Depression? - Raymond_Matison
9.The Fed Celebrates While Americans Drown in Financial Despair - John_Mauldin
10.Hi-yo Silver Away! - Richard_Mills
Last 7 days
Stocks: When Grass Looks Greener on the Other Side of the ... Pond - 3rd Apr 20
How the C-Factor Could Decimate 2020 Global Gold and Silver Production - 3rd Apr 20
US Between Scylla and Charybdis Covid-19 - 3rd Apr 20
Covid19 What's Your Risk of Death Analysis by Age, Gender, Comorbidities and BMI - 3rd Apr 20
US Coronavirus Infections & Deaths Trend Trajectory - How Bad Will it Get? - 2nd Apr 20
Silver Looks Bearish Short to Medium Term - 2nd Apr 20
Mickey Fulp: 'Never Let a Good Crisis Go to Waste' - 2nd Apr 20
Stock Market Selloff Structure Explained – Fibonacci On Deck - 2nd Apr 20
COVID-19 FINANCIAL LOCKDOWN: Can PAYPAL Be Trusted to Handle US $1200 Stimulus Payments? - 2nd Apr 20
Day in the Life of Coronavirus LOCKDOWN - Sheffield, UK - 2nd Apr 20
UK Coronavirus Infections and Deaths Trend Trajectory - Deviation Against Forecast - 1st Apr 20
Huge Unemployment Is Coming. Will It Push Gold Prices Up? - 1st Apr 20
Gold Powerful 2008 Lessons That Apply Today - 1st Apr 20
US Coronavirus Infections and Deaths Projections Trend Forecast - Video - 1st Apr 20
From Global Virus Acceleration to Global Debt Explosion - 1st Apr 20
UK Supermarkets Coronavirus Panic Buying Before Lock Down - Tesco Empty Shelves - 1st Apr 20
Gold From a Failed Breakout to a Failed Breakdown - 1st Apr 20
P FOR PANDEMIC - 1st Apr 20
The Past Stock Market Week Was More Important Than You May Understand - 31st Mar 20
Coronavirus - No, You Do Not Hear the Fat Lady Warming Up - 31st Mar 20
Life, Religions, Business, Globalization & Information Technology In The Post-Corona Pandemics Age - 31st Mar 20
Three Charts Every Stock Market Trader and Investor Must See - 31st Mar 20
Coronavirus Stocks Bear Market Trend Forecast - Video - 31st Mar 20
Coronavirus Dow Stocks Bear Market Into End April 2020 Trend Forecast - 31st Mar 20
Is it better to have a loan or credit card debt when applying for a mortgage? - 31st Mar 20
US and UK Coronavirus Trend Trajectories vs Bear Market and AI Stocks Sector - 30th Mar 20
Are Gold and Silver Mirroring 1999 to 2011 Again? - 30th Mar 20
Stock Market Next Cycle Low 7th April - 30th Mar 20
United States Coronavirus Infections and Deaths Trend Forecasts Into End April 2020 - 29th Mar 20
Some Positives in a Virus Wracked World - 29th Mar 20
Expert Tips to Save on Your Business’s Office Supply Purchases - 29th Mar 20
An Investment in Life - 29th Mar 20
Sheffield Coronavirus Pandemic Infections and Deaths Forecast - 29th Mar 20
UK Coronavirus Infections and Deaths Projections Trend Forecast - Video - 28th Mar 20
The Great Coronavirus Depression - Things Are Going to Change. Here’s What We Should Do - 28th Mar 20
One of the Biggest Stock Market Short Covering Rallies in History May Be Imminent - 28th Mar 20
The Fed, the Coronavirus and Investing - 28th Mar 20
Women’s Fashion Trends in the UK this 2020 - 28th Mar 20
The Last Minsky Financial Snowflake Has Fallen – What Now? - 28th Mar 20
UK Coronavirus Infections and Deaths Projections Trend Forecast Into End April 2020 - 28th Mar 20
DJIA Coronavirus Stock Market Technical Trend Analysis - 27th Mar 20
US and UK Case Fatality Rate Forecast for End April 2020 - 27th Mar 20
US Stock Market Upswing Meets Employment Data - 27th Mar 20
Will the Fed Going Nuclear Help the Economy and Gold? - 27th Mar 20
What you need to know about the impact of inflation - 27th Mar 20
CoronaVirus Herd Immunity, Flattening the Curve and Case Fatality Rate Analysis - 27th Mar 20
NHS Hospitals Before Coronavirus Tsunami Hits (Sheffield), STAY INDOORS FINAL WARNING! - 27th Mar 20
CoronaVirus Curve, Stock Market Crash, and Mortgage Massacre - 27th Mar 20
Finding an Expert Car Accident Lawyer - 27th Mar 20
We Are Facing a Depression, Not a Recession - 26th Mar 20
US Housing Real Estate Market Concern - 26th Mar 20
Covid-19 Pandemic Affecting Bitcoin - 26th Mar 20
Italy Coronavirus Case Fataility Rate and Infections Trend Analysis - 26th Mar 20
Why Is Online Gambling Becoming More Popular? - 26th Mar 20
Dark Pools of Capital Profiting from Coronavirus Stock Markets CRASH! - 26th Mar 20
CoronaVirus Herd Immunity and Flattening the Curve - 25th Mar 20
Coronavirus Lesson #1 for Investors: Beware Predictions of Stock Market Bottoms - 25th Mar 20
CoronaVirus Stock Market Trend Implications - 25th Mar 20
Pandemonium in Precious Metals Market as Fear Gives Way to Command Economy - 25th Mar 20
Pandemics and Gold - 25th Mar 20
UK Coronavirus Hotspots - Cities with Highest Risks of Getting Infected - 25th Mar 20
WARNING US Coronavirus Infections and Deaths Going Ballistic! - 24th Mar 20
Coronavirus Crisis - Weeks Where Decades Happen - 24th Mar 20
Industry Trends: Online Casinos & Online Slots Game Market Analysis - 24th Mar 20
Five Amazingly High-Tech Products Just on the Market that You Should Check Out - 24th Mar 20
UK Coronavirus WARNING - Infections Trend Trajectory Worse than Italy - 24th Mar 20
Rick Rule: 'A Different Phrase for Stocks Bear Market Is Sale' - 24th Mar 20
Stock Market Minor Cycle Bounce - 24th Mar 20
Gold’s century - While stocks dominated headlines, gold quietly performed - 24th Mar 20
Big Tech Is Now On The Offensive Against The Coronavirus - 24th Mar 20
Socialism at Its Finest after Fed’s Bazooka Fails - 24th Mar 20
Dark Pools of Capital Profiting from Coronavirus Stock and Financial Markets CRASH! - 23rd Mar 20
Will Trump’s Free Cash Help the Economy and Gold Market? - 23rd Mar 20
Coronavirus Clarifies Priorities - 23rd Mar 20
Could the Coronavirus Cause the Next ‘Arab Spring’? - 23rd Mar 20
Concerned About The US Real Estate Market? Us Too! - 23rd Mar 20
Gold Stocks Peak Bleak? - 22nd Mar 20
UK Supermarkets Coronavirus Panic Buying, Empty Tesco Shelves, Stock Piling, Hoarding Preppers - 22nd Mar 20
US Coronavirus Infections and Deaths Going Ballistic as Government Start to Ramp Up Testing - 21st Mar 20
Your Investment Portfolio for the Next Decade—Fix It with the “Anti-Stock” - 21st Mar 20
CORONA HOAX: This Is Almost Completely Contrived and Here’s Proof - 21st Mar 20
Gold-Silver Ratio Tops 100; Silver Headed For Sub-$10 - 21st Mar 20
Coronavirus - Don’t Ask, Don’t Test - 21st Mar 20
Napag and Napag Trading Best Petroleum & Crude Oil Company - 21st Mar 20
UK Coronavirus Infections Trend Trajectory Worse than Italy - Government PANICs! Sterling Crashes! - 20th Mar 20
UK Critical Care Nurse Cries at Empty SuperMarket Shelves, Coronavirus Panic Buying Stockpiling - 20th Mar 20
Coronavirus Is Not an Emergency. It’s a War - 20th Mar 20
Why You Should Invest in the $5 Gold Coin - 20th Mar 20
Four Key Stock Market Questions To This Coronavirus Crisis Everyone is Asking - 20th Mar 20
Gold to Silver Ratio’s Breakout – Like a Hot Knife Through Butter - 20th Mar 20
The Coronavirus Contraction - Only Cooperation Can Defeat Impending Global Crisis - 20th Mar 20
Is This What Peak Market Fear Looks Like? - 20th Mar 20
Alessandro De Dorides - Business Consultant - 20th Mar 20
Why a Second Depression is Possible but Not Likely - 20th Mar 20

Market Oracle FREE Newsletter


Edgar the Entrepreneur Demonstrates Harm the Minimum-wage Inflicts on Workers

Economics / Economic Theory Apr 16, 2012 - 01:16 PM GMT



Best Financial Markets Analysis ArticleDaniel James Sanchez writes: Edgar the Exploiter is a wonderful animated short by Tomasz Kaye that defends voluntary employer-employee relations and demonstrates the harm that policies like minimum-wage laws inflict on the very people they are supposed to help.

Edgar is a capitalist who hires Simon as an unskilled laborer, until a minimum-wage law impels Edgar to lay Simon off.

Give it a view. It is beautifully done.

How the free market benefits workers, and how government intervention hurts them, is an important lesson indeed.

But to get the full picture of the virtues of the free market and the evils of interventionism, it is essential to bring the consumer into the picture.

Edgar may be the "boss" of Simon in Simon's role as a worker. But Simon as a consumer is, along with the other consumers of the market, the boss of Edgar in Edgar's role as an entrepreneur.

As Ludwig von Mises wrote,

The orders given by businessmen in the conduct of their affairs can be heard and seen. Nobody can fail to become aware of them. Even messenger boys know that the boss runs things around the shop. But it requires a little more brains to notice the entrepreneur's dependence on the market. The orders given by the consumers are not tangible, they cannot be perceived by the senses.[1]

To perceive in market activity the orders given by the "sovereign consumers," one must employ economic theory.

How Consumer Sovereignty Works

Say Edgar owns a business that manufactures and sells tablet computers called "ePads." As an entrepreneur, he will try to acquire profits by selling his product for more money than what he paid to have it made.[2] So, for Edgar, his anticipation of consumer demand for the ePad is of prime importance, because it indicates how much revenue he may get.

In order to ensure that he gets profits, Edgar will want to spend on each factor of production less than its expected contribution toward garnering revenue from the consumers.

For example, as the video has it, every hour of Simon's labor as a floor sweeper is expected to result in $4 of extra revenue for Edgar. Perhaps without someone keeping the factory floor clear and clean eight hours a day for a year, the whole process would slow down to the extent that Edgar would sell fewer ePads, costing him over $8,000 over the course of a year.

Four dollars is, in Murray Rothbard's terminology, the expected marginal value product (MVP) of an hour of Simon's work in this particular production process. [3]

This expected MVP is Edgar's estimate of what the consumers will pay for Simon's contribution toward making ePads. And it sets an upper limit on what Edgar will be willing to pay Simon. Were Edgar to pay Simon more than $4/hour, he would expect to lose money.

Is there a lower limit? And if so, what sets it? In the video, Edgar pays Simon $3/hour. Why doesn't Edgar save money by paying Simon $2/hours or less?

For one thing, the wage must be high enough for Simon to consider its marginal utility to be higher than the marginal utility of leisure.

Also, as the video points out, Edgar is only one of many entrepreneurs eager to hire labor for their production processes.

For example, let us say Carlos the Competitor makes "gTabs," another kind of tablet computer. gTabs don't sell as well as ePads, so Simon's expected MVP in Carlos' production process is lower: only $2.75/hour. Even so, to keep Simon from getting bid away by Carlos, Edgar cannot cut Simon's pay too much.

In fact, Edgar may have to give Simon a raise if a competing employer comes along who has a production process in which Simon's MVP is higher than $3/hour (even if it is still less than $4/hour). He may need to pay Simon $3.50/hour in order to keep Simon from being bid away by someone willing to pay $3.75/hour.

Furthermore, if someone comes along with a production process in which Simon's expected MVP is higher than $4, Simon would indeed be bid away, and there would be nothing Edgar could do about it.

In this way, labor will tend to be allocated to the production process in which it has the highest expected MVP. And a worker's wage will tend toward equaling that MVP. In fact, this is true of virtually all factors of production and their hire prices.[4]

Remember it is the anticipated demand of the purchasers that determines the various expected MVPs. For first-order goods, those purchasers are consumers. Therefore, in the production of first-order goods, it is anticipated consumer valuations that determine where the factors (second-order goods) are allocated and what is paid for them.

And it is in anticipation of those payments that yet other entrepreneurs (for example, businessmen who sell microchips to Edgar) formulate the expected MVP of third-order goods (for example, the labor of microchip engineers).

Thus, in a market economy, consumer demand ultimately holds sway over every stage of production. When a factor is expected to have a high MVP in a given line of production, that means the entrepreneur expects the consumers to urgently want the product at the end of that line. And the opposite is true of an expected low MVP.

When an entrepreneur bids a factor away from a low-MVP role in one production process to move it into a higher-MVP role in another production process, he is attempting to win profits by pleasing consumers better than they were before. This is because the higher MVP of factors, as Rothbard says,

is due solely to their being more highly demanded by the consumers, i.e., being better able to satisfy the desires of the consumers. That is the meaning of a greater discounted marginal value product.[5]

Of course the entrepreneur may fail in the attempt. For example, Edgar may be entirely wrong in his anticipation of Simon's MVP. The demand for ePads may be such that Simon may only contribute to Edgar's bottom line less than he is getting paid. This, plus other similar errors, may result in Edgar making losses.

Consumers punish inept entrepreneurs with losses through their buying and abstention from buying. Losses are a sign that the entrepreneur has arranged factors in a way contrary to the wants of the consumers. For example, maybe consumers like gTabs better, and would have preferred Simon to have worked toward their production, even if it was at a higher wage.

By making an entrepreneur poorer, and thus less able to bid for factors, losses reduce that entrepreneur's role at the helm of production. So much the better for the consumers he served poorly!

But then Edgar may be correct, and Simon may contribute to Edgar's bottom line more than he was paid. This, plus other similar good calls, may result in Edgar making profits.

Consumers reward capable entrepreneurs with profits through their buying and abstention from buying. Profits are a sign that the entrepreneur has arranged factors in a way pursuant to the wants of consumers.

By making an entrepreneur richer, and thus more able to bid for factors, profits increase that entrepreneur's role at the helm of production. So much the better for the consumers he served well!

The characteristic feature of the market economy is the ceaseless striving of entrepreneurs to, in the course of seeking profit and avoiding losses, arrange factors of production to better satisfy consumers.

And, because the greatest profits are to be found in servicing the masses, "modern capitalism is essentially mass production for the needs of the masses."[6]

Consumer Dethronement

This casts another shaft of light on the situation in Edgar the Exploiter.

It is indeed a personal tragedy for Simon to have lost his job due to the minimum-wage law. But he is not the only one made worse off.

Consumers are worse off too. For example, it might have been the case that Edgar cannot make ePads at all without low-wage labor.

The video considers the prospects of Edgar buying machines to replace Simon, or relocating to another country without minimum-wage laws. Even in those cases, the consumers' interests are likely to be harmed.

Had Edgar thought that consumers would have rewarded him extra profits for replacing Simon with robots or foreign labor, he would have done so even without the minimum-wage law. Therefore, in the judgment of the guy with skin in the game, keeping Simon was the best way available to satisfy consumers. And now that is no longer an option.

For example, due to hurdles presented by using robots or foreign labor, Edgar may only be able to churn out fewer, or lower-quality, ePads.

Now there is one person you may not expect to care a whit about all that. In the video, "Bob" did not lose his job. In fact, he got a raise due to the minimum-wage law. Why should he care? Maybe he doesn't even like ePads.

But he is a consumer of some goods. And the minimum-wage law may very well result in those being produced in lower quantities and quality as well. To the extent that the minimum-wage law effects how the goods he buys are produced at all, it partially nullifies the orders he transmitted through the price structure as a "sovereign consumer."

Furthermore, a minimum-wage law is just one instance of a "producers' policy" ethos. Minimum-wage laws, like other producers' policies, privilege certain producers (like Bob) at the expense of other producers (like Simon) and of consumers.

To the extent that such producer privileges become the norm, and the sovereign consumer is dethroned across the board, it is certain that

everybody loses in his capacity as consumer as much as he gains in his capacity as a producer. Moreover, all are injured because the supply of products drops if the most efficient men are prevented from employing their skill in that field in which they could render the best services to the consumers.

And this is true not only for products like ePads but for products like food and clothing.

And on top of all this, Tom may find himself worse off as a worker as well. Even with his nominal raise, he may ultimately find himself with lower real wages than he otherwise would have had. This is because any state-induced reduction of profit (like the reduction caused by Edgar losing Simon) means less additional savings that the entrepreneur-capitalist can invest in capital goods. And fewer capital goods means a lower marginal productivity of labor, which in turn means lower real wages.

Every state intervention into the market is an abrogation of consumers' sovereignty. It impairs the satisfaction of consumers by hampering the efforts of entrepreneurs to adjust the intricate structure of production so as to better serve them. And because, with regard to economic provision, we are all consumers first and foremost and producers only subordinately, reduced consumer satisfaction means reduced public welfare.

Abolish the minimum wage, not only for the sake of Simon the worker, but for Simon the consumer (and the rest of us too).

Comment on this article.

Daniel James Sanchez is editor of and director of the Mises Academy. Friend him on Facebook. Send him mail. See Daniel James Sanchez's article archives.

You can subscribe to future articles by Daniel James Sanchez via this RSS feed.

© 2012 Copyright Daniel James Sanchez / Ludwig von Mises Institute- All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

© 2005-2019 - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.

Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules