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You want the poor to have more money? Well, doh! Splash the cash

It's really not that taxing

Worstall @ the Weekend Phillip from London writes in to note that I'm really not a fan of the minimum wage. So, given that we don't want the poor starving in the streets, or that we might actually think there is some minimum income that a rich country should provide just because, what's the recommended Worstall method of achieving this?

To which the answer is really very simple: if you want the poor to have more money then give the poor more money. Yes, this does mean tax and redistribution.

To start from the beginning, let's abandon any Randian ideas that there's not going to be any form of governmental interference in the income distribution. Whatever anyone might say about tax being theft and all that, there's simply too many people with the vote who don't like that idea for it to ever happen.

So that's dead. Thus, there's going to be some form of redistribution and some form of welfare state. The question then is how do we best construct that?

One answer is that we can try and fix the market. Mandate certain pay levels for example, insist upon minimum wages (and as you go down that path, maximum as well). The problem there is that prices in a market system are not “just rewards” for having done something, they're also signals as to what should be done.

As Hayek pointed out in his Nobel lecture* we don't actually have any other manner of calculating what an economy should be doing. Planning just doesn't cut it when there's a billion items available at any one time in any one place.

And we don't even know what the utility function we're trying to maximise is (no, really, try writing a societal utility function!) let alone have enough information or computing power to be able to do so.

Just an aside on that information bit. Imagine you were trying to do Keynesian fine tuning of aggregate demand in the economy (as people in the 50s and 60s did try). And then you find out that your GDP figures aren't all that accurate, the GDP figures you're using to fine tune your actions.

At the end of a quarter, a month after the end of it, you're told that GDP shrank by 0.5 per cent. A month later they come back and say, well, we've recalculated with better information and that same quarter was now flat.

The final revision, three months after the end of the quarter under discussion, is now actually growth of 0.3 per cent. And by the standards of these things minus 0.5 per cent is recession demanding expansion and plus 0.5 per cent (per quarter!) is breakneck expansion requiring tempering.

That's not good enough information for you to be able to steer the economy, is it? Not just the rear view mirror aspect, it's simply not accurate enough either: and that is what current GDP figures can be like.

Hayek can be thought of as being a bit extreme in that he says that only the economy itself can calculate what those prices should be. But at some level of detail every economist will agree: various people have tried having the state set the price of apples in February and it really never has worked out well at that level of detail.

It might be that setting the price of money, the interest rate, is something that should be done. But somewhere between setting one or two prices and all of them, the effort simply fails.

So, going down that path of trying to set prices, which is what a minimum wage is, is at some level of detail going to fail. That's before we come to the obvious point about setting any prices at all. Which is that there is a market clearing price, one at which demand equals supply.

If you set your price lower than that then there's excess demand and not enough supply. This is what happened to Venezuela and toilet paper: the price is too low for anyone to be bothered making the stuff.

We can also set the price too high: at which point there's a deficiency of demand over supply. Think the EU and farm subsidies, leading to butter mountains and wine lakes. And actually, that minimum wage.

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