The minimum wage, demurrage and the economics of labor

What I am about to summarize or, more or less faithfully record, here is a discussion on facebook which should be available for future reference … temporary as they are those traces that remain of our social networking interactions and exchanges of ideas and views.

Michel Bauwens started the ball rolling by pointing to an article that argued that “Even in Hard Times, Boosting Minimum Wage Makes Sense”.

The article’s discussion was about some US State legislatures proposing to increase the minimum wage over and above the federal minimum, and doing so in times of economic hardship. Several voices affirmed that increasing the minimum wage would not be costing jobs, as has traditionally been said it would.
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  • Edward Miller intervened somewhat forcefully, saying that “it doesn’t [make sense]. It is a good way to create unemployment… yet even if it could boost aggregate wages, that would merely cause rents to rise.
    The Fabian Society who promoted the original Fair Labor Standards Act did so because it combined *overtime laws* and child labor laws with minimum wage. Minimum wage was an afterthought to ensure automation of menial tasks in light of the labor scarcity created from overtime laws and child labor laws. Overtime laws are what raise wages, though in a rather convoluted way.
    Minimum wage is not about helping workers and never was.
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  • Not agreeing with this assessment, I (Sepp Hasslberger) countered as follows: In my view it does make sense … boosting the minimum wage will allow more of the people who work to actually buy the things that are being produced.
    Since employment is the only way for most people to gain the means to buy the necessities of life, as well as the extras our type of economy would like them to buy, it makes sense that the more money you put into the hands of those who work, the more of the products that are made will actually be sold = stimulus to the economy as a whole. You cannot run an economy thinking of only one side of the equation – the employers.
    If no one has money to buy, what are they [the employers] working for?
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  • This elicited another response by Edward Miller: Prices are set by supply and demand. Price controls necessarily create shortages and surpluses. The only way to truly raise minimum wage without creating a shortage of jobs is to raise the market power of labor.
    However, as I said, even if it could raise the nominal wages of labor (which it can’t) the real wages would be unaffected because the slice of the pie eaten by rent would necessarily rise, as per the Law of Rent. The real minimum wage is the margin of production.
    Government mandates are just bullshit.
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  • To which Michel Bauwens replied: in capitalism, prices are almost never set by supply and demand, they are almost entirely political … now they can be political in two ways, set in the interest of financial capital, or set in the interests of the majority .. actually, a minimum wage, and better yet, the basic income, is the only way to restore the market power of labor … unless of course we want to wait for that mythical free market to emerge, when birds will sing and the lambs will kiss the lions … it’s not going to happen tomorrow, in the meantime, a minimum wage is vital protection
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  • Eliciting another contrary view by Edward Miller: A basic income can only help in the form of a Citizen’s Dividend, otherwise increases in rents will nullify all benefits for the lower classes (non-landowners). A price floor, no matter how many other interventions exist, will not help anything. The most it could do is promote automation instead of immigration in the face of a labor scarcity (such as new overtime laws). Anti-immigrationists were staunch defenders of it for that reason.
    I see no labor scarcities at the moment, to say the least.
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  • Extending the discussion I (Sepp Hasslberger) then added: Prices are entirely political, I concur with Michel, at least they move within a range in accordance with political considerations. Prices will always be “what the market will bear”. Ideally, that is limited by competition, but there seem to be more ways to eliminate competition than can be envisioned by anti-monopoly legislation.
    An interesting idea is the connection with rent. There definitely is interlinkage. Silvio Gesell recognized that same link between interest and rents. Consequently, his proposal for reform not only included intervention in the money area but also in the area of rents.
    Gesell proposed money that tends to bring interest down to zero through demurrage, basic income to all mothers, free movement of everyone across borders, and most importantly, eliminating rent by gradually bringing ownership of land into the hands of the community which would rent [lease] it out for commercial use (enforcing certain ecological restrictions). The income from land rent was to finance the basic income. The state’s income from demurrage would eliminate most or all other taxes.
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  • To this adds Edward Miller: Yes, Gesell was influenced by Henry George and correctly understood the issue with rent, however if we use the proper definitions of capital and interest then we shall see that interest and wages have a fixed relationship.
    Capital is merely “stored-up labor,” as Henry George would say. “It is not capital which employs labor, but labor which employs capital.”
    Seeking to eliminate interest necessarily requires authoritarianism. No sort of currency mechanism can eliminate interest. Capital is just what people create to satisfy their desires with the least exertion. If you sell your surplus produce and buy a machine to generate wealth in a more automated fashion, what the machine produces is interest.
    “[There exists a] natural relation between interest and wages… and this relation is fixed, it is evident that interest and wages must rise and fall together, and that interest cannot be increased without increasing wages; nor wages lowered without depressing interest. For If wages fall, interest must also fall in proportion, else it becomes more profitable to turn labor into capital than to apply it directly; while, if interest falls, wages must likewise proportionately fall, or else the increment of capital would be checked.” – Progress and Poverty
    Market interventions (rent-seeking) have indeed made it difficult to enter the capital market, and furthermore much of the so-called interest is really stolen rent which has been appropriated towards capital investment. Nevertheless, excepting perfect totalitarianism, it is necessarily the case that as the general rate of wages rises, so too will the general rate of interest.
    Demurrage would not change anything. Inflation already eats away the value of currency in just the way Gesell wanted, and interest still exists. The market can deal with inflation as long as it is not volatile. Uncertainty in regards to inflation can be even worse than high inflation. Uncertainty can stall that market (which of course would reduce interest, but simultaneously reduce wages)
    Since there is already a high national debt, inflation already does act as a de facto tax. These ideas are basically in practice now, but never had the potential ascribed to them.
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  • Chris Cook comes in, directing his remarks @ Edward Miller.
    I disagree with your definition of capital and interest.
    My analysis is that Capital may better be seen as:
    (a) Energy capital – in material form, and in terms of energy embedded in a location; and
    (b) Intellectual capital – both in terms of eg design and IP, and in terms of the skills and experience deployed by individuals.
    This Capital is invested and embedded in a location and has a use value over time, exactly as does Labour.
    This use value is entirely independent of the use value of Labour, which is comprised of (a) energy (manpower, or unqualified Labour as Keynes had it) and (b) intellect (everything between our ears).
    As for inflation, that is caused by the demand for profit in excess of costs and arises out of accounting identities.
    Interest is the charge made for the use of credit.
    The cost of such credit is comprised of both system costs and default costs: insofar as a profit is collected (eg by credit intermediaries aka banks) that is BY DEFINITION inflationary.
    If this cost is charged only to a buyer then the result is a trade imbalance, as Keynes – a Gesellian – observed. that is why his Banco/ICU proposal at Bretton Woods included a (gesellian) charge on both positive and negative trade balances, since this will tend to rectify imbalances.
    IMHO a sustainable monetary system requires such a Gesellian balancing mechanism or the resulting negative feedback will destroy it, by leading – when combined with private property in commons – to unsustainable imbalance in wealth and purchasing power.
    A sustainable fiscal system requires Henry George’s insight that the fruits of privileged property rights should be shared by those who benefit from them. This is as much the case with the Creative Commons as with the Commons of Land/Location.
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  • Edward Miller than adds: I agree with a good portion of what you say, but you seem to be confusing capital and land. I am using the definitions of Political Economy.
    In practical terms, energy is part of the physical universe and as such energy itself falls under the category of “land,” yet if it is in any way directed or harnessed, it can become “improved” and the added value from improvement is considered capital.
    Granted, the term “land” doesn’t quite convey the full scope of what is included, since by this political economists really mean “everything that was here before we got here”
    IP is a corrupt notion which lumps together distinct legal concepts to obscure truth. Patent holders are essentially rent seekers, and are infringing on the commons, because they seek to stop anyone from using an idea regardless of how the idea was acquired. Like classic rent-seekers, instead of producing value they manipulate the environment via the government to gain privileged access rights.
    Copyrights, on the other hand, are fundamentally different. While the arguments here can get rather metaphysical, it is clear that while it is plausible to argue that copyrights are a fruit of labor, patents can never be.
    Differences in talents and skills can produce economic rents, and I don’t deny this. However, the vast majority of inequality is the result of privilege not differences in skill. Violating self-ownership ought not be our fist instinct as long as there is an elephant in the room.
    The key distinction here is between regular rent-seekers (aka “robbers”) and what Henry George called “the robber who takes all that is left.”
    If we are both stranded on a deserted island, and you have a superior talent at constructing baskets, it may be the case that you could stand to benefit from me. I may choose to pay you to assist me. Yet, this talent does not enable you to claim all of my production minus enough for mere subsistence.
    However, considering the absolute necessity of land for human life, when all the land is owned the non-landowners are in such a diminished position in terms of market power that the supplier can charge whatever he likes. At that point, the margin of production has been lowered to its absolute minimum point… subsistence. It can’t go lower since people die below that.
    Let’s suppose an ideal currency system really were a good thing. It would increase productivity and raise nominal wages. Almost immediately you’d see an increase in rents which eat up virtually all the gains.
    “…every improvement in the circumstances of the society tends either directly or indirectly to raise the real rent of land, to increase the real wealth of the landlord, his power of purchasing the labour, or the produce of the labour of other people.” – Adam Smith (Book 1, Wealth of Nations)
    As long as we raise the margin of production we can be sure that labor is being helped. Ideally we’d raise it as high as possible by reclaiming virtually all the ground rent, and ideally translate that into a Citizen’s Dividend.
    At no point does minimum wage factor in, unless a labor scarcity begins to develop at which point bureaucrats may wish to choose increased automation instead of increased immigration. Yet, that would be a good problem to have compared to now. Time to deal with the elephant in the room.
    By the way, I agree that a fractional reserve system is inflationary, though again the market can handle inflation if it is expected. People simply change their behaviors to compensate for that. They tend to hoard in less unproductive ways, for instance, which is why Keynes tended to like inflation.
    As for trade imbalances, and charges thereof, I’m not sure what you mean.
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  • To this, Chris Cook replies: Edward
    Thanks for your response. I don’t find the definition of economic land which you refer to particularly useful.
    I prefer to use Location as immaterial 3D space as a basic ‘factor of production’.
    Energy is either static or passing through any particular Location.
    As for Capital, that’s even more of a bastard hybrid definition, and so is Labour – which conflates energy and intellect.
    I outline my approach here
    http://nordicenterprisetrust.wordpress.com/2009/04/12/towards-an-economics-of-common-sense/
    I envisage a ‘reality-based’ political economy built in practice upon these bases of credit, or factors of production if you like.
    There is no such thing as fractional reserve banking: that is either a misunderstanding or an ideological misrepresentation of how the system works.
    Credit creation is not currently restricted by reserves but by the financial capital of credit intermediaries aka banks.
    Re currency, there is no ideal currency, although some are probably more fungible than others.
    I think that domestically we will see currencies redeemable in payment for location rental (John Law had a similar concept in 1705) , while globally we will see currency redeemable in payment for energy.
    The oil market already has been thoroughly financialised/monetised, as it happens.
    But currencies must be distinguished from the Unit of account or numeraire, which I refer to as a ‘Value standard’.
    This is the abstract benchmark unit by reference to which transactions are priced and exchanges made. Unfortunately, in our current monetary architecture we use bank-created credit objects as both currency and numeraire.
    In my view an absolute unit of energy is the appropriate standard unit of measure for value since it is something to which everyone may relate.
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  • Jonny Cache: The whole Mythology of Hard Times (not too incidentally the name of a book by Charles Dickens) may have made sense in a time when hard times were hard times for all, which is to say, never, but it sure lacks making a single bit of sense in these times, when the wealthy are nigh unto drowning in the wealth they sucked from the common wealth. So let us dispense with the rhetorical mind-fucks of the oppressor, shall we, while we still have any wits at all.
    http://www.gutenberg.org/catalog/world/readfile?fk_files=1443569&pageno=6
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  • Sepp Hasslberger: @ Edward Miller
    “Demurrage would not change anything. Inflation already eats away the value of currency in just the way Gesell wanted, and interest still exists.”
    I do not agree with your evaluation of demurrage here. In my view, demurrage has a distinct psychological advantage over inflation as a means to make people either spend their money or invest it in a way other than interest-seeking loans.
    While inflation is felt as a general malaise, a feeling that “everything is getting more expensive”, demurrage is different. When your account is charged – let’s say – one half of a percent every month, that is in effect the same as a 6 % inflation. But it is much more immediate for every economic operator (every person participating in some way in the economy) because all of a sudden I see MY MONEY diminishing slowly and gradually. If there is a well defined way of avoiding that charge by giving (loaning) my money to someone else, I will be very likely to do so, even if I get little or no interest.
    If a majority of economic operators are willing to loan their money for little or no interest, because they can avoid a monthly charge, the general interest rate will come down. Gesell never did talk about eliminating interest. He was careful to specify that, in a regime of monetary demurrage, interest “will tend to go down naturally, and eventually will approach zero”. He was very much aware that force had never eliminated interest and indeed was had not been capable of doing so when it was tried.
    Just as interest would tend towards zero in a society that used Gesell’s demurrage paying “free money”, so would inflation, the function of which would be replaced by demurrage. There would no longer be a reason to tolerate inflation as a necessary evil, as we do today.
    I believe we should be looking at both Gesell and George for a solution to our quandary. A land tax alone will not do it.
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  • Edward Miller: Sepp, so you are essentially advocating free banking and microloans in the context of mandatory demurrage? In order for everyone to be willing to loan out the way you want, barriers to entry to the banking market must be reduced almost to zero. More competition would, in any event, reduce interest rates.
    Must the currency be mandatory, or do you just think that if the currency stipulated for payment of ground rent were demurrage-based, then that would become the de facto standard?
    Or do you also propose banning fractional reserves? My thought is that private deposit insurance ought to naturally handle that. Demurrage alone would not discourage fractional reserves any more than inflation does now, but unlike many people I always considered fractional reserves a fact of reality, and as long as everything is transparent, it is not fraudulent.
    I’m willing to see demurrage tried out. Alternatively some sort of computer simulation could help prove the effects. Ultimately, I’m skeptical. Though I do very much like your thinking, yet there is an order by which activist priorities must occur. Whenever there is a “robber who takes all that is left,” then most other mechanisms for improving society (including free banking and freigeld) would cause production to rise, and rent to rise with it.
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  • And Edward Miller responding to Chris,
    your link showed excellent understanding of the issues. Outstanding even. You were very correct to bring up Gaffney’s work. I’ll be going to New York to study under him next month. The landed interests have been shockingly effective at “airbrushing” history, and it is great that you recognize this.
    There really isn’t any difference between what you say and what I say, except that you wish to create subcategories underneath what you consider to be the Commons.
    In reality there are only two factors of production… the fruits of nature and the fruits of labor. You also call this the Commons and the Market, or whatever else you like. That is what George meant when he said “labor employs capital” and called capital “stored-up labor.”
    I am less concerned about you wishing to nix the use of the term “land,” and I recognize the term “capital” is already highly corrupt (as Gaffney shows). Perhaps by some definitions it is possible to extend capital to include knowledge, or like others extend it to include things like trust (social capital).
    I’m not that concerned with definitions, except insofar as I think the definition implies that we breach self-ownership. If talent is considered part of the commons, then talented people can justifiably be penalized. Regardless if one believes this to be a good policy, that definitely ought not be at the forefront of our minds.
    Furthermore, even if all that is meant by that association is that patents ought to be abolished, then it is still mixing up the order. Patents are a “robber” not a “robber who takes all that is left.”
    I agree with what you say in regards to the need to tax carbon emissions, and would say that all sorts of “pigovian taxes” ought to be imposed. It is actually more efficient than restitution via the courts in scenarios where broad groups of people are only harmed a slight amount, while special interests stand to gain big.
    Taxing limited liability is ok, since it is a privilege and all privileges are perfectly acceptable to tax. You have a great instinct in that regards, and intuitively understand the role of privilege, which is unfortunately rare.
    Though I tend to think of Limited Liability as a harmful privilege. If done at all, it should be done on a case-by-case basis. Though even doing it at all is a risk. The current system promotes the “McDonaldization of society” by its wanton use of limitations on liability.
    Replacing debt-money with greenbacks may be helpful, but only if done after or simultaneously with a broad attack on the Land Monopoly. That order is extremely important to keep in mind.
    You used the term “Systemic Fiscal Reform.” Are you aware of this, perchance?
    http://www.systemicfiscalreform.org/Home/land-value-covenants
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  • Chris Cook to Edward:
    Thanks for the comprehensive response.
    It was Bentham who pointed out that Property is a relationship, and not an object. My work concerns the agreements/protocols which define that relationship, and all of the rights of use and the fruits of use comprised therein.
    I am familiar with Adrian Wrigley’s work, but believe that the use of an associative/partnership approach to the Property relationship allows a much simpler and less conflicted solution, particularly in terms of the financing and funding of the development of location/land.
    I concur that Limitation of Liability is a double edged sword, and like all guarantees, I believe that those investors who receive a state guarantee of limited liability should pay something for it or we will see – as you say – that externalisation of costs which, together with the principal/agency issue, is the principal drawback of the Joint Stock Limited Liability Corporation.
    My approach to real property financing and funding is simply the creation by a Custodian of Units redeemable in payment for rental value. The return is the discount to the face value of the rental.
    So if a £1.00 Unit is sold for 80p the return is 25%: the only question then is the RATE of return, ie the time which will elapse before that Unit may be redeemed (either by the holder. or by a buyer), which is a question of:
    (a) the number of Units in issue compared to the rental: and
    (b) the certainty that the rental value sought will actually be there.
    It’s not Rocket Science: John Law proposed a land-BACKED currency 300 years ago: I characterise Units as land-BASED currency in effect.

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As of now (Tuesday 14 June 2011, 11:49 am), this is the discussion. I hope that it might stimulate some to delve more deeply into this important area of research and that a more justly arranged economic system will eventually emerge from the process…

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