What Is the Right Choice?

Column for week of March 3, 2014

     Consumers face endless choices.  What should they buy,
and how much?  A single principle guides all of the choices. 
What will bring the most satisfaction?   Satisfaction can't be
measured or weighed.  It is impossible to find that a burger will
yield 11 grams of satisfaction while a candy bar will produce 14
grams.

     Besides this, the choices will yield different satisfactions
for different individuals.  If that isn't enough uncertainty, the
satisfaction a person will enjoy from a choice varies from time
to time.  It is impossible to write a formula to calculate how
satisfying anything will be.

     When individuals venture into business, they still seek
satisfaction.  The business person may gain some satisfaction
simply from being successful.  The main highway to satisfaction
from a business runs through profit land.

     The business buys resources.  It uses those resources to
produce a product.  If the product pleases consumers and sells
for more than the resources cost, the business earns profits.  The
business owner can use those profits to purchase the things he
believes will yield satisfaction.  More profit means more income
with which to pursue satisfaction.

     The satisfaction still can't be measured.  The profits that
are the means to satisfaction can.  The primary goal for
businesses is to maximize satisfaction through maximizing
profits.

     The business must seek to buy only those resources that
will increase the value of its products more than the resource
cost.  Consider a corn farmer deciding whether to buy another
ton of fertilizer for $800.  The important issue is, Will the
fertilizer increase the value of the crop by more than $800? 
Another consideration is, Will some other use of the $800
increase the value of the crop even more?

     The same principles apply to all resources, including
labor.  Will hiring another employee to speed up planting
increase the yield enough to pay the cost of the employee?  The
cost of the employee isn't just wages.  Taxes, insurance, cost
of hiring, etc. are all part of the cost of hiring an employee.

     Suppose the farmer calculates that he can pay the
employee no more than $6.00 per hour and come out ahead.  If
it is illegal for the farmer to pay only $6.00 per hour he can't
afford to hire the worker, even if the worker is willing and eager
to work for $6.00.  Instead of working for $6.00 the worker
remains unemployed earning nothing.

     The farmer produces a little less corn.  The entire world
has a little less corn available to use.  This will tend to push
corn prices higher.  What happens to one farmer won't have a
noticeable impact on the total corn supply.  If it happens to
thousands, it can make a noticeable difference.  Meanwhile, the
unemployed worker may be drawing unemployment
compensation or getting welfare at someone's expense.

     The least skilled workers are the main victims of
minimum wage laws.  Businesses can't afford to pay workers
more than they produce, no matter how much the worker may
need more.  Minimum wage laws are one of the main reasons
unemployment is so high among young, unskilled workers.

     Not only are they producing and earning nothing, they
are denied the opportunity to get the work experience that would
enable then to become more productive and earn more.  Only 10
percent or so of workers remain at minimum wage for two years.

     A recent study found that only about 10 percent of
minimum wage workers live in a household that is in poverty. 
The other 90 percent live in households that have multiple
incomes and are above the poverty line.

     The minimum wage earner is rarely trying to support a
family.  Even if the minimum wage worker is trying to support a
family, pricing him out the labor market is a strange way to
help. Sure, some workers get a raise when the minimum wage is
increased.  They ride on the backs of the low skilled workers
forced into involuntary unemployment.

aldmccallum@gmail.com
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Copyright 2014
Albert D. McCallum