 Good morning, ladies and gentlemen. We are ready to begin. You have survived day one of Mises University. Actually, we're thinking about changing the name to Mises Survivor. Today, we've got a lot of great lectures, but probably none more important than on this topic. And with this lecture, Dr. Walter Block from Loyola University, New Orleans, he is going to be speaking to us on a topic of the utmost importance in today's economy, which is labor, unemployment, and interventionism. Dr. Walter Block. Thanks for the kind introduction, Mark. It's a pleasure to be here. I've talked to a lot of students, and everyone seems to be enjoying themselves, and that's the usual refrain. Let me just ask you people that in 10 years, 15 years from now, when you start making some money, you donate some of it to the Mises Institute so that they can keep this going. This costs a lot of money, and the Mises Institute isn't made of money. And perhaps, if you've got parents who support this, they can write a check even now. So think about that as a possibility. OK, what I'm going to do today is a bit of unemployment, labor economics, minimum wage, unions, things like that. If what I do isn't clear, email me, and I will try to make it more clear, or maybe we can discuss these things together and work on them. Here is a Venn diagram. And a Venn diagram is an overlap like you might have. This is Austrian economics. This is neoclassical. And there is an overlap, which would be B, the overlap between the two. Sometimes this could be A could be round, and C could be colored, and B would be round and colored, or a certain color, or what have you. So you have an overlap. And what I'm going to say, a lot of it, what I'm going to say today is the overlap in B, where neoclassicals and Austrians pretty much agree. Not totally, but to a great degree. Free enterprise, private property rights, economic freedom is a recipe for peace, prosperity, reduction of poverty. Free trade is a wonderful thing. Mankind's best hope, Adam Smith, wealth of nations made this point. Trade is mutually beneficial. If I trade you my tie for your pen, it must mean that I like your pen more than I like my tie. If you agree to the trade, it must mean that you like my tie full. It's a lousy tie, more than my pen. We each gain. I gain the difference between how I value the pen and the tie, you gain the difference between how you value the tie and the pen. We each exploit each other. We each benefit from each other. Now this insight applies also in the labor market. If I hire you for $5 an hour to wash my car, you must value the $5 more than the alternative enjoyment foregone by washing my car, which you'd rather be rather doing something else. And I also make profit off of you, because I value my car clean more than the five bucks I've got to pay you. So it's a mutual benefit. And any law that says that we can't trade either ties for pens or money for labor services or any mutual benefit, first is a violation of rights from a libertarian point of view. And then from an economic point of view, it's a reduction in welfare. It's a reduction in well-being. So it's not really exploitation, there's mutual gain. Before I get into the minimum wage, I wanted to ask some more basic questions. First of all, why do we have to work in the first place? Why don't we just sit there, twiddle our thumbs and stuff come down from heaven like manna? Well, because we have scarcity. We're not in the Garden of Eden. If we were, we wouldn't have to work. We could play all day. But we're in a situation where we don't have as much as we want of everything. We want more than what we've got, so we've got to work to get more stuff. Okay, given that we have to work because of scarcity, by the way, we're always gonna have scarcity. Even if you had magic machines that could create stuff, they'll always be magic, they'll always be scarcity because we'll always want more than we have. That's the human condition. Even if they can take, I don't know who the heartthrob is now, in my day it was Marilyn Monroe. I guess it's Lady Gaga now. I'm not sure. I haven't kept up as well as I should on these things, but suppose those inflatable dolls, you perverts, you guys know about these things. I suppose they had a real Marilyn Monroe or Lady Gaga inflatable doll, and you could just get them very cheaply, but still we want the real one. And there's only one each of them, and there aren't enough to go around, so they'll always be scarcity no matter what. They're always the alternative costs of time. You can only be in one place at a time, so get used to it, guys. We're always gonna have scarcity. Okay, given that we have work, why do we have employer-employee relationships? Why don't we just all work for ourselves? Well, one reason for this is that the employer gives something to the employees that the employee doesn't really have on his own. For example, risk. Suppose we could, here's a group of, I don't know, about 100 people in the room. Suppose we wanted to make these podiums, and suppose we didn't want to have an employer-employee relationship, we wanted to have a worker's co-op. We're all equal, like our friends on the left say, none of this hierarchical and exploiting employment, the employer-employee relationship. We're gonna make these podiums, and we're gonna start right now. How long will it take before the first podium rolls off the assembly line? Well, maybe a year. And during that time, what we're gonna do is we're gonna each assign ourselves, we'll all agree we're great workers, or wakers, as we say in Brooklyn. And we're going to, first we have to get machines, we have to get the wood, we have to hire a factory, all sorts of things like that. And we do that. And at the end of the year, nobody wants to buy these. Well, we're all out of luck, we have no money. Whereas if you have the employer, the employer takes the risk, he bears the risk. He says, well, I'll be the residual income claimant. I will take the money that we sell, and if there's no money, because nobody wants to buy these, they don't like this kind of podium, we don't need podiums or whatever it is, we want a different color. Well, the employer can't come back to the workers and say, hey, guess what, the thing didn't sell, give me back the salary that I paid you for the year. So the employer is the risk bearer. The second thing that the employer offers to the workers, the reason that we don't have very many workers' co-ops, is time. If we have workers' co-ops, what are you gonna do for a salary for a year? You're gonna have to use your own savings, or you're gonna have to borrow money, or you're gonna have to put a mortgage on your house, or something like that. Whereas what the employer will do is he's, the reason he's the employer is because he used to be a worker and he just saved up money, and now he's using his savings to give you a salary for the first year before these things come off the assembly line. So the second thing that the employer gives is one is risk, the other is time. He gives you a year's time. And the third is initiative, you know, usually the employer initiates the sort of a thing, although theoretically the workers could initiate it. So the key elements here are time and risk. Okay, so we have, we have employers, and the way you become an employer is you just save money and you set up yourself, you get up on your hind legs, and now you're an employer. Okay, so here's the residual income claimant. What will the wage be in the absence of the minimum wage law under free enterprise? What will wages tend to be? And we have a theory in economics, which is subscribed to by Austrians and neoclassicals, and the theory is marginal revenue product. We will get wages in accordance with our marginal revenue product. The reason LeBron James and Oprah Winfrey and other very rich people, workers, get a lot of money is because they have a high marginal revenue product. And the reason that I, a middle class person, gets a middle class salary is my marginal product is mediocre or in the middle somewhere. And the reason the people who push grooms around and ask you if you want fries with that, get lower wages is because their marginal revenue product is lower. So that's the theory. So what is marginal revenue product? Marginal revenue product is the idea that, let's say you have, I don't know, what do I have here? The marginal revenue product of the 101st worker, can everyone see that, is that clear? Is the difference between what 101 workers can produce and what 100 workers can produce? So let's say you have 100 workers and they're producing 10,000. And now you hire a 10,000 and first worker or 101st worker rather. And now the total revenue product is 10,005. And what you do is you attribute to the last guy, you say Cedrus, Paribus, other things equal. We had 100 workers, they produced 10,000. We have 100 workers, they produced 10,005. We attribute the extra $5 product to this 101st worker. And we say that the 101st worker has a marginal revenue product or a productivity of $5 an hour. Clear? What marginal revenue product is? Okay, well now the wage, we say the wage will tend to equal the marginal revenue product. And in order to prove that is what we do is we assume all possibilities. Well, one possibility is that the wage is higher than the marginal revenue product. Let's say we pay $7 an hour to this guy who's bringing us in five. Well, if so, we lose $2 an hour. And that's no way to run a railroad. If you keep losing money on your workers you're gonna go broke. So that's not a sustainable sort of a thing. Our friends, the environmentalists are always talking about sustainability. Well, this is not sustainable. This can't be an equilibrium sort of a situation. This can't last because if the employer is losing money he can't continue in business. Another possibility is that the worker gets paid $2 an hour. The problem with that is if somebody is being paid $2 an hour, what will some other employer do? How will another employer react? If, here's a worker whose productivity is $5 an hour is being paid $2 an hour. And therefore the employer, employer A, is making $3 an hour profit off of this guy's work. If you were a competing employer, what would you do? What would you say? How would you react to this? Well, first you would applaud because employers are exploiting workers and that's all to the good. So, you know, we favor that sort of philosophically. But rather than that guy make $3 an hour profit you would then offer what? Not four, you're not, you're not. $2.01, never you're a capitalist pig, I think. And you want to exploit workers, you're not gonna give them $4 an hour or $3 an hour, you give them $2.01 just enough to get them away from that previous employer and to maximize your profits. So instead of making $3 profit you're making $2.99 but someone else will offer $2.02 and $2.03 and you're off to the races. Now it usually doesn't go that way but theoretically if we look at it this way you see that the wage would tend to rise. How high will it rise? Well it'll rise toward $5 an hour. Might not get there, it'll only get there in equilibrium and whenever in equilibrium so it might not well get there. So the marginal revenue product theory is just a tendency theory. It's not, no one's saying that it's gotta be exactly five. And there are pockets of places where the real workers making less than their marginal revenue product and it's expensive to go out and find them so the wage might not be as high but in a place like Auburn where there are many employers, many employees and it's easy to find people the wage tends to get bit up more and also the impetus can come from the other side. Need not come from the employer side grabbing employees who are underpaid. It also could come from the employees. You're in the bowling league, you talk to people hey I'm making $5 an hour and you're only making $2 an hour? Well you're gonna go to the other guy's employer and say hey hire me. So the wages tend to get up to marginal revenue product. What does marginal revenue productivity look like in the course of the day? Marginal revenue product looks something like this I just sort of drew this freehand. You know you come into work and it's negative because you're hanging up your code and you're not doing any work which would make it zero but you're talking to your coworkers hey how is your weekend? It's Monday morning so what you're doing is not only are you not working but you're getting them away from their work so they're not working either so your marginal revenue product is negative. And then later on it's very high and it just sort of zigzags all over the place. People don't come in with a little thing on their forehead or a lapel pin like saying you know my marginal revenue product is $5 an hour. It's a guess, the employer has the guess and employers will succeed or not succeed partially on the basis of how well they can assess the marginal revenue product of the various workers. Here is another diagram of interest and what it does is it looks at marginal revenue product over the lifespan and you know when you're say under 15 or 10 years old your marginal revenue product is negative you can't produce anything you just stop other people from working later on it gets high and then when you get older and the senile gets lower various activities, sports have different profiles like swimming, the height is right here like around 20 or so in math and physics. It's very similar to swimming. A lot of people get Nobel prizes when they're in their 60s and 70s but they usually get it for work they did when they were 25. On the other hand literature is a little higher namely people can still write worthwhile things when they're 50s and 60s. Austrian economists are lucky because we're more of a literary type so we've got a chance to keep going in our 50s and 60s whereas mathematical economists peak earlier. I don't know why that is, psychological, physiological, whatever but I thought that would be of interest. Now there are alternative theories to marginal revenue product. Some people say well it's assertiveness and these are the people who say well you know men get more money than women because men are more assertive or men pay less for a new car or use car than women because men are more assertive and women are you know wusses and you know they'll just take anything. That's sort of a silly theory. I don't think it's got much to recommend it. Lady Gaga, opera Winfrey, Marilyn Monroe these actresses make tons of money and it's not because they're assertive or not it's because they can put people in the seats and people are interested in watching them. There are other things that determine marginal revenue product. Beauty for example. There have been studies that show that what they do is they get people to look at pictures of women. Beauty is much more for women. Height is more for men. For every inch taller you are over the macro you make I don't know a thousand or two more per year. What they do is they give hundreds of pictures to juries and they say make them put in this pile beautiful this one mediocre this one ugly and now you look at their salaries and the more beautiful women are making more money so this just means that part of productivity is beauty. I mean if you want to hire a waitress or somebody to attract to your restaurant you want to hire a beautiful woman pay her more because she'll attract more customers. So marginal revenue product doesn't just mean how many widgets can you turn out it means how much revenue can you generate and that's the brakes. Beautiful women can turn out more productivity in that sense. Okay now for the minimum wage. The argument in favor of the minimum and by the way you know where the minimum wage law is most popular. It's most popular in college towns like Ann Arbor People's Republic of Ann Arbor Cambridge Mass wherever there are many many colleges or universities the minimum wage is most popular which just shows that the marginal revenue product of public education is negative. They're teaching them you know economic illiteracy mainly in you know sociology courses and religion and history and places like that. Hopefully we do better in economics but most people don't major in economics. Okay so the argument in favor of the minimum wage is like it's a floor under wages and the higher the floor and no one can get below the floor and the higher we raise the floor the higher wages are are and since we all want wages to be higher than they are we have to favor the minimum wage law and this is just totally wrong. Rather the minimum wage law is not a floor under wages and raising wages rather the minimum wage is a way to cut off employment and the way I like to illustrate this sometimes is here's an employment ladder and there are rungs in the ladder and when you put a minimum wage in there what you do is you cut off the bottom rungs of the ladder and the way you sometimes you rise in the ladder is through schooling but another way is on the job training and if you knock off the bottom rungs of the ladder you're not going to be helping people at the bottom of the economic pyramid. It's not a floor under wages this mechanical analogy is all wrong rather it's a barrier over which you have to jump in order to get a job. So if the minimum wage law is $2 an hour you have to have a productivity higher than $2 an hour and if the minimum wage is $5 an hour you have to have a productivity of five an hour and if it's $100 an hour you have to have a productivity of $100 an hour. The higher the minimum wage law is the higher you have to jump over in order to get a job in the first place. You know what the world's high jumping record is? Something like eight feet, eight feet I guess about that high people can actually jump over a bar, eight feet. Now I used to illustrate the minimum wage law when I was very young. You know I've been at these Mises things for I don't know since 83 when it started and I used to be the youngest on the faculty now I'm the oldest I don't know what happened that time goes by. The way I used to illustrate this was I would take a chair that you're sitting on and I would actually jump over the chair. Illustrate that you have to jump over something in order to get a job. Then later when I got older and fatter I used to take this attaché case and put it on its side and jump over it. Then a couple of years later I put it on its side and jump over it. I'm now going to demonstrate but not I can't jump over that but I'll put it flat. Now I don't know if the people in the back can see this but I'm about to demonstrate by jumping over this thing and if I make it I want a round of applause for this. I usually need more of a lead but I'm going to try to work it. This is the way they do it in the Olympics they go like this. Oh, I lost a step. Well actually I've lost a few but. Okay so what's going on here? The minimum wage law is a way of making people jump over it in order to get a job and there are some people who can jump over it and some people can't jump over it or it's harder for them to jump over it. Here is another illustration and what it does is it compares, why is it low? What should I do with this thing to make it more clear? Maybe the focus? A lot of nice buttons here. Can you see it? Okay, I can't see it too well but if you can see it we're okay. What you have is teenage males over here and it's the unemployment rate here are years and here are adult males and what it's saying is that teenage males have a higher unemployment rate two to three times higher than adult males because adult males are able to jump over the minimum wage law more easily than our teenage males because teenage males have lower productivity. So this is one illustration of the idea of being able to jump over barriers. Now teenage males are able to physically jump higher distances but we're not talking about that. What we're now talking about is not jumping over a chair or an attaché case but what we're talking about is jumping over a productivity level and adults 40, 50 years old have higher productivity levels than 17 year old people because 17 year old people haven't had the experience of whatever it is on average to be productive. Okay, the next point I wanna make is that if now it's the summer and in the summer you have a lot of high school kids and college kids out of school and a lot of them don't have jobs and people are saying the politicians, the ones responsible for the unemployment in the first place through the minimum wage are asking employers to hire teenagers and it's very hard to get teenagers hired because their productivity is below the minimum wage. So what they do sometimes is they have an exception. They have a lower minimum wage. I think the minimum wage law is something like 710 or 715. It keeps changing under Obama and Bush and what they'll do is they'll have a lower minimum wage, three or four dollars an hour. But the point is that if the minimum wage law is a floor under wages and the higher it raises the more wages go, why should you have an exception? You need not have an exception. The fact that you have an exception shows that even they realize that it's not a floor under wages, rather it's a barrier over which you have to jump. Another example of this is the disabled. Disabled, physically disabled doesn't really matter. If you're physically disabled it doesn't impact your productivity very much but mentally disabled, mentally handicapped people have very, very low productivity levels and yet it's been decided by psychologists or whoever is in charge of these people that even they benefit from working and it used to be before the advent of the minimum wage law that they would work for very, very low wages. And then came the minimum wage law. Let me illustrate when the minimum wage law came in. Let me see if I can find that, here it is. This is sort of a history of the minimum wage law. It started out in 1938 at 25 cents an hour and I've only got it to 1997 where it went up to 515. So way back in the day in 1938 the minimum wage law was 25 cents an hour but mentally handicapped people didn't have a productivity level of 25 cents an hour. So all of a sudden nobody wanted to hire these people and the only way you could get a job for them was out of charity or the government hired them or something like that but they wanted private people to hire them. So again, they made an exception. They made an exception for mentally handicapped people but again, what's this exceptions business? If minimum wage law is such a great thing that raises wages, why do you need exceptions for the least in the loss that the teenagers and mentally handicapped people it just undercuts this thesis. Okay, the way most economists illustrate. Oh, here is a newspaper clipping that I took out in Paris. Plain clothes police arrest the young man after writing broke out during a demonstration. Tens of thousands of workers marched in Paris and of course the city yesterday to protest the jobs policy of Premier Edwin Balladour. Specifically Balladour's plan to allow a below minimum wage for young people and during the labor force. So what they found in Paris and by the way, the reason they have all these problems in Paris where people can't get jobs is they have very high minimum wages and immigrants can't get jobs because they don't rise above that and they're confined to a life of idleness and when you're 18 years old and you can't get a job and you're idle. What is it? Devil's hands, idleness, something like that. People get in a trouble when they have forced idleness. So the government of France tried to have an exception for teenage minimum wage and they was rioting. So, you know, go figure. Okay, the usual way that economists illustrate this minimum wage is you have a supply and demand curve and in the supply and demand curve for labor, what you would get is that here's the wage, there's the quantity of labor. You would tend to go to point A where supply and demand equal then there'd be no unemployment. But what they do is they raise the wage above point A and at that higher level, the minimum wage intersects with the demand curve at point B and only B workers instead of A workers where A is bigger than B are hired and you have a supply curve of labor and more people are willing to work there. So you have an unemployment rate between this point and that point. The people from A to B lose their jobs, the people from A to this point C would like to work but can't get jobs at that higher wage. So you have higher unemployment and that's the way economists illustrate the minimum wage. And I think that's all to the good. Now what I wanna do is complicate matters a little bit and give you the following example. Suppose we had the following example. If there were no minimum wage and workers had a marginal revenue product of $5 an hour and the wage was $5 an hour and 1,000 workers were employed at $5 an hour, what would the wage bill be? Namely how much money would all the workers get? And the answer is you multiply $5 times 1,000 workers and you get 5,000 bucks, pretty straightforward. Now what we do is we raise the minimum wage to seven and at seven, only 900 workers are employed and the wage bill is now 6,300. Notice that the wage bill rose. The workers are now making more than they used to be. They used to be making 5,000 and now they're making 6,300. Now it's true that 100 of the workers will be unemployed and only 900 will still be employed but the workers are filled with a milk of human kindness. They're all great guys and what they decide to do is they decide to share the wage bill. Take turns being unemployed. We're assuming that the workers are homogeneous, they can be substituted for each other and what they do is they make a deal with each other and they say, hey, it's not fair that 100 of us won't get anything and 900 of us will get more, let's just share it out. So how much over the long haul how much would all the workers get instead of $5 or $7? How much would they get? How much on an hourly basis? $6.30, when we divide 6,300, not by the 900 workers who produce it but by a thousand workers because they're sharing it. Okay, everyone with me on this so far? So now this looks pretty good. Minimum wage law looks pretty good. It's true that they're not getting $7 an hour but it's an increase from 5 to 6.30 and 6.30 is better than 5 so this seems to be an argument in favor of the minimum wage. So I must have made a mistake. What mistake did I make? Can't hear you? Sorry? Yeah, 100 of them won't work but they'll be making more money than before because before they were making $5 an hour. Now 900 of them can make $7 an hour but a thousand of them can make, I'm sorry? The supply curve will shift, no? Yeah? Well, the demand curve is such that they're making 6,300. Let me illustrate the answer to you now that I've given you this puzzle. It's too early in the morning to answer questions like this so let me answer it for you. And the way I'm gonna answer it is through baseball. Now, it used to be that professional baseball players could throw the ball at around 100 miles an hour or 90 miles an hour typically and now there are two or three pitches who can throw it like at 105 miles an hour. Why do they throw it so fast? The, because the faster they throw the ball, the harder it is to adjust for the batter. When they pitch batting practice in order to give the batters confidence, how fast do the pitches throw the ball? 40 or 50 miles an hour and then everyone bats it right out of the park? The point is that when they throw it at 105 miles an hour or 95 miles an hour or when a tennis player serves the ball at 130 miles an hour, the reason they do it is that the faster the ball goes, the less time you have to adjust. The slower, the more time you have to adjust. Let me give you a different illustration. Here we go. You remember I showed you that thing about minimum wage. Well, the minimum wage rose the most in percentage terms from 1945 to 1950. It rose from 40 cents to 75 cents, which is almost a doubling. If you look at the other accretions, it's not quite that big a percentage increase, right? And nowadays they'll raise it 15 or 20 cents an hour, which is a very small percentage. Well, there was a time when the minimum wage law was 40 cents and if you had 1,000 workers, they were making $400. And if you rose it to 75 cents, they would be making 750 if the demand curve was vertical. Now you people, most of you are too young to realize this, but there was a day when you got on an elevator, there was this guy standing there. He wasn't a pervert. He was the elevator operator. There was such a thing as a manually operated elevator. And you got on and you say 12 floor please and he would move this little thingy and he couldn't get exactly to the 12 floor but he'd get real close and then he'd say, let me adjust it a little bit so you didn't have to go up or down to get onto the 12 floor. And usually he couldn't get it exactly so there was like an inch up or down. The next day after the minimum wage law went from 40 to 75 cents, how many elevator operators got fired, do you think? Zero, none of them got fired the next day because if you start firing elevator operators, the tenants are gonna get snarky. The tenants in a high rise commercial building are gonna say look, we're paying you a certain rent predicated on there being eight elevators operating in this building and now you're gonna fire two or three of them while you're gonna lower our rent then or we're gonna protest. So the very next day they couldn't fire any. So the minimum wage law looked really good. People's wages were practically doubled. They went from 40 cents an hour to 75 cents or to 40 to 75, almost a doubling. Nobody got fired, everything was great. But then they started bringing in automatic elevators. See automatic elevators were not competitive with manually operated elevators at 40 cents. But at 75 cents they started to become competitive so they started putting them in. How many could they put in in the next day? None, how many could they put in the next month? Maybe one or two? How about in the next year? More and more. The point is that it's not the supply curve, you were very close. It's rather the demand curve that keeps moving and it doesn't shift rather what it does is it pivots. And pivots means here is the immediate short run, here is the short run, the moderate run, the long run. Now getting back to my baseball, the more time you give the batter or the receiver of the tennis serve to adjust, the more likely they are to be able to return it successfully in tennis or to hit the ball in baseball. Well the more time you give people to adjust, the more elastic is the demand curve. The reason the mistake I made was I drew an inelastic demand curve. You'll remember from your elasticity that when we move down a demand curve if the total revenue goes up, the elasticity is greater than one so it's elastic. If it's the same, it's unitary. If it's less, it's inelastic. Well this is inelastic because when you go down this way, total revenue falls which means when you go up, total revenue rises. Okay, so what I did here is I made an inelastic demand curve which is not unreasonable for the short run. So in the short run, the minimum wage law looks pretty good. In the short run, people think yeah, the minimum wage law is great. During that elevator operator thing, it took three or four or five years before virtually all manually operated elevators became automatic elevators and people didn't put the two together. They didn't say that the reason so many elevator operators are being fired is because of the minimum wage because it wasn't a constant conjunction. It wasn't an immediate effect. It was a long run effect as the manually operated elevators were led out to pasture and the automatic ones came in and people started getting fired but it took two or three years for many manually operated elevators to be fired or operators to be fired. So they started to, well, interest rates changed or technology changed or something else. They didn't put it together. They didn't say it was the minimum wage. So that was the mistake I made here. I purposely drew it inelastic and inelastic is okay in the short run but as time goes by and people have more and more time to adjust it's not short run anymore. Okay, now you remember that at the very outset what I did is I drew a, let's see if I can find that stupid thing. Next year I got to get organized. I can't find it. Remember the Venn diagram I drew and I said I'm gonna be doing stuff that is where the neoclassicals and the Austrians agree. Well, now I'm gonna do something where the neoclassicals and the Austrians diverge because this is after all an introduction to Austrian economics. So I want to illustrate a difference between the Austrians and the neoclassicals and the difference has to do with these guys Cardin Kruger, Princeton economists from the same place as Ben Bernanke. Boo. Boo. And what's going on there, here it is, here is my Austrian and neoclassical thing. So what I was doing before I was doing the B area where Austrians and neoclassicals sort of agree. Now I'm gonna move into this A area to show that there is a difference even though we agree, we Austrians agree with the neoclassicals sort of. And I think if a neoclassical economist were to hear what I said so far, he would pretty much say block has got it. That's the mainstream stuff. That's what they teach in the micro texts and this is all very straightforward. But then what happened is Cardin Kruger wrote this article in the most prestigious economics journal that is the most prestigious neoclassical economics journal, the most prestigious Austrian economics journal is the quarterly journal of Austrian economics edited by our Joe Salerno. In any case, Cardin Kruger had this article and they took a case in Pennsylvania and in New Jersey. I forget which one of them, one of them raised the minimum wage law and the other didn't. And the one that raised it, according to the right wing neoclassical economists, which is the overwhelming majority of neoclassical economists, the place that raised the minimum wage law should have had a fall off in the number of workers. Back to this, if you raise the minimum wage law you get less employment and you get more unemployment. Instead the very opposite occurred. So let's suppose that New Jersey raised its minimum wage and instead of New Jersey having fewer workers they had more workers. And Cardin Kruger said, well this shows that all the neoclassical stuff that we've been talking about about minimum wage is wrong. And minimum wage really is like a floor under wages it raises wages and all this other stuff is all wrong. Now, one of the differences between Austrian economics and neoclassical economics is that neoclassical economics sees themself on the basis of testing theory. Okay, they see themselves as modeled on physics or chemistry or any of the hard sciences. So we have a theory, now we have to go out and test it. Because if you don't go out and test it you're a religion or a cult or something like that. Whereas the Austrian economists don't see economics as an empirical science or an empirical effort. We see economic science rather as analogous to logic or math or geometry. You don't go out and test whether triangles have 180 degrees. You don't go out and test whether the Pythagorean theorem is correct or not. Pythagorean theorem is correct and the way we prove it is not by looking at triangles and the way we prove that triangle's got 180 degrees not by going out in the real world and measuring triangles and measuring the degrees but based on the pure logic of it. So if the mainstream neoclassical economists were really true to their scientific, what Hayek calls scientific or to their empirical science what they would have said is oh, Cardin Kruger came up with this refutation of the theory. Oh, well that's okay. The theory is mostly true. But there are exceptions. Or they'd say, well maybe economic law doesn't work in New Jersey. Or they would say well maybe economic law you ordinarily works but in 1995 when they did this study it didn't work. Okay, no big deal. They didn't. They didn't have that attitude at all. My former mentor at Columbia, Gary Becker and his cohorts, they started writing. They really had fire in their eyes. They said you know this is BS. And one of the key elements of empirical science is replicatability. Notice if I do something in my chemistry lab and I find X, Y, Z and I tell you what I did in my journal article well then you in your chemistry laboratory have to be able to replicate what I did. And if you can't it shows that I had a dirty test tube or I'm lying or something like that. So what they did is they went back to the data. They, Cardin Kruger got this data from small firms in New Jersey and Pennsylvania. So they started calling these small firms two or three years later and they couldn't replicate it. Probably what happened is Cardin Kruger called some guy and said well you know how many workers do you have and what do you pay? And the guy was the I don't know the guy pushing the broom there and made up some numbers and then on the basis of that Cardin Kruger got their data. So Becker and other neoclassical economists tried to replicate this, couldn't replicate this and then they said it was wrong. But the interesting thing is that my point here is if you scratch a good neoclassical economist you're gonna get an Austrian because they had Austrianism in their bones. They knew that this was wrong. They knew that this was nonsense. And they went out there not with the attitude of oh you know let's just replicate it and you know we'll show that Cardin Kruger were right. They said this is absolutely wrong and we're gonna show Cardin Kruger for the Schroldens that they are. So this is my own PhD dissertation with Gary Becker was on rent control and I had an econometric equation model. And usually I got good, I got the right sign of my variables and I got statistical significance showing that the more rent control you had the lousier housing was. Every once in a while I would come up with the wrong signs. And sometimes very embarrassingly the wrong signs was statistically significant. And what Gary Becker should have said is oh I've got this genius block who's gonna turn economics on its ear and is gonna show that rent control is really great. Instead what he said he was too kind to say this but what he really meant was he said what he really meant to say is block you more and go out and do it again until you get it right. So what's testing what? Is my empirical crap testing the insights that we know from the logic of rent control or is it the opposite? It was the opposite. Namely the theory was showing that my statistics were wrong. And the theory of minimum wage shows that Cardin Kruger were wrong. If the minimum wage law is so bad why do we have it? If the minimum wage law is so bad why do we have it? And the way we answer that is we say quobono. Who benefits from it? You know in CSI when there's a dead body what they do is first they have forensics to test the blood and the hair follicles and the semen and whatever else is there but then what they do is they say well who benefits from this guy being dead? And they start looking at the spouse or the child who's gonna inherit or something like that? Well it's the same thing here. Who benefits? Who benefits from lots of teenagers being unemployed? We're all prison guards. Because more unemployed teenagers means more crime and more crime means more jobs for prisons. Psychologists maybe. Unions. Unions are the key. And here what I wanna do is illustrate what's going on with a thing called an isoquant. Isoquant is an equal productivity curve and here I illustrate the isoquant with bushels of wheat and here you can make bushels of wheat with a lot of labor and a little bit of land like in Japan or in the US with a lot of land and a little bit of labor, isoquant. You can make 100 bushels in various ways. Everyone with me on isoquants now? Okay. Well, suppose what happens with this isoquant is that wages fall. Well since Japan is labor intensive and if wages fall we'll move toward Japanese ways of producing a way, we'll move toward the suddenly cheaper factor production, right? Okay. Well, you can have an isoquant not with land and labor but with skilled and unskilled laborers and here are 100 shoes and you can make it with a lot of skilled workers and very few unskilled workers or you can make it with a lot of unskilled workers and a few skilled workers. And if you move the minimum wage, oh, let's start this way. Let's suppose that the union goes into the manager and says, hey, we gotta go from 20 to 25. We're making $20 an hour and we need $25. What's the attitude of the employer? The attitude of the employer is, well, let's move from A to B. We wanna move toward the suddenly relatively cheaper factor production and if the skilled workers are going from 20 to 25, the unskilled are staying the same, well what we'll do is we'll start firing some skilled unionized workers and substituting for them unskilled workers will move down to the right from A to B. Does the union like this? No, they don't wanna have union members being fired just because they wanna wage increase. So in the old days, when there were blue collar types, what they would do is call the unskilled workers scabs and beat them up and slash their tires and stuff like that. But that's such, the problem with a fight is even if you win, you get blood on you and sometimes the scabs fight back and it's awkward. So what you do, so what you do instead is you have this thing, drum roll, minimum wage. What you do is you raise the minimum wage from five to seven which moves the employer back in the right direction from the union's point of view. You see how vicious this is? What the skilled workers are doing is picking on unskilled workers. They're pricing them out of the market. They're making it harder for the employer to hire unskilled workers. They're making it harder for the employer to fire some of them and hire some unskilled workers. So this is one of the big impetuses for the minimum wage. Now look, the union wage rate is way higher than the minimum wage. Minimum wage is like 715 or 735, it keeps changing. The union scale is much higher in Detroit. The way they had it bailed out, they were making $75 an hour on the assembly line in Detroit. So how do you account for the fact that the union wants to raise the minimum wage and they're adamant that the minimum wage must rise? And Obama is big into this raise. Well one, excuse me, one hypothesis is that the highly skilled unionized workers just feel for their brethren at the lower end of the economic pyramid. And if you believe that, the old joke was I've got a bridge to sell you but I have a book out on privatizing bridges so it doesn't work out as well. But the point is that one of the reasons for the minimum wage is who benefits from it is organized labor unions. And it's a particularly nasty, vicious sort of a thing. Let me talk a little bit about how unions, whether they raise wages or not. Unions do raise wages sometime, temporarily, for some workers and then what they do is they unemployed companies. It's sort of like a parasite. Parasite gets fed but it eats up the host and that's why you have the rust belt. Rust belt is a product of unionization. But they don't raise wages permanently because wages come from marginal revenue product or productivity. So if you wanna know what the effect of unionism is on wages, you have to ask what is the effect of unionism on productivity and then you'll know what the effect on wages is and to ask what the effect of unionism on productivity is is very clear. It reduces it. They have strikes, they have strife, they have internet sign debates and all sorts of stuff like that. Look, there are wages that are high in countries that have no unions, Singapore, Hong Kong. Japan has unions but they're company unions that they mainly teach the workers, the company song and stuff like that. They're not the kind of unions that we're used to hear. Unions only came into effect in the late 20th century, the 1900s, no, the late 19th century, 1890, the Wobblies, the Knights of Labor, the AFL came in in the early 20th century, 1905, 1910, later on the CIO came in. But wages were rising since, I don't know, since the year 1500, long before union so you hardly need unions to raise wages because wages come from productivity and productivity was increasing with new technology. You have wages that are high in industry with no unions, computers, banking, insurance, babysitters, house cleaners, their wages have been rising and they're not unionized. In the United States, the high point of private unions was 1930s when 30% of the labor force was organized. Now it's in single digits in the private labor force. What is happening instead is public sector unions are on the increase. But public sector unions are sort of a logical abomination because look, the whole point from the left about unions is the reason we need unions is because the employer is an exploiter. The employer is an exploiter, but the government is a good guy, the government will help the working men. So how do you justify organizing against the government which is supposed to be in favor of the people? So public unions are a weird thing. They just had a thing in, was it Wisconsin where the public sector unions were going berserk and the state government was having deficits and all. And most libertarians would say, well, you know, the unions are evil and we have to support the government. And I wrote several articles on lewrockwell.com saying, oh, whoa, wait a minute, yes, we're against unions and I had to reiterate that I was, yes, against unions. However, they're picketing the government and the government is hardly the libertarian institution. So it's sort of like the blood and the crypts are fighting or the Nazis or the Nazis and the commies are fighting. You don't just say, well, we're pro-Nazi. Because the commies aren't so good either. So it's a much more complicated thing. Look, I am second to no one in my condemnation of unions, but that doesn't mean that I always have to oppose unions, especially when they're fighting other groups that are even more highly problematic. There's one more thing I wanted to do and if this was an advanced class, I'd spend a lot more time on it, but I've only got two or three minutes and this is the issue of monopsony. For those of you who are in graduate school, monopsony is the only sophisticated argument in favor of the minimum wage. And the idea here, I'm not gonna go through the diagram. Those of you who know of it will know of it and I'll explain the rest of it verbally. The idea here is think Hershey, Pennsylvania. What do they produce in Hershey, Pennsylvania chocolate? The Hershey, Pennsylvania accounts for 95% of the employment in Hershey, Pennsylvania. And you have this thing called monopsony. It's not a misspelling, it's monopoly, only a monopoly on the buyer side, not on the seller side. And the argument is that if you have a monopsony, what they'll be able to do is lower the wage from where supply and demand is to this point over here because of marginal cost and marginal revenue meeting here and you go to the supply curve. And when you have a minimum wage law, they'll actually be able to go from A to C. Namely, since the monopsonists supposedly exploits workers, minimum wage can actually raise wages and not reduce employment but increase employment. Okay, now there are several criticisms of this and I've only got another minute or two so I'll run through them quickly. There are three neoclassical criticisms of this. First of all, Hershey, Pennsylvania is very rare. It's rare that you have monopsony. Secondly, this could only work in the 15th century when transportation didn't work because if they were exploiting workers in Hershey, Pennsylvania, workers would go 10 miles away and transportation would be good enough nowadays so that they wouldn't be exploited. The third one is that there's a limited gap between point A and point D where the minimum wage law has to be and if it goes above that, you'll have the usual unemployment effects and if it's below that, it won't have any effect so there's only a narrow gap where it works. The more serious criticisms of this are the Austrian criticisms and I'll give you two of them. First, what's with this cost curves crap? You know, in the beginning of every micro text, they say, what does cost, cost is alternative or opportunity cost foregone? What are the costs of you people being here? The fact that you're not doing something else, you could have been out working or swimming or sleeping or whatever it is, the alternative or opportunity cost of you being here is what you could have been doing when you're not here. But I don't know that. You might not even know that so you can't draw cost curves. The second problem is you have this interpersonal comparison of the utility business and I'm gonna have to stop here because I'm out of time. Thanks for your attention. Thank you.