Minimum wages, executive pay and the price of labor are all hot button issues and have remained at the forefront of political discourse since the financial crisis. However, despite all of the rampant discussions and immense number of articles, there is still quite a bit of erroneous pontification on the matter.
Robert Reich is a perfect example of someone who is tremendously smart but misguided.
Reich maintains incredible and celebrated credentials: a former Secretary of Labor in the Clinton administration, a Harvard Kennedy School professor, a bestselling author and an award-winning filmmaker. With all of these commendable achievements, how can he get it wrong on the most rudimentary premise of the price of labor?
Last week, Reich published on Facebook a conversation he had with an affluent businessman regarding the pay of teachers in the United States. The post, which currently has more than 50,000 Likes, essentially illustrates that teachers, who are helping construct human capital, should be paid more.
"In other words, investment bankers and portfolio managers are earning about 20 times what teachers are earning. Yet if the nation’s human capital is more important than its financial capital, that ratio is absurd. The law of supply and demand isn’t repealed at the classroom door. If we want talented men and women to become teachers rather than bankers, we need to pay them far more. He nodded, caught in the net of his own logic."
Since the late-18th century, we have become aware of the neoteric price theory. The theory examines how the wide spectrum of goods and services available in the marketplace are listed in relation to their marginal contributions, marginal utility to consumers and marginal productivity to the business owner.
Water Diamond Paradox
In economics, there is something called the paradox of value, otherwise known as the water-diamond paradox, a concept that was explained by Adam Smith in the Wealth of Nations. The term means that although water is essential to sustaining life, diamonds are still more valuable in the market. Why is this? When looking at marginal utility - gain from increase, loss from decrease - a bucket of diamonds is a lot more valuable than a bucket of water. In other words, diamonds are scarcer than water (at the present moment) and thus more expensive.
This is something that can easily be translated into the cost of labor.
Indeed, it can certainly be argued that a mathematics or English teacher is a lot more valuable to society than a basketball player or a Hollywood actor. Therefore, a teacher should be earning millions of dollars while a baseball pitcher should be earning far less. However, that’s not how it works.
In the market economy, the market will determine what the real salary is. Akin to the water-diamond paradox, a baseball pitcher throwing 100 mph fastballs 125 times in a three-hour time span is a lot scarcer than a teacher instructing children about the multiplication table in the fourth grade. Teachers are a dime a dozen while LeBron James or Michael Jordan are rare. Anyone can push a broom, but not everyone can be a corporate lawyer.
As economist Robert Murphy alluded to in a blog post this month if we take Reich’s premise, why should we stop at education? Surely, someone providing food and clothing is a lot more valuable than learning about William Shakespeare? Therefore, a farmer or a sewer worker should be earning more than a fifth grade teacher. But, again, that’s not how it works.
The Price of labor is certainly an important facet of the market economy. It sends signals throughout the marketplace informing the general public what sectors and industries are most in demand and what skills are scarce right now. Today, for example, there is a greater demand and generous salaries for those in the oil and gas sector than professionals with a strong acumen for Medieval history and gender studies.
Usually what people like Reich want is labor legislation and more government funding to give certain groups higher pay. The question is: how does one even determine the value of specific labor? If we abide by Karl Marx, how do we value something that is "socially useful"? Austrian Economist Carl Menger may have written it best in "Principles of Economics":
"[V]alue is… nothing inherent in goods, no property of them, but merely the importance that we first attribute to the satisfaction of our needs... and in consequence carry over to economic goods as the… causes of the satisfaction of our needs."
Considering Reich’s vast knowledge and teachings, he should know better. Perhaps he is coming at this from a political or emotional standpoint. Let’s face it: it’s a lot more popular, and lucrative, to take advantage of economic illiteracy than it is to espouse the teachings of Ludwig von Mises or Eugen von Böhm-Bawerk regarding price of labor.
It’s similar to what economist Hans F. Sennholz wrote a long time ago:
"Yet, economists who dare to point to labor legislation and regulation as important causes of mass unemployment are criticized, denounced, condemned, and vilified as callous and ruthless agents and spokesmen of greedy employers."
Why should Reich care? He was paid nearly a quarter of a million dollars in 2013 for teaching one course at the taxpayer-funded University of California. By being paid this amount of money for teaching a few hours in a year, Reich can definitely be viewed as a hypocrite.
What are your thoughts on the price of labor?Do you think that Robert Reich is correct or just a fool and a hypocrite? Your thoughts and comments below please...