re: EBC Book #2 - Applied Economics by Thomas Sowell

Started this yesterday, about 2 chapters in. Pretty good stuff said so far, though I'm not sure he's said anything insightful beyond what Hazlitt talks about in EIOL. When Sowell says "Thinking Beyond Stage One," he really means investigating into "That Which is Unseen" as specified in Hazlitt's book and in Bastiat.

Will read more this weekend, looking forward to it.

Great quote in reference to the Indian fertilizer firm that wasn't allowed to close even though it had become unviable:

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Given such laws and practices, it is not surprising that while more than half of India's industrial work force worked for government-owned enterprises, they produced only 27% of the country's industrial output. Job security laws often mean low productivity and low productivity means lower standards of living for the country as a whole.

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You don't have to go all the way to India to see this for your own. A large portion of local taxes are used to pay the wages and antiquated defined benefit pensions of local government "civil servants" who are nearly impossible to fire (even for blatant incompetence).

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Pretty good stuff said so far, though I'm not sure he's said anything insightful beyond what Hazlitt talks about in EIOL. When Sowell says "Thinking Beyond Stage One," he really means investigating into "That Which is Unseen" as specified in Hazlitt's book and in Bastiat.

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If what you mean by "that which is unseen", also means that which can be foreseen, then I agree. Sowell is describing that actions have predictable consequences that decision makers should assess before acting.

Although Hazlett and Sowell's discussion did focus on some unemployment basics, there other implications not addressed that are discussion worthy. Sowell touched on it, but I think there's more meat on the bone that hasn't been picked with regard to the effect minimum wage has on our youth. Since most starter jobs pay minimum wage, these increases impact our youngest workers most in need of starter jobs.

Our goal should not be to favor the employed at the expense of the unemployed. But minimum wage laws minimize the opportunities to become employed by raising the cost of what someone’s labor must be worth. Our policies should favor the goal of getting more unemployed people to be employed. If they are not employed, they learn absolutely nothing about the value of showing up on time and performing the labor they are earning as fair compensation for the value they are providing. The biggest problem we have about our future productivity is the teen and minority unemployment rates. These are the populations most affected by minimum wage increases. We need them working so they can learn the lessons of the workplace and become more valuable in an economy that will become more dependable on knowledge and ideas than on human labor. We need their knowledge and ideas to grow, not rot in unemployment. 

Another relevant observation on the topic of minimum wage is everything is only worth what someone is willing to pay. You may believe your car should be worth $10,000. But if the most someone is willing to pay for it with their own money is only $5,000, then that is what it is worth. If you want it to be worth more, then add value to it. How do we know what someone's labor is worth if we make it illegal to pay them less than some arbitrary amount?

Minimum wage laws suggest that our labor is really worth more and that the only thing holding us back is some corporate villain. The responsibility to earn a higher salary or wage is ours individually to make ourselves worth that higher wage. We have to offer something that someone else is willing to pay for. 

A worker's experience, dependability, and value added to the workplace should determine their wages. I trust an employer/worker negotiation to determine a wage appropriate to the job far more than a politician's whimsical visions of the way things ought to be. 

I’m in favor of a minimum wage rate. But that wage rate should be zero. It should not be illegal to give it away for free for the opportunity to make your labor more valuable than $0.

About 50% through right now. I have a couple thoughts on the first 25% of the reading below

1) Sowell on socialism:

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"While socialism may be conceived of in political terms as a system that aims at greater equality, a planned economy, job security, and other humane goals, in economic terms socialism is more likely to be described in terms of what it actually does, rather than in terms of what it hopes to achieve. In these latter terms, socialism is a system in which property rights in industry, commerce, and agriculture can be defined and assigned only by political authorities, rather than by private transactions among individuals and organizations in the marketplace"

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I haven't really thought about how closely some of our government programs, while "noble and humane", resemble a creep toward a socialist society based on the passage above. While I agree with some forms of government public subsidies such as unemployment, public housing, food stamps, etc, I thought, maybe naively, that these programs were meant as a safety net to empower people to take some risks improve their lives rather than a crutch from which they can live.

2) Quote on the Value of Human Capital Appreciation vs Compensation

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In more recent times, minimum wage laws and public disapproval of non-paying jobs have elimintated this particular way of acquiring human capital. However, many people continue to take lower-paying jobs than they could get elsewhere when they value the experience available to them in the less remunerative job and expect to cash in on it later on in their careers. They are thinking beyond stage one

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I think that this concept is one of the few where a majority of the population actually thinks beyond stage one. Probably because people evaluate their self interest and their short and long term economic viability moreso than they can see effects of other programs and policies that affect micro economies (such as price controls on housing for example).

What do people on this board think about non-paying jobs in general? I worked 3 jobs while at grad school, all non paying, just to get experience and build my network. But one wrinkle that was thrown into most interviews was whether I was paid for the work I did. Because while I know I was providing value to the firms, if I wasn't paid, my work was deemed less valuable by potential employers who would have me do the same or similar work despite me giving my rationale for why I was doing the work in the first place (human capital development). Which brings me to the Atlantic article from 4 years ago re: paid vs unpaid internships:

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The conclusion was "Unpaid internships: Good for the economy, bad for low-wage workers, and a wonderful gift to students at a terrible price"

The students taking the unpaid internships were thinking beyond stage 1 and the author attempts to apply stage 2,3 thinking to the problem. But he stops short of understanding the broader stage 2 picture. For example, the diagnosis of "bad for low wage workers". If the employer can now make more goods/services for cheaper because of free labor, that would either give them the ability to expand capacity for more supply, increase demand because of price decreases, or invest the added margin in other opportunities which would result in more jobs. Wouldn't that create more demand for unpaid interns (in theory until they can be paid a certain market wage) as well as the demand for low wage workers? Not sure what the proper solution is but painting the conclusion like he did seems to improperly diagnose the end results

I made a relatively dramatic change in career direction very early on. To get my foot in the door in the new industry, I would have been willing to take an unpaid position. I didn't advertise this, but knew I'd accept such an arrangement if it came down to it. I think you have a lot of people nowadays who would do the same, but I also think you have a lot of people who think they are worth an awful lot more than they actually are. Based on Hazlitt's arguments from the previous book, you would think, reductio ad absurdum, zero wages would have a similarly stimulative effect as lower wages.

Good stuff. This should be required reading for college entrants the summer before freshman year. You could make them read Marx as well; I think most would end up siding with Sowell.

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How's everyone doing with it?

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I laid off when I thought I was ahead. Still at 20%. But I should knock out another 20% by the end of this week, if not more.

I could easily get to 50% or higher by the end of this week, but it sounds like a few people are still catching up and some are even still on Hazlitt, so let's target 40% and we can reassess next week.

By the way, it's probably not too early to begin thinking about the next book since it may not be free online like these first two were and people may need to order.

Should we stay with the Austrians (as an aside, I'm including Sowell here but understand some may disagree), move elsewhere on the below map, or take a brief break from economics and knock out one of the books from adjacent fields?

The point you're referencing regarding insurance also jumped off the page and slapped me. For anyone to entrust the purchase of health care to someone other than themselves must mean they expect that other person to deliver more value for them than they could achieve on their own. For instance, most people entrust utilities to provide them with gas, water and electricity because they must feel utilities can render those services more cheaply or with better quality than they could do themselves. We can supply that same cost-quality bake-off to any consumer decision, including health care. For the American people to think handing money over to the federal government (via taxes) who will then hand money over to health care providers is a better result than paying the doctor themselves, there must be some value associated with that. Of course, whether any such value exists is immediately called into question when the government opts to penalize those who don't participate. Usually, people offering a value-added service don't need to coerce you into realizing that value. Not to mention one must believe the government to be a good steward of your tax dollars to believe you get more value for your dollar through the elongated government route than otherwise. I think most people are paying drastically more in insurance premiums than they actually consume in terms of health care in any year. They should all switch to HDHPs with HSAs, which is one reason I have long portfolio exposure to the HSA space in my stock portfolio. Barring some sort of government interference, HDHP plans (basically a call option on health care cost volatility, e.g. a medical emergency) + an HSA (which can act as a stealth 401k for those who max out) is the future.

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They should all switch to HDHPs with HSAs, which is one reason I have long portfolio exposure to the HSA space in my stock portfolio. Barring some sort of government interference, HDHP plans (basically a call option on health care cost volatility, e.g. a medical emergency) + an HSA (which can act as a stealth 401k for those who max out) is the future.

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If politicians are so committed to mandating compulsory health plans, HDHP plans should be the obvious no-brainer, as long as end of life balances are transferable tax free to heirs. This would clearly help make health plans a non-issue for future generations, though admittedly a measurable sum of national health savings would surely have an effect on pricing.