Peter Thiel's recent comments in support of raising the minimum wage have been making the rounds among the libertarian blogosphere this past weekend. The idea of "libertarians" supporting minimum wages is not uncommon, especially in Europe where many of the classical liberal parties have lent their support to various iterations of a basic wage. Needless to say, I disagree wholeheartedly with the idea of minimum wages, living wages, basic wages, etc., as they are a pretty clear violation of libertarian principle. Employers and employees should be free to contract at whatever wage rate the market will bear. Using the force of government to force laborers not to offer their services at a rate below a government-mandated minimum is a horrendously anti-labor, anti-lower class policy decision. Neither is it compatible with the non-aggression principle; if "libertarians" can support the minimum wage, then there really isn't any government policy they couldn't support.
Thiel does make a good point that corporations take advantage of the fact that welfare benefits exist so that they can pay their employees less, hoping that they will make ends meet by using government benefits. In that way, the existence of welfare acts as a subsidy to corporations. But the solution to that is not to raise the minimum wage. Some things that Thiel overlooks are:
1. If the existence of welfare, food stamps, etc., acts as a subsidy to corporations by allowing employees to eke by on low-wage jobs, then it follows that in the absence of welfare, employers will have to pay higher wages in order to attract workers, thus there is no need for higher mandated minimum wages.
2. If the minimum wage were increased, unemployment will increase, ceteris paribus. These newly unemployed people will now be totally dependent on government assistance, thus exacerbating the reliance on welfare that Thiel seeks to end.
3. As the minimum wage increases, workers who were previously at the lower bound will seek to have their salaries raised, and so on up the ladder. As these wage increases work their way through the system, the additional costs are passed onto the consumer in the form of higher prices. As prices increase, the workers making the new minimum wage eventually find that although their nominal wage has increased, their purchasing power has not.
4. An increase in the minimum wage will affect ALL employers, and the employers least able to afford the increase in labor costs are small businesses. Small businesses will have to lay off workers, or pass on increased labor costs in the form of higher prices to consumers, both of which put them at an even greater disadvantage vis-a-vis large corporations. So an increase in the minimum wage will only increase the advantage that large corporations have over small businesses.
Thiel also fails to see that the solution to government intervention is not more government intervention. Ludwig von Mises stressed in his series of Argentine lectures, compiled in "Economic Policy: Thoughts for Today and Tomorrow", that each government intervention distorts the market and results in further government interventions in an attempt to counteract the negative effects of the previous interventions, resulting in the gradual evolution of a free market system into socialism, or perhaps more correctly, fascism.
I wanted to mention this, because people often say: "What is needed in order to make price control effective and efficient is merely more brutality and more energy. Now certainly, Diocletian was very brutal, and so was the French Revolution. Nevertheless, price control measures in both ages failed entirely.
Now let us analyze the reasons for this failure. The government hears people complain that the price of milk has gone up. And milk is certainly very important, especially for the rising generation, for children. Consequently, the government declares a maximum price for milk, a maximum price that is lower than the potential market price would be. Now the government says: "Certainly we have done everything needed in order to make it possible for poor parents to buy as much milk as they need to feed their children."
But what happens? On the one hand, the lower price of milk increases the demand for milk; people who could not afford to buy milk at a higher price are now able to buy it at the lower price which the government has decreed. And on the other hand some of the producers, those producers of milk who are producing at the highest cost-that is, the marginal producers-are now suffering losses, because the price which the government has decreed is lower than their costs. This is the important point in the market economy. The private entrepreneur, the private producer, cannot take losses in the long run. And as he cannot take losses in milk, he restricts the production of milk for the market. He may sell some of his cows for the slaughter house, or instead of milk he may sell some products made out of milk, for instance sour cream, butter or cheese.
Thus the government's interference with the price of milk will result in less milk than there was before, and at the same time there will be a greater demand.
...The government is disappointed. It wanted to increase the satisfaction of the milk drinkers. But actually it has dissatisfied them. Before the government interfered, milk was expensive, but people could buy it. Now there is only an insufficient quantity of milk available. Therefore, the total consumption of milk drops. The children are getting less milk, not more.
...Now the government asks the milk producers (because the government does not have enough imagination to find out for itself): "Why do you not produce the same amount of milk you produced before?" The government gets the answer: "We cannot do it, since the costs of production are higher than the maximum price which the government has established." Now the government studies the costs of the various items of production, and it discovers one of the items is fodder.
"Oh," says the government, "the same control we applied to milk we will now apply to fodder. We will determine a maximum price for fodder, and then you will be able to feed your cows at a lower price, at a lower expenditure. Then everything will be all right; you will be able to produce more milk and you will sell more milk."
But what happens now? The same story repeats itself with fodder, and as you can understand, for the same reasons. The production of fodder drops and the government is again faced with a dilemma. So the government arranges new hearings, to find out what is wrong with fodder production. And it gets an explanation from the producers of fodder precisely like the one it got from the milk producers. So the government must go a step farther, since it does not want to abandon the principle of price control. It determines maximum prices for producers' goods which are necessary for the production of fodder. And the same story happens again.
The government at the same time starts controlling not only milk, but also eggs, meat, and other necessities. And every time the government gets the same result, everywhere the consequence is the same.
...Before the government interfered, milk and eggs were expensive; after the government interfered they began to disappear from the market. The government considered those items to be so important that it interfered; it wanted to increase the quantity and improve the supply. The result was the opposite: the isolated interference brought about a condition which-from the point of view of the government-is even more undesirable than the previous state of affairs which the government wanted to alter. And as the government goes farther and farther, it will finally arrive at a point where all prices, all wage rates, all interest rates, in short everything in the whole economic system, is determined by the government. And this, clearly, is socialism.
This is what Thiel and others like him fail to recognize. The failure of a government action is not rectified by further government action; it is rectified by repealing the initial government action that caused the problem in the first place. The problem with the US economy today is that government has interfered at every single level in numerous ways. And every single time that government intervention causes a problem, the solution has never ever been to repeal the bad regulations, it has always been to give more and more power to the government agencies that caused the problem in the first place.
If you believe that welfare benefits are a subsidy to corporations, then the solution is to eliminate the subsidy, not to burden all employers with an increase in the minimum wage. The great French thinker Frederic Bastiat is known, among other things, for his discussion of both the seen and unseen effects of actions. Proponents of increasing the minimum wage focus only on the seen effects, that some workers will see an increase in wages, and they fail to see the many negative unseen effects such as those discussed above. It's irresponsible to look at just one side of the coin.
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