14. Dollars and Scholars, Cartels and Competition The Midnight Economist
Especially in “higher” activities–including medicine, religion, and education–some majestically
eschew the sordid and castigate the contemptible. And they are pleased to pronounce standards
of refinement and punish transgressors. Sometimes they manage to believe their haughty
foolishness.
Consider, with economists Armen Alchian of UCLA and William Meckling of the
University of Rochester, intercollegiate athletics and their supervision by the National Collegiate
Athletic Association. And find comfort in young scholars occasionally bounding about the playing
fields and gyms of our colleges, with some “student athletes” representing Alma Mater in friendly
strife with equally well-scrubbed sophisticates from other centers of study.
But a given school could not long compete–and generate that massive income–if it
uniquely paid below-market wages to its athletes. Any school not meeting the labor market
competition would have inferior teams and small gate receipts. But employee exploitation which
is not practicable for an individual school is feasible when done by all schools under enforced
agreement.
The cartel agreement does have to be enforced. For there is temptation to cheat by
surreptitiously paying players something closer to their free-market worth. Correspondingly, there
is incentive for schools to squeal on each other when they see rules being broken by competing
institutions. Finally, authority of the endorsing agent—the N.C.A.A.–is great, for flagrant cheaters
Questions for Thought and Discussion:
1. Who are most exploited by the NCAA=s maximum wage for student athletes? Why does this
make college recruiting so important to athletic success and so subject to abuse?
2. Do the NCAA restrictions help explain why college coaches are so concerned that star
athletes complete their education, while sometimes being far less concerned about how much
they learn from that education?
15. Minimum Wages, Market Wages, Employment, and Income The Midnight Economist
I’m so ticked off, I’d like to flee,” cried Mouse Karl.
“Sorry to hear of your tick and flee problem,” responded Mouse Adam. “What is the cruel
cause of your current crisis?”
“Poverty!” shouted Karl. “There is too much of it and it could be so easily eliminated, but
over $11,000.”
“So be bolder,” boldly suggested Karl. “Make the minimum hourly wage $6 or $7, which
many beginning and menial workers are already getting.”
“You call that bold?” chided Adam. “Make it $45 or $450 an hour!“
Karl twitched his tail nervously. “We have to be realistic,” he grudgingly suggested. “Not
many would be hired at wages that high.”
“Precisely,” confirmed Adam. “What is income to the worker is cost to the employer. It is
not good for one’s economic health–whether he be a consumer or a supplier–to pay more for
something than it is worth.
Questions for Thought and Discussion:
1. Is the claim that raising the minimum wage to $6 or $7 and hour won t reduce low-skill
employment consistent with the claim that an even higher minimum wage would reduce low-skill
employment?
2. Why are the very lowest skilled workers the ones most likely to be harmed by an increase in
the minimum wage?
16. Workers and Employers, Wages and Profits The Midnight Economist
The labor market is, indeed, a market, where something is bought and sold at a price.
How much is exchanged on what terms?
As a supplier of labor services, what do you have to offer? What talents, skills and
mannerisms do you have; what can you mentally and socially do? How unique is your product?
In light of what you can do and of how many others can do it, how attractive are you to potential
buyers? And what are your alternatives either in competing for a variety of jobs or in getting by
without working at all?
productivity.
I do not Iike fellow workers competing with me. The competition I do like is among
employers. The wage one employer is obliged to pay for labor is affected mightily by how much
other employers are offering and it is a happy situation for me when rival employers bid against
each other for my services.
So competing workers offering labor lower my wage and competing employers bidding for
labor raise my wage.
Questions for Thought and Discussion:
1. Why will developing skills of value to others as well as to your current employer tend to
increase your wages faster than just developing skills valuable to your current employer?
2. Do unions make workers better able to compete with employers, or do they restrict other
workers ability to compete with current employees for their jobs?
17. The Plight of the Paycheck The Midnight
Economist
Are wages falling? The answer depends on how they are measured.
If the rate of pay fails to include noncash benefits like medical insurance, then one
measure of the average real wage has fallen for more than two decades. But fringe benefits are
part of wages. And for years Americans have been substituting more benefits for cash. Total
hourly compensation, including benefits and adjusted for inflation, tell a far different–far more
optimistic–story.
Still, this broader measure began growing more slowly after the late 1960s. Why? Might
workers must produce more per hour if their average hourly wage is to rise.
Rising labor productivity generally has lifted real wages throughout our history. Yet,
about twenty-five years ago, productivity growth began to slow. Predictably, decline in growth in
real wages soon followed.
Why, then, did productivity grow more slowly? We have no simple answer. But we know
that labor productivity rises because people have more tools and better technology to use. And
we know that new tools and technology come from businesses making risky investments.
Investments are risky because businesses will lose wealth if consumers don’t buy what the
new investments produce. The risks are not taken mainly by customers, employees or creditors.
They are borne most directly by business owners—the proprietors, partners and stockholders
who bet their personal wealth that they can well anticipate and efficiently satisfy consumers’
preferences.
Questions for Thought and Discussion:
1. How can average real wages fall and average real compensation rise at the same time?
2. Why can t worker compensation be substantially increased by forcing corporations to spend a
larger fraction of their current profits as compensation to workers?
18. Efficiency, Productivity and Wage Rates The Midnight Economist
“I find it painful,” said mouse Karl in a voice filled with pain, “that I have discerned a massive,
fundamental error in economic analysis.”
“I am not amused, mused his mouse associate, Adam, “by massive, fundamental errors.”
Karl hastened to explain. “You and your economist friends, he explained, “often speak of
efficiency in production. And efficiency, as I understand it, calls for each person to specialize in
doing what he does best.”
“Well, murmured Adam hesitantly, “efficiency does have to do with exploiting differences
“True, “agreed Adam, “most of us would find no place in production if the only ones to work
are those who are absolutely the best in their respective occupations, if ‘absolutely the best’
means turning out the most widgets per hour. But there is work to be done—and done efficiently–
even by those who do not have a physical input-output advantage in producing anything, if they
will work where their disadvantage is least. Most of us are not the best in anything, but we are
relatively less bad in some jobs than others. Each of us should work where we are least bad.
Compared to me, you are slow in making widgets, but you are still slower in making gadgets, so
the community gives up very little when you make widgets instead of gadgets.”
Questions for Thought and Discussion:
1. What is the logic of the difference between comparative advantage and absolute advantage,
with respect to efficiency?
2. If efficiency required absolute advantage, how many houses, factories, cars, farms, etc., would
be efficient? Why are people, capital, equipment, cars, etc., used even when they aren t “the
best”?
19. Employment and Wages, Competition and Fairness The Midnight
Economist
The editorial writer was speaking about employment and wages.
There is something wrong with “the system,” he said, for there are more workers than jobs:
“there is never a surplus of jobs,” and the unemployment rate is invariably greater than zero.
Even those who have jobs, he added, are not likely to be paid what they are worth, for the market
is “always a buyer s market,” tilted in favor of the employer. Daddy Warbucks can decide by
whim how many and whom to hire and on what terms, while the poor but honest worker can only
accept whatever is offered.
So there is always some unemployment–thank goodness. If everyone is always to be
employed, a worker could not quit a job for any reason, including investment of time and foregone
current income to seek a better job.
The problem of unemployment is not jobs being fewer than workers. On some terms, a
job is always available in an open market. But a wage and the hours of labor required to earn it
can be so unrewarding that a person is rational to decline the job offer and remain unemployed.
Questions for Thought and Discussion:
1. Why would we not want the unemployment rate to be zero?
2. Why is it not clear whether the official unemployment rate over– or understates the rue
degree of unemployment?
20. Sweatshops: Outrage and Analysis The Midnight
Economist
A major newspaper has run a series of stories and commentaries on southern California
sweatshops. We are told much of morality and legality; but we are provided no analysis of
economic efficiency or policy efficacy or appropriateness in personal adaptation to cruel
circumstances.
In the garment industry, retailers–dress shops and department stores–buy merchandise
prescription? We simply outlaw the scourge of sweatshops and walk away in prim satisfaction?
What is to happen to the erstwhile workers–commonly uneducated, poorly trained,
illegally in a land foreign to them, with little experience and marketplace sophistication–who have
had their livelihoods abolished? They had been surviving–even if meanly by civilized standards-–
in market competition by selling their limited services of low value at meager wages. Taking
away those miserable jobs, pricing them out of what had been their best option, does not
magically provide them with better alternative employment. Reducing their already poor power to
compete, leaving them more handicapped than before, is a strange way to help them.
The sweatshop situation does have tragic elements. But to alleviate the tragedy, we
Questions for Thought and Discussion:
that ban working for so little?
2. How long would you continue to work at your current job at your current pay if both you and
your employer knew you had a better job offer pending?
21. Measuring Income Inequality The Midnight Economist
In a system of capitalism, personal income is determined basically by productivity: those prosper
most who produce much of what the community values most highly.
Since productivity varies much over the population, income shares vary much. Indeed,
income varies widely in all societies.
Still, some of us are irked by and worry about the extreme ends of income distribution. If
percent.
Second, gross data of family incomes ignore differences in sizes of families and in
number of workers per family. Contrary to mythology, the average household in the top one-fifth
of incomes is larger than that in the lowest bracket, so per capita incomes are closer than family
incomes. Better-paid families also have more wage-earners than have poorer families–and the
market productivity of those workers is greater.
Finally, the Census Bureau traditionally counts only cash income–before taxes, at that–
and it undercounts cash and especially noncash government assistance. Oddly, it manages also
to count some government assistance to relatively well-to-do families more fully than the same
kind of aid to poorer families. Altogether, government spending on low-income families is
undercounted by 50 percent.
1.
Questions for Thought and Discussion:
1. Why would per capita consumption likely be far less unequal than per capita incomes in a
given year?
2. Do you think people stay in the same part of the income distribution their entire lives? What
difference would it make if they did not?
22. Sneaky Taxes The Midnight
Economist
“A great idea,” bubbled excitable mouse Karl to sober, sensible mouse Adam. “Congress wants
to give workers health insurance, unpaid leaves for new parents, day care for children, advance
notice of plant closings and other benefits.”
“These goodies are not gifts,” said Adam soberly. “Who will pay the immense cost? No
costs of production.”
“So what?” responded Karl. “Businesses have lots of profit; they ought to use some of it
to provide more benefits for workers.”
“Including money wages and benefits,” explained Adam, “labor compensation represents
nearly three-fourths of national income. In contrast, after–tax corporate profits represent far less
than a tenth as much. Compare that amount with the likely cost of the mandated benefits. A
health insurance bill recently before Congress could itself have cost businesses close to one-third
of all after-tax profits earned that year!”
“That is a big sum,” admitted a surprised Karl.
production and employment,” continued Adam. “The mandated benefits would be a tax
Questions for Thought and Discussion:
1. Why would mandating benefits tend to make most workers worse off, once money wages
have adjusted to the changes? If it was “worth the cost” to workers, why wouldn’t employers
have already offered those benefits?
4. Why might mandating benefits be politically popular? What does this have in common with
corporate profits taxes and the employer half of Social Security and Medicare taxes?
23. Medical Folks and Artichokes The Midnight Economist
What shall we do about the persistently rising cost of medical care? Artichokes may suggest
the answer.
The price of artichokes depends on many things. One is the number available. As with
virtually all goods and services in the marketplace, a greater supply makes the price of artichokes
lower than it would otherwise be. And smaller supply makes it higher.
expenditures for medical care. As proof, the study shows that during the 1980s the number of
physicians and their average income both increased.
The suggested prescription for rising medical costs is to limit the number of doctors. But
before we begin closing down medical schools, we ought to ask if physicians really are all that
different from artichokes.
True, doctors can influence spending for their services. But that influence results largely
from the way we finance most medical care. Consumers of medical services pay out of their own
pockets for only a small fraction of the services they buy. Since 1981, out-of-pocket expenses
have been less than 25 cents out of each dollar patients spent for health care.
the marketplace, medical folks are not at all like artichokes.
Questions for thought and discussion:
1. Why does the Midnight Economist argue that doctor=s ability to influence the demand for
2. What would the proposal to limit the number of doctors have on the market for medical care,
for a given demand for medical care?
24. Diseased Kidney, Pure Hearts, and Dialysis for the Brain The Midnight Economist
I am quite attached to my kidneys. So far as I know, they feel the same toward me. But I have
two of them, and the National Kidney Foundation assures us that one good kidney is enough.
Some people do not have one good kidney. At some finite price, I would be willing to sell one of
my kidneys; it is easy to imagine a person in grave kidney difficulty being willing to meet my
supply price. I would sell my kidney for his money; he would sell his money for my kidney; in our
respective assessments, each of us would be better off.
Surely, economics is not to be the ultimate arbiter of morality and ethics. Indeed, economics
is amoral, being simply a technique of thought to help explain–dispassionately, even (if we may
say) cold-bloodedly–certain cause-and-effect relationships. In uncoerced exchange, both parties
gain, and, if no one else is hurt, it might seem pretty clear that the transaction should be
permitted. But maybe the National Kidney Foundation and congressmen are attuned to a higher,
more subtle Truth. Perhaps it is better for the kidney patient to die–morally and ethically, to be
sure–than to participate in utterly contaminating market exchange. Some wiII suspect that a
more likely explanation of the anti-market position is sophomoric sophistry.
bidding, offering, and contracting–we improve our condition.
All this strikes reasonable people as reasonable. It is reasonable, not only with respect to
houses and cars, but also kidneys. The unreasonableness of some is a pity–especially since
there is no dialysis for the brain.
Questions for Thought and Discussion:
1. Why are markets for kidneys “immoral and unethical,” when voluntary exchange is ethical for
police, firemen, soldiers, coal miners, and high-rise steel workers, each of whom accepts higher
pay in exchange for more risk?