The Mexican Pizza Riddle

Discussions on the Economics of Poverty
Part 4. Conclusions (continuation)
William F. Hummel
    OK Donald, show us. Explain why the labor movement a century ago resulted in decreasing welfare.
Don Dale
    OK. Imagine a Cartesian space with the wage on the vertical axis and hours of labor on the horizontal. Imagine in this space an upward sloping labor supply curve. This represents workers' decisions; as the wage increases, more workers want to work, and they want to work longer hours. Meanwhile, imagine a downward sloping labor demand curve. This represents firms' decisions: the lower the wage, the more workers firms will generally wish to hire. The wage that would result in a competitive equilibrium is at the point where these two curves cross. This equilibrium also represents the efficient level of employment.

    Now, assume that a union has forced a wage substantially above equilibrium. With this higher wage forced upon them, firms will now choose to employ fewer workers (or have their workers work fewer hours). This can be seen by looking at the labor demand curve; at the higher union wage, firms will demand less labor. Now, notice that at this new, lower quantity of labor hired, there is (generally speaking) a person willing to work for far less than the union wage, but this individual is not hired because at the union wage, the firm doesn't want any more workers. We see this by looking at the labor supply curve at the new, lower quantity. If the firm could cut a "side deal" with this marginal individual, paying him a wage somewhat less than the union wage but above the wage at which he is willing to work. This would increase both that individual's welfare and the profits of the firm. But the firm can't do this, because of the presence of the union. If the firm could lower the wage for all the workers, it would again hire that marginal worker and social welfare would again increase; the lower wages to the workers who would have been hired at the higher wage is just transferred to increased firm profit.
John B. O'Donnell
    With a bit of a catch to this little parody. The location and slope of the supply of labor is quite possibly so low as to allow proprietors to exact monopoly profits at all attainable levels of production. So long as the force applied by organized labor demands no more than that which would otherwise be pocketed by owners as monopoly or economic profit, there will be a crossing of the lines at a point more favorable to labor which, when considered at the macro level results in all parties becoming better off. And, to really get an economy moving don't let either labor or capital abscond with the monopoly/economic profits -- have the government collect them and use them to finance whatever government programs are politically accepted then distribute whatever excess may exist as a "Citizen's Dividend" to compensate all those folks late to the table when privileges were being handed out.
William F. Hummel
    Explain why the progression to a humane working environment and a reduction from the 60- to the 40-hour work week would have come about without the pressure of the union labor movement.
Don Dale
    As living standards increase, people tend to want more free time to spend on pleasurable activities. Hence, as living standards rise, people will tend to choose those jobs which demand fewer hours. Also, as living standards rise, people become less willing to endure uncomfortable working conditions; they will choose a job that's more comfortable, even at the cost of a somewhat lower wage.
John B. O'Donnell
    This is beginning to sound like the old chicken-egg routine. It takes an increase in income to raise living standards and it takes an increase in living standards to be free to take the time and effort to find these better paying and more pleasurable jobs.
William F. Hummel
    Economists need to learn history as well as econometrics. Better still, forget econometrics and study in detail the institutions that comprise the world of economics.
Don Dale
    My dear fellow, econometrics is history; it is the quantitative measurement of past events and the formulation of these events into a model which attempts to explain some phenomenon.
John B. O'Donnell
    If only it were so. Unfortunately it appears more often to be an assemblage of correlations posing as causal relationships.
Robert Vienneau
    Even if one accepted the norm of Pareto efficiency, I am not sure that unions can be shown to be welfare decreasing. Is Don familiar with the theory of the second best? Does Don's claim hold up under second best theory?
Don Dale
    Your question is incomplete. Broadly stated, the Theory of the Second Best asks and answers the question, "Given an irreparable market failure, what is the optimal allocation and the optimal institutional arrangement to achieve such an allocation?" The answer to this question depends critically upon the particular class of market failure we specify. So tell me: Where is the labor market failing? Are we talking about externalities? Public goods? Asymmetric information? Monopsony?

    I'll answer my own question (and beat a small tactical retreat from my untenable position above) by pointing out that in the presence of a monopsonistic employer, both a minimum wage and a monopoly union can, under some circumstances, result in a Pareto superior allocation. Of course, the question now becomes, "Is monopsony an accurate model of the labor market, either for unskilled labor (minimum wage) or largely unionized industries?" I would argue that the answer to that question is, in nearly every case, no.
Robert Vienneau
    Every institutionalist knows economics is about the evolution of norms. There you go, violating the norms of Usenet.

    Anyways, you will have observed that I don't accept Pareto optimality as the right norm for economic policy. I just want to register my disagreement with your consensus on how pricing decisions are made in the U.S. before moving onto other posts.
Al VanZee
    Coates's point is that this elite establishment and maintenance of power also interferes with production of new wealth. The Soviet Union and Mexico are perfect examples of this inhibitive process.

    The destruction of democracy will make you no richer. It will, in fact, make you poorer.
Donald J. Dale
    That depends upon what it is replaced with.
Eyler Coates
    And with what would you replace government of the people (democracy)? Government by a ruling philosophical elite? Bear in mind that governmental power is not exercised by theories on pieces of paper, but by corporeal beings. The pieces of paper merely define the channels through which sovereign power flows.
Don Dale
    How about a government of laws, not of men? How about a government that is not the citizen's master, but his agent? How about a government whose power is explicitly, irrevocably and strictly limited in form and extent? How about a government such as was conceived by a few brave, brilliant men 222 years ago?
Eyler Coates
    Anyone who thinks "A government of laws, not of men" is an alternative to a democratic government of the people does not understand either. The former means that governmental agents (who all happen to be men and women, BTW) act pursuant to authority granted them by established law, not according to their own whim. The latter means the FORM of government recognizes the people themselves as the ultimate sovereign. To assume that a government could be "irrevocably limited in form and extent" derives from one of the fundamental and fatal flaws of Objectivism: the assumption that there can be law without a law-giver. Those brilliant men of 222 years ago determined that no law and no form of government could be established irrevocably, and that the best and only sure protection for a free society was the people themselves, who are the ultimate sovereign and hence the ultimate law-giver. Laws and forms of government founded on "objectively valid principles" are only possible under some form of dictatorship.
Robert Vienneau
    What system is better than democracy in delivering the goods?

    Anyway, the belief that all parties affected by decisions (e.g. investment decisions) should have a say in making those decisions is not solely an instrumental value. Currently, the U.S. is becoming less democratic since so much private power is increasingly being treated as outside public control. The rise of multinational corporations is also a challenge for these Jeffersonian values.

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