Global capitalism and minimum wage policy in changing economies

Money

The existence of money makes exchange easier, compared with barter systems, because money provides a stable store of value. If exchange is conducted with physical goods only – as in a barter system – then there are many points of friction that will inhibit exchange. First, goods have different physical characteristics that can put limitations on exchange. Some goods are perishable, others too large to transport, still others difficult to transport. Two goods may have equivalent value, but these physical limitations create barriers to exchange. How does one exchange a house for a year's supply of fish, for example? They might have roughly the same value, but you can't take all the fish at once, you can't trust that the fish will be delivered later, and moreover if the person wishes to take back the house because the deal fell through, but the other person ate all the fish, there is no means by which to settle the dispute. So money as a medium of exchange removes some of the barriers associated with the physical nature of goods.

Further, money allows for market-based exchange. This allows for goods and services to find their true value. In a moneyless world, a painter might paint all day one day for the week's food, but then paint all day the next for a simple shoe repair. With money, the painter can find fair value for work done, and then use that money any way seen fit. The divisibility of money is one of its best attributes as a medium of exchange.

The last aspect that makes money a powerful means of exchange is that it serves as a store of value. This references again the physical limitations on both services and barter goods – money can withstand time, whereas many physical goods and most services cannot. This removes some friction from the creation and transference of value – money's lack of temporal constraint is one of its best attributes because of how easy it makes the creation and transference of value.

As a unit of account, money is consistent, at least when compared with barter goods. Barter goods can fall in or out of fashion in a way that money never does. Many goods see spikes and crashes in demand over time, so that a good that is highly valuable today might not be valuable six months from now. Money, however, retains its value much better.

Graeber (2011) doesn't really argue that money isn't a medium of exchange; he mostly spends time arguing against metaphorical anecdotes explaining why barter is efficient. By attacking the anecdotes instead of the nature of barter, he is arguing against a straw man. His alternative is a system of credits, which he describes as being frequently the norm in societies with limited money supply. These societies were also relatively compact and simple, which enabled the maintenance of credit schemes. Money as a medium of exchange allowed for the development of far more sophisticated economic systems, something Graeber ignores because he was too busy beating up the straw man to understand what those anecdotes about barter were trying to tell him.

Markets II

Markets serve as a decentralized coordination mechanism linking buyers and sellers. They do this by performing a number of critical functions. First, markets allow for prices to more accurately reflect the interests of multiple buyers and sellers. A market does this because it has transparency. By reducing information asymmetry, markets reduce friction related to exchange. The value of goods is more accurately reflected in markets.

Markets are quite different from central planning. In central planning, the central planning body determines the value of goods. This is typically done relative to a common medium of exchange, but ultimately the cost of goods and the price paid for labor is determined centrally. Typically, this has two impacts. One is that the value of things reflects the central body's vision of what it wants for the economy. Two is that the value of things does not reflect what the people living within that economy value. This creates a disconnect. In a planned economy, setting prices serves as the government's way of ensuring demand for goods that it has in abundance or for reducing demand of goods that are scarce. However, there are limits on how well this works. Ultimately, there is going to be a disconnect between the official price of a good and the demand for that good.

I am not sure what a "wrong signal" would be for prices in a market. That is ambiguous wording. What is the signal? What is wrong about it? Making a moral judgment ("wrong") about a signal a price is sending is an odd thing to do. I'm sure there's a concept worth discussing here, but the ambiguous wording leaves me not knowing what the subject actually is.

Externalities are problematic because they are not built into the price of a good. For example, we have long assumed that burning fossil fuels was an efficient means of doing things, when such burning is applied to motors. However, that is because the full cost of burning fossil fuels is not built into the price for them. The price includes the costs of exploration, development and bringing to market, but not of the impacts of the pollution related from their burning. As such we think of fossil fuels as a cheap way to get things done, but if they end up destroying the ability of humans to live comfortably on this planet, then the actual cost of burning fossil fuels will be far higher than whatever the alternative would have been these last 150 years. Externalities are a problem because they distort the costs and value that are built into prices, and thus lead people to make decisions that appear to be efficient on the surface, but are actually inefficient.

Macroeconomics I

Structural inflation is inflation that arises from monetary policy, whereas cyclical inflation arises from temporary misalignment of demand and supply for money. What this is means is that demand for money rises and falls. It is the result of economic activity, which changes over time, rising during productive periods driven by either innovation or population growth, and falling when these factors are lower. The central bank can create inflation outside of the cyclicality that is driven by economic activity, in the sense that the central bank can spur inflation by creating cheap money, which then leads to an overheated economy, a certain portion of economic activity that really only occurred because of the central bank policy.

There are several factors that can lead to inflation. In general, economic activity creates demand for money, and this leads to inflation. Low unemployment in particular is linked to wage growth, which in turn creates inflation to the extent that wages are a major cost input for businesses producing things. The Fed notes that there is a trade-off between inflation and employment because an economy in full employment will naturally see higher inflation, due to higher demand. An economy with higher unemployment, which results in lower buying power for its citizens, will have lower inflation rates ("Central Banking", 2018). This trade-off is known as the Phillips Curve, and argues that there is a trade-off in the short run (Pettinger, 2017).

Inflation has a number of different impacts. The biggest is that buying power declines, because wages are stickier than prices. As buying power is reduced, people are legitimately poorer. In the long run, wages will increase in order to accommodate for this, but wages growth will typically lag. Another impact is that inflation erodes savings. This is especially true for savings that is locked in at a fixed interest rate – the value of that money will decline as inflation takes hold, as the buying power associated with that money is reduced.

Macroeconomics II

If unemployment is too high, profits should theoretically be higher because the high unemployment rate will supress wage growth. However, it is not always the case that this condition exists. First, there is the fair wage-effort hypothesis (Akerlof & Yellen, 2013). This hypothesis holds that workers in a suppressed wage environment will have lower motivation. Feeling that additional efforts will not result in additional pay, they will withhold those efforts. Thus, a high unemployment environment that sees wage suppression will also see a reduction in worker productivity, which in turn will harm profits.

Another means by which high unemployment can harm profits is that it results in lower demand. For many companies, consumer demand is critical, and if people who should have jobs do not, then they don't make as much money as they should, and have less money to spend. This was the case in 2009, or really in any recession. High unemployment means that companies have their pick of workers, but they also don't have as much demand for their products. So any productivity gains that might occur are offset by a decline in demand.

When unemployment is too low, profits can also be lower. The most obvious hypothesis is that low unemployment increases the bargaining power of workers, driving up wages. Higher wages, in absence of corresponding increase in demand, will decrease profitability for a company.

Furthermore, when unemployment is too low, firms might not be able to find quality candidates. The reality is that companies may end up with unfilled positions, or hiring people who are less qualified than they really need. The result is that these companies are either less productive than they could be, or they are simply unable to pursue worthwhile projects for lack of talent. Growth can be constrained in such situations.

This can even be true in situations where the unemployment rate is actually at a fairly reasonable level, but the right kind of candidates are not to be found. There are usually many professions at a given time that are undersupplied, or undersupplied in a particular geographic region. This is one of the reasons why the optimal unemployment rate is at least 3%, and might be more. The skill sets of workers do not always align with the available workforce in an area, and in that situation what would be considered a reasonable unemployment level overall still ends up with a some firms having trouble earning profits, for one of the different reasons mentioned.

The ideal rate of employment would allow companies to hire the right people at a reasonable price. Doing so would allow them to pursue the worthwhile projects, to manage their costs effectively, and strike the right balance. However, labor markets are often quite changeable, and difficult to manage, and that is without the cyclical changes in the unemployment rate.

Policymakers are unwise to push for full employment. They might like the idea on paper, but it is impossible to align the precise needs of the labor market with the precise supply of labor, largely because of how long it takes to train people. Someone who received limited or poor training but is 50 years old and part of the workforce, is entirely ill-equipped to fill the current vacancies in technology and health care, for example. Unemployment is cyclical as the labor market adapts to the needs of business, but then the needs of business shift and change. Governments only have some control over these processes, and the central bank even more limited control still.

References

Akerlof, G. & Yellen, J. (2013) The fair wage-effort hypothesis. Princeton University. Retrieved May 17, 2018 from http://blog.press.princeton.edu/wp-content/uploads/2013/10/camerer-chapter-16.pdf

Central Banks and the Federal Reserve System. In possession of the author.

Graeber, D. (2011) Debt: the first 5000 years. In possession of the author.

Pettinger, T. (2017). Trade off between unemployment and inflation. Economics Help.org. Retrieved May 17, 2018 from https://www.economicshelp.org/blog/571/unemployment/trade-off-between-unemployment-and-inflation/