Last week I had a peculiar encounter at work with a customer that I think illustrates how the average person in the UK lacks even the most basic understanding of economics, which leads them to make rather foolish arguments.
“This used to be a pound about a year ago” said the woman as she shook her head in quiet disbelief and handed me the tin of Vaseline petroleum jelly she had decided to buy.
“I bet they haven’t doubled your wages though have they!?” She asked rhetorically with raised eyebrows and a self-satisfied look of righteousness. I smiled politely to hide the fact that I was baffled by her line of reasoning and said only “no” in order to avoid having to engage her in a conversation of a length that would infuriate those waiting behind her.
Later, as I reflected on my encounter with this woman, I was reminded of something American economist Murray Rothbard once said:
“It is no crime to be ignorant of economics, which is, after all, a specialized discipline and one that most people consider to be a ‘dismal science.’ But it is totally irresponsible to have a loud and vociferous opinion on economic subjects while remaining in this state of ignorance.”
The woman’s economic reasoning was utterly flawed of course – we’ll see why in a moment – but from her perspective she wasn’t talking about economics, she was making a simple moral statement: this state of affairs between you and your employer is morally wrong.
She clearly implied that my employer is exploiting me by gaining more from my labour without increasing my wage because they are now making more profit on the product in question. She entirely failed to take into account the fact that my employer has to first buy the product from the producer. If my employer has raised the price of the product, then this must mean it is costing them more to buy it in the first place from the producer (for whatever reason), which means my employer is making the same profit on the product as before (in this case 20%). Why must it mean this? Because there is no incentive for my employer to raise its profit margins in a highly competitive market where its competitors are all working on the same or similar profit margins. In fact it must do everything to avoid doing so otherwise it will lose out to its competitors and profits will fall. If the loss of profit is significant enough, then it may have to reduce its costs. Labour is the most costly factor of production and so a fall in profits can mean anything from reduced hours’ work for part-time workers to redundancies, or even store closures should the fall in profits be significant enough.
The woman incorrectly assumed that my employer was making more profit on this product as a result of it costing her more. The prices of all the products my employer sells are ultimately determined by the actions of those who assign value to the them, i.e. consumers. Because she incorrectly believed that my employer was making more profit on it this lead her to resent paying more for this product, even though by buying it at the higher price she demonstrated that she agreed with its current valuation (price).
When she asked whether my employer had doubled my wages she was effectively asking: why isn’t your employer prepared to pay twice as much for your time and labour? Well, the same could be asked of all those who have stopped buying tins of Vaseline since its price increased. Evidently they believe the cost now outweighs the benefit to them. In other words, at the new cost they would rather spend the money on other things which they deem more valuable than the benefits of using the product. This weighing up of the costs and benefits of our actions is what all human beings do when deciding how to dispose of the resources we have at our disposal (in other words what to spend and what not to spend our money on). This necessary evaluation is what made the woman hesitant to pay £1.99 for a tin of Vaseline.
So, the answer to her question is that my employer doesn’t pay me any more than they currently do for the role I perform for them because the cost to them would outweigh the benefit. Perhaps she was really saying that my employer should value my time and labour more, which is not a question but an assertion based on a belief. But as value is subjective such an assertion is nonsensical. It’s like demanding that everyone should like vanilla ice cream as much as you do. I could just as easily declare that she should value tins of vaseline more. In fact in order for my employer to be able to pay me and my colleagues a higher wage she and the rest of my employer’s customers would have to value my employer’s products more such that they would be willing to pay x amount more for them. Given that she was quite reluctant to pay £1.99 for a tin of Vaseline I think we can safely say that she would not be prepared to pay even more in order for me to receive a higher wage. She doesn’t realise it, but my wages are constrained by her subjective valuation (as consumer) of the products that my employer supplies to society, in this case by her unwillingness to pay more than £1.99 for a tin of Vaseline.
I would never dream of forcing her to pay more for it and I don’t resent her for not wanting to. After all, she’s just acting to improve her lot like the rest of us. Sadly, however, the socialist propaganda she’s been raised on coupled with her ignorance of basic economics has left her quite prepared to advocate forcing my employer to pay more for my labour, in a totally misguided attempt to do me a favour and to make the world a better place. Thanks, but no thanks.