The Mexican Pizza Riddle

Discussions on the Economics of Poverty
Part 3. Consequences
Eyler Coates
    If the wealthy persons in Mexico would allow their fellow Mexicans to earn enough money to buy the products of industry, they themselves would be many times wealthier than they are, and their whole nation would experience enormous prosperity. But their self-centered greed that sees itself as owing NOTHING to their fellow man, actually reduces their own prosperity.
Jim in Boulder
    Ah, so the Mexican's at the top, many of whom have gone to good universities and even graduate schools in the US have missed all of this and you yourself have deduced it from a trip to the local pizzaria???
Eyler Coates
    This is the Authoritarian argument, plus a little ridicule and ad hominem. Need I say more?
Jim in Boulder
    No, you have made it plain that you reject the conventional wisdom on experts. There is nothing wrong with doing that, except that you did so and gave nothing more for your grounds as doing so than anecdotal evidence.
Don Dale
    Okay, let's take this and run with it. I think you'll agree that the Government of Mexico governs largely for the benefit of wealthy Mexicans. Now, these wealthy Mexicans aren't stupid, and, moreover, let's take your assertion that they are motivated solely by "self-centered greed" as fact. If your theory were true, why hasn't the Mexican government enacted policies which you advocate?
Al VanZee
    The Mexican elite isn't interested in growth of production, because it has no incentive to increase production. It can maintain its position of power without the hassle and expense of production. Why engage in productive enterprise when you can be filthy rich by simply maintaining the status quo?
Donald J. Dale
    Coates' assertion was that raising the minimum wage would make rich Mexicans richer. My point is that if this were true, it would have been done. It has nothing to do with productive enterprise.
Mohammad Gani
    For starters, Israel Kirzner's book "Perception, Opportunity and Profit (1979)" would be a good thing to read.

    This argument, that if something were profitable it would have been done is a grand fallacy that ignores the whole concept of entrepreneurship. People do not do profitable things, simply because they do not see that it is profitable. Entrepreneurs are people who think they see profit opportunities and they try to seize what they see as profit. It is not easy to see opportunities, because they are subjective in large measure. Quite a lot of people end up losing, because they discover only after trying that what they had thought was profitable was not so. Many wealthy Mexicans will bite the dust, because profit opportunities that they fail to see will be overlooked as will the dangers undermining their position. Many big companies and empires went extinct precisely because they failed to do what ought to have been done. No, no, no : profit opportunities are not automatically seized.
Donald J. Dale
    This is not an issue of entrepreneurship, of individual discovery of an opportunity for profit for a particular person. Coates' assertion was that an increase in the minimum wage would make all Mexicans more wealthy.

    I am not asserting that all opportunities for profit are automatically seized. I am asserting that this particular opportunity, if it existed, would have been seized.
Eyler Coates
    My point, properly stated, was that raising the minimum wage would make rich Mexicans richer IN SPITE OF THEMSELVES. As explained in a previous post, each individual rich Mexican sees a raise in the minimum wage as coming directly out of his pocket and reducing his profits, because he thinks only on a microeconomic basis. But on a macroeconomic basis, higher wages vis-a-vis the costs of goods will mean a better economy from which all, especially the rich, will benefit. This has not already been done because it is a macro phenomenon. Of course, greater wealth would not be an automatic occurrence for the rich. It is still a competitive economy.
John B. O'Donnell
    The problem here, Eyler, is that raising the minimum wage does not in and of itself enrich the wealthy. What can enrich the wealthy is a more viable set of consumers which requires they have the resources to do the consuming. If the resources come from the capital owners then they have less with which to purchase more capital therefore they do not become richer in spite of themselves. So, the problem, once recognized, is to find a way to increase the resources of the consumers without raising the costs of producers. And that is the essence of my "Three Steps to Economic Freedom."
Donald J. Dale
    E.C. appeals to "macroeconomics" as if it were some magical phenomenon completely divorced from the actions of individuals. If the capital stock is increased, then the productivity of labor will increase, as will the real wage. The increase in the real wage is not the cause but the effect. If the wage is increased by fiat, this can only serve to decrease the return to capital and discourage its accumulation, which will serve to further depress the economy. Mohammed Gani pointed this out in another post.

    If your theory were true, would the logic not apply to any country? By your argument, raising the minimum wage to $10 per hour, or $20, or $100 would create a nation of untold prosperity!
Eyler Coates
    I am not suggesting the minimum wage should be increased arbitrarily. I am only trying to examine the RELATIVE relationship between wages and the cost of the products produced by the workers making those wages. Your suggestion that wages be arbitrarily increased to $10, $20 or $100 only proves that you have not grasped the point my argument is trying to make. To increase wages arbitrarily as you suggest would completely distort the relative relationship between wages and prices.
Don Dale
    Which is exactly the policy you advocate.
Jim in Boulder
    Look at it this way, you haven't done ANYTHING to raise productivity, so there aren't going to be any more goods in the economy after your proposed round of massive pay increases then there were before it.
Eyler Coates
    It is true that this does nothing to raise productivity. But since productivity is not the issue, that is totally irrelevant.
Jim in Boulder
    On the contrary, it is everything.
Eyler Coates
    We are not talking about production efficiency, but the quantity of production. Not output per worker, but more output with more workers. Not more efficient business, but MORE BUSINESS. There will be more goods in the economy because the economy will have expanded. Instead of one pizza parlor, you will have two. Their productivity will be the same. There will be higher employment, probably less money stashed away in foreign banks and more of it in Mexico with which to buy pizzas and other things.
Jim in Boulder
    If people aren't willing to open pizzarias now when wages are low and capital can suck up the profits, who is going to want to open them (or even keep the ones they've already got) when returns to capital are low. You say time and again that there are rich Mexicans who don't care about anything other than profits. Fair enough. But what do you think Pizza Hut is, a philanthropic organization?

    Now there will be a lot more money chasing the same number of goods as before.
Eyler Coates
    A small amount of inflation is almost unavoidable as the economy adjusts to these new relationships. This is not intrinsic in the higher wage-price differential, but it IS intrinsic in the practicable means necessary to bring about the improvement, i.e., union wage demands or minimum wage increases. But inflation is the price you pay. (?;-) Certainly, the United States did not get where it is today without a steady, if usually small, rate of inflation. The leap in inflation in the 70's was not related to the factors discussed here.
Jim in Boulder
    Well, I welcome your willingness to do things slowly, rather than all at once. I would also be willing to welcome more independent union activity in Mexico, since I WILL agree with you that it isn't good to have the owners of capital who are few and easily organized to go one on one with the owners of labor who are many if they aren't organized as well. In none of this am I saying that increasing labor's share of production isn't a good thing. I am saying that it will come at a cost to the rich, which will be permanent.
John B. O'Donnell
    So long as you make your analysis on the basis of land, labor and capital being the only three factors of production you are likely to come to this conclusion.

    But, consider a fourth claimant--society--and the division can then assign all that would otherwise be captured as the monopoly/economic profits (i.e.-- those profits over and above the "normal" profits needed to encourage production/investment.) and unburden both labor and capital from the distortionary effects of taxes on transactions that discourage production.

    Without the consideration of this fourth claimant then labor and capital are left in the enviable(?) position of dividing up the spoils (i.e. -- The value created by society by the degree to which it encourages the existance of viable consumers.) rather than sending it of to where it belongs. It rightfully belongs to the society that creates the value and could be collected as taxes/fees to pay the cost of enforcing the rules that create property rights with any excess be distributed to compensate those of the society who have surrendered their equal claim to property because private property has been shown repeatedly to be a better choice than commons.
Jim in Boulder
    Your claim that if they just weren't so greedy and were willing to pay their workers more that they themselves would reap new riches beyond their wildest dreams was off the mark.
John B. O'Donnell
    Not so far off as you apparantly think. It is only Eyler's method (higher wages) of distributing the value of monopoly/economic profits that is in error.
Jim in Boulder
    I also long to see the middle class in Mexico grow, but I don't believe that the government is in any position to decide what labor's share should be in every different industry.
John B. O'Donnell
    And if Eyler is suggesting such a thing, shame on him!
Jim in Boulder
    Let the union's in bargaining sessions with the owners do that.
John B. O'Donnell
    Which is a good way to determine a rational division of the profits left after the society has been properly compensated for its share of the value produced.
Gary Forbis
    I'm reminded of a guy who gets mugged by a gang and calls for friends to help. As the friends arrive a policeman comes up and domands a fair fight. He reasons that a fair fight would involve one of the muggers and the person now mugged.

    Mexico is not a labor friendly state. It has come down on the side of capital and against labor many times.

    How long as Mexico allowed international unions to organize within its boarders?

    Even in the US there are laws favoring capital. Some states do not recognize companies right to freely enter into exclusive labor agreements with unions. They claim to come down on the side of labor by saying every worker should have the right to work anywhere he or she so chooses but in reality this hinders Labor's organizational power with which to fight for a greater share of the fruits of the laborer's labor.
John B. O'Donnell
    To all of which I can only concur.
Jim in Boulder
    Lots of economies have tried something similar to what you suggest, except instead of mandating higher wages, they inflate the money supply so that there is more purchasing power in the economy.
Eyler Coates
    So, it's not the same, is it? Inflating the money supply is hardly the equivalent of adjusting the wage-price differential. They are two entirely different concepts.
Jim in Boulder
    Do it without regards to productivity of labor and you will get the same result. Bottom line: more money chasing the same amount of goods = inflation.

    The result, from ancient Rome to the modern Third World, has always been inflation, sometimes hyper-inflation, and often the serious decay of the economy as people cease to be willing to hold money.
Eyler Coates
    I am not suggesting anyone inflate the money supply.
John B. O'Donnell
    The only exception I find with E.C.'s statements is that I suspect that it is ignorance of economic consequences exacerbated by economists who refuse to acknowledge that P(macro) is not a causal factor in determining Q(macro), and not self-centered greed that reduces everyone's prosperity.
Eyler Coates
    What I am doing is comparing our wage scales vis-a-vis prices to Mexico's wage scales vis-a-vis prices. I am suggesting that herein lies the explanation of why we are the world's greatest economic power with one of the world's highest standards of living, and why Mexico is a third world country with much of the population in poverty. I am saying that perhaps the main reason why we got where we are was because of unions demanding higher wages and because of the minimum wage itself. I'm talking about the central dynamic of the whole free enterprise system.
Jim in Boulder
    That is a highly questionable claim. The minimum wage was not begun until the Great Depression, and for many many years did not cover many industries. America's rise to prosperity can be far better explained by its increasing productivity due to the industrial revolutions than the rise of the minimum wage or even unionism, though I feel that the latter was a significant player.
Eyler Coates
    Productivity is important for producing incremental increases in the standard of living. But increases in productivity do not necessarily put more money in everybody's pocket. We have had increases in productivity in this country with a decline in average middle incomes. It stand to simple reason that an industry could have an increase in productivity that goes entirely to stockholders and not a penny of increase to the employers. Of course, stockholders are people, too, and that is at least some degree of distribution. But in a country like Mexico, you have a very wealthy class and a vast number of people with little income. Increases in productivity there as well as here will accrue to those who actually share in the benefits from the increase. There is no guarantee that this will go to any but the wealthy. Also, in Mexico, you are starting from a base of such outrageous dislocation, it is doubtful the general population would ever catch up merely by increases in productivity.

    Producers in this country want to lower their labor costs by shifting jobs to Mexico or overseas, then bring the products back to this country and sell them to our consumers at regular prices, thus making huge profits. But if ALL the jobs are shifted to low wage areas, where will consumers get the money to buy the products? No one seems to be thinking of that.
Don Dale
    You're talking about the antithesis of the free enterprise system. The minimum wage does not foster free enterprise, but inhibits it. There are people willing to work, and others willing to hire them, at some wage, yet the minimum wage makes these transactions illegal. Unions are monopolies on the supply of labor, with all the resulting anticompetitive effects.
Eyler Coates
    This is the crux of the myth concerning wages, because it equates a working person to a commodity, like a loaf of bread. This was the kind of thinking that produced slavery and that still infects labor economics thinking today. "Supply and demand" is a concept appropriate for commodities, not people.
Don Dale
    Supply and demand are not concepts appropriate for people?

    Tell me: Would you continue at your present place of employment if your employer were to suddenly reduce your current level of compensation by a factor of 10? No? Then do not waste my time with empty assertions that supply is not an appropriate concept for labor.

    Would your employer continue to employ you if you suddenly demanded an increase in your level of compensation by a factor of 10? No? Then do not waste my time with empty assertions that demand is not an appropriate concept for labor.
Eyler Coates
    The quantity of commodities available on the market can be regulated by inventory control and is related to the cost of production, because if prices consistently exceed costs, production will be reduced until by one means or another until the results are economically satisfying. Workers, however, are not subject to inventory control. They cannot be stacked in cold storage until required. If there is an oversupply, the solution is never to kill them until the supply is more compatible with the demand. They have to eat every day, whether there is a market for their labor or not.

    The minimum wage not only fosters the free enterprise system, but it has been the backbone of the incredible success of the American economy. Why? Because it ensures that workers will have sufficient income to purchase the products of industry. The competitive free enterprise system works normally to push prices down, while the minimum wage works to push labor's share up. The conflict between those two complimentary forces creates a "moving equilibrium" which produces optimum economic growth and development. Rather than being the antithesis of free enterprise, the two forces work together to produce a living and livable economic system.

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