Knowledge And Decisions

The element of force is crucial to the distortion. The knowledge transmitted by voluntarily chosen prices conveys the terms on which various forms of mutual cooperation are available. The knowledge transmitted under government price constraints reflects the desire to escape punishment, and the knowledge conveyed by such prices does not reflect the full array of options actually available to the economy. In particular it does not convey the cheapest options. For example, a large, far-flung corporation can communicate among its many plants either by using the already existing telephone network or by building its own telephone system connecting its plants. It may require far fewer of the economy’s resources to use the existing telephone network, but if these low incremental costs to the economy are forbidden to be conveyed by low prices, the corporation may find it cheaper (in its own financial terms) to build a socially redundant telephone network for itself rather than pay high prices reflecting the “average cost” of telephone service.

The crucial importance of force as a distorter of knowledge transmission is overlooked in abstract discussions of the merits and demerits of “marginal cost pricing.” Such discussions attempt to directly determine what should be done rather than decide who should make that determination. Such questions as the precision with which incremental (“marginal”) costs can be calculated,³ the cost of such precision,⁴ circumstantial variations in incremental costs,⁵ and the disparity between actual decision making variables and statistical artifacts,⁶ are serious social issues only in the context of forcibly “solving” economic “problems” directly from a unitary or godlike perspective, or as academic exercises. Where force is not involved, then whatever methods of coping with these difficulties emerge, the least cost methods among them will have a decisive competitive advantage in voluntary transactions, whether those methods result from intuitive insight, rationalistic expertise, or simply stumbling across something that happens to work. It does not depend upon the intentional modus operandi of businessmen,⁷ but on the systemic effects of competition.

Minimum wage laws likewise prevent transmission of knowledge of labor available at costs which would induce its employment. By misstating the cost of such labor, it causes some of the labor to be unemployed, even though perfectly willing to work for wages which others are perfectly willing to pay. The term “minimum wage” law defines the process by its hoped-for results. But the law itself does not guarantee that any wage will be paid, because employment remains a voluntary transaction. All that the law does is reduce the set of options available to both transactors. Once the law is defined by its characteristics as a process rather than by its hoped-for results, it is hardly surprising that there are fewer transactions (i.e., more unemployment) with reduced options. What is perhaps more surprising is the persistence and scope of the belief that people can be made better off by reducing their options. In the case of the so-called⁸ minimum wage law, the empirical evidence has been growing that it not only increases unemployment, but that it does so most among the most disadvantaged workers.⁹ This undermines some of the key assumptions of the price fixing approach.

Some who might not support the general proposition that people are made better off by reducing their options may nevertheless believe that one party to a transaction or negotiation can be made better off by eliminating his “worst” options — that is, low wages for a worker, high rents for a tenant, or sales at a loss for a business firm. But, almost by definition, these are not their worst options. They could have no transactions at all (or fewer transactions) — that is, be unemployed, unhoused, or unable to sell. Third parties may be morally uplifted by saying, for example, that they would rather see people unemployed than working at “exploitation” wages, but the mere fact that people are voluntarily transacting as workers, tenants, or businessmen reveals their own very different preferences. Unless price-fixing laws are to be judged as moral consumer goods for observers, the revealed preference of the transactor is empirically decisive. The fact that the worst-off workers tend to be the most adversely affected by minimum wage laws suggests that what is typically involved is not unconscionable “exploitation” but the payment of wages commensurate with their desirability as employees. If the lowest paid workers were simply the most “underpaid” workers relative to their productivity, there would be more than the usual profit to be made by employing them, and a minimum wage law could simply transfer that extra profit to the workers without costing them their jobs.