Stephen Monrad

Suppose we don’t care about other people. Suppose that we care only about our own welfare or perhaps the welfare of a small group of people we are a member of.

The easiest way to meet our needs is to find a way to get outsiders to meet them at as low a cost to ourselves as possible. One solution would be to round up a bunch of outsiders and force them to work for us, giving them the bare minimum they need to remain healthy enough to work. Another tactic would be to try to set up economic conditions so that they voluntarily work for low wages because their alternative is starvation.

Can this type of exploitation be justified? I think the answer, sadly, is yes. We can claim that the others wronged us in the past, are inferior in some way, or would exploit us if they were given the chance. Rationalizing oppression isn’t hard. It is actually trivially easy.

Given the potential benefits of using others to meet our needs, why should we worry about them? Why should we care about their plight?

I could list a heap of rational reasons to care about others. We could worry about crime poverty causes. We could worry about the tables turning and finding ourselves in poverty. There are all sorts of things that could go wrong. Is it worth the risk?

My guess is that a careful analysis of the pros and cons of selfishness would be inconclusive.

If there isn’t an objective rational way to decide how much to care about others, what’s the alternative? Do we trust our emotions? Do we follow tradition? It’s an important question to answer when thinking about economic problems. It is frustrating that a clear solution seems out of reach.

In an attempt to generate more interest in this blog, I’m going to focus on making this blog more interactive. My plan is as follows:

• I’m going to post less often. I’m going to start posting once per week as a start to see what happens.
• My posts will be designed as a launching point for discussion. Instead of explaining what I think, I will describe questions I am interested in.
• My hope is that people will leave comments with their views on the week’s post.
• I will participate in the dialog, responding to what people write.

The idea behind this change is that people don’t have enough time to read the daily onslaught of posts I write. When people do log on, they probably encounter several days worth of posts and just skim over them.

Instead of going for volume, I want to go for depth. My hope is that by having a focus for the week and time to think about a problem readers will find it easier and more inviting to comment. I’d like to turn my monolog on economics into a dialog.

This is my post for the week. I would like to hear back from readers about what they think of this change. Would they like to participate in back and forth comments on less frequent posts?

If you people like the idea, what topics would you like to start with? My hunch is that I should start at the top and explore what the purpose of economics is.

p.s. I’m starting up my blog How We Choose again with the same approach.

We become adults at about age 18. We are fully grown and sexually mature. Our instincts tell us that it is time to leave home and start independent lives and perhaps families.

Unfortunately, most 18 year olds are only qualified to do low skill, low pay work. Several more years of school are needed to get the knowledge and credentials required for good jobs. This is a recent problem. It is only in the past century or so that education has become so important. While it isn’t hard to till a field, designing computer chips is tricky. More skills and training are needed to work with modern technology.

Getting the skills is definitely worth it – skilled workers are far more productive than unskilled ones. Acquiring the skills, however, demands patience. Independence as an adult needs to be put off for several years. In most cases, some support from parents is needed for people to get post-secondary education.

In today’s world, people become adults before they acquire the skills they need to look after themselves.

While this works out okay for many people, lots of people don’t get the skills they need to be productive. They end up working at low paying jobs and being only marginally productive for their whole work lives.

I believe that it would be much better to view post secondary education as work. People should be paid to study medicine and physics. It’s demanding work. In this post, I’m not going to concern myself with where the funding would come from. I only want to point out that adults should be paid to do things that prepare them for their careers. Not paying students to do advanced studies drags out childhood dependence. If parental support isn’t there, people don’t get the training they need.

I think I have been getting bogged down in the details for a while. I want to take a moment to articulate a very high level objective for an economy.

What I want, and I believe most people want, is the ability to manipulate my surroundings. I want to be able to engage the world I live in and to have an impact on it. I want to be an active, rather than a passive, player.

Most animals want this sort of freedom. Animals in a zoo that have a guaranteed supply of food and quality veterinary care often dislike their surroundings. There is nothing for them to do.They’d rather take their chances pitting their skills and abilities against the world than to have what they need handed to them in a controlled environment.

The goal of economics isn’t simply to meet people’s needs. The goal of economics is to create an environment that we can actively and meaningfully engage. Unlike a caged bird that need only be set free to find a suitable stand of trees to make its home, people can only thrive in man made environments. I don’t think the answer is to return to the forest. The answer is to create an economic system that people can easily engage.

In more concrete terms, I want an economic system to more closely connect the desire for something like a hamburger to steps that need to be done to get one. It’s seemingly simple now. To get a hamburger you need money. To get money you need a job. Therefore the way to get a hamburger is to find a job.

The catch is that jobs can be hard to find. Your desire for a hamburger doesn’t create a job for you. In hard economic times, you may be unable to do anything to move closer to your objective of eating that hamburger.

For most desires you have, there should be only two outcomes: The desire is unattainable, or there are clear steps to take to achieve it. If you want a 747 jet of your own, forget it. It takes the effort of thousands of people to build one. A 747 is unattainable. If you want a hamburger, on the other hand, there should be something you can do today to get one.

As I envision it, allowing different jobs to have different wage caps doesn’t change the fundamental idea that workers are being paid based on effort instead of output. The increased wage caps for some jobs just makes it easier to deal with the fact that some jobs are more appealing than others.

I also don’t envision the difference in wage caps to be that significant. I’d want the highest paid people in the economy to only be paid 2 or perhaps 3 times the standard wage. More than that can’t really be justified in terms of providing incentives.

Rock stars and basketball players would only get 2 or 3 times as much as ordinary people, not orders of magnitude higher pay.

People don’t get frustrated with low pay, they get frustrated with pay that is low relative to pay other people they know get. The question isn’t “Am I getting fairly compensated for the work I do?” The question is “Am I getting paid fairly compared to what others are getting paid?”

I was working for the government and was furious when other people doing similar work to me managed to get a promotion before I did. I thought that I was actually doing better work than some of the people who got the promotion. The funny thing is that I was angry even though the promotion wasn’t that big. It only amounted to a couple of thousand dollars a year. It wouldn’t make a material difference to my life.

I was angry because I didn’t think it was fair.

It is okay to pay people different amounts so long as there is a good story to explain the differences. It doesn’t have to be a great story, it just has to be plausible. It’s okay to pay higher wages to people with more skill, seniority, responsibility, or talent. There are plausible stories for why these people deserve higher pay. What won’t fly is to pay your friends more than your acquaintances or people with blue eyes more than people with brown eyes.

I’m not saying that paying different wages to different people is a good idea. It only makes sense in terms of other ends, such as providing incentives. If different pay levels are going to be used, though, I think it is more important that there is a good story to explain the differences than to get the magnitude of the differences exactly right.

My new approach of setting different wage caps for different job classes creates room for incentives which is good. However, it also creates a big problem: how should the wage caps be set?

I still think it is too difficult to try to measure the value of what people produce. The caps need to be linked to something else.

Another problem is that there are too many combinations and permutations of job responsibilities to try to classify all jobs individually. Simple rules would need to be used.

If we focus on the problem of incentives, the problem might be more manageable. Let’s assume that all jobs get the same standard pay range as the default. Equal pay for all fails when people refuse to do work for one reason or another. The way to determine which jobs need bigger incentives and thus higher pay caps is to look for jobs that are difficult to fill.

Instead of setting higher caps on a job-by-job basis, the factors that make it hard to fill jobs should be identified. Common sense and a little data analysis should yield results. Right off the top of my head, I expect higher pay caps would be needed to attract people to jobs that:

• involve shift work,
• are dangerous,
• require training where the cost is borne by the employee,
• are located in isolated communities,
• are unpleasant (smelly, hot, cramped),
• involve added responsibility (I’m less sure about this one), or
• require long work hours.

One solution would be to develop a long list of factors like this, find ways to measure the degree of the problem, and then assign a wage cap increase that jobs with the characteristic get. If a job has multiple negative factors, the cap increases could simply be added together.

How big should the cap increases be? That’s ultimately an empirical question. If the caps aren’t high enough, the problems attracting workers will remain. If the cap for a job is too high, there will be fierce competition to get the job. Either way, there will be clear signals that something is wrong.

Fortunately, I think our lack of rationality actually works in our favor in this case. People aren’t looking to be precisely compensated for the extra burdens of difficult or unpleasant jobs. I believe that the important thing is that there is a pay benefit for doing unpleasant work. The magnitude of the benefit isn’t all that relevant.

While idealistically I still support the idea of equal pay for all, it may not be achievable in the real world. I’d be happy if there was a decent minimum wage that paid enough to keep people out of poverty.

If the goal is to control inflation, there is no particular reason to pay everyone the same wage. All that is needed is to prevent a general creeping increase in wages across the economy.

The only way to prevent increases in wages when the economy is close to full employment is to regulate them. Someone, somewhere needs to write down maximum allowable salaries for different jobs. If every job has the same maximum, inflation will eventually push everyone up to the maximum and we would be back to the equal pay for all scenario.

The person responsible for setting wages, then, will need to set different maximum wages for different jobs. There could be many different reasons for setting higher maximums for some jobs. Right now, I’m just going to assume that the maximums are set somehow and are enforceable.

What I envision is an economy with a decent minimum wage that all workers must receive. Each job or job class has a maximum wage that is at least somewhat higher than the minimum wage. The difference creates room for the use of pay incentives.

The result would be a system where temporary bouts of inflation and deflation could occur when wages move up and down between the minimum wage and the maximums established for each job class. This type of inflation couldn’t get out of control. Prices would therefore not have to be kept in check by strong competition.

What I imagine would happen is that wages would tend to hover near their maximums when the economy is close to full employment. If a disruptive shock to the economy causes it to falter temporarily, wages could fall as the ripples of the shock spread through the economy. With proper interventions by government, the downturn would be only temporary, full employment would be restored, and wages would again rise close to their maximums.

I’ve spent a lot of time blogging about value and pricing without reaching any clear conclusions. Right now I want to drop back and remember why I am so concerned about prices in the first place.

The problem with letting prices be set by market forces is that they tend to rise when the economy is close to full employment. This much is clear and uncontroversial. What I want is to find a way to control prices directly so that the economy can be run at or very close to capacity without causing inflation.

My solution was to focus on pricing the inputs labor, raw materials, and capital in a sensible way. I would then build the prices for goods and services based on the labor, raw materials and capital used to produce them.

I still think that focusing on the prices of inputs is the right place to start. There are far fewer inputs to worry about than outputs.

What I want to do at this point is to consider less egalitarian approaches to setting prices for labor, raw materials, and capital. If we want full employment, we can’t let the prices be set freely. However, there may be ways to set them where more variation can be allowed. The egalitarian approach was appealing to me. There may, however, be better pricing mechanisms for inputs that can provide better incentives.

Suppose we want to pay producers based on the value of what they produce. I think there is a fundamental problem. Nobody really knows what things are worth.

People aren’t rational. We aren’t good at putting numbers to things. We aren’t even that good at arithmetic often. I think it is unrealistic to expect people to be able to do anything more than guess at an order of magnitude value for the things they buy.

I believe that our intuition about fair prices is based mostly on recent history. If apples cost a dollar yesterday, it’s okay for them to cost a dollar today. A dollar feels fair because we are used to paying it. I believe we convince ourselves that an apple is worth a dollar when we really don’t have a clue. We are just making crude comparisons to yesterday’s prices.

Given stable prices over a long enough time period, I think we could convince ourselves that apples are “worth” anywhere from 20 cents each to $2 each.

While it might be nice to pay people based on the value of what they produce, I would want to see at least moderately objective way for establishing value first.