Friday, May 09, 2008

Minimum Wages and Monopoly Prices

An interesting possible line of argument not explored often enough is that the minimum wage law is actually a monopolistic privilege, effectively enforcing cartelisation of the labour supply.

Think of it like this: A cartel is classically thought of as occurring when different competitors in an industry, or supply a particular type of good or service, get together to agree not to undercut each other. They threaten to withold supply of goods unless buyers agree to pay a higher price, or they just reduce the supply anyway, so that supply falls relative to demand, and prices increases.

Well, what examples do we have of this? People like to alledge that supermarkets do this, that railways did it in the nineteenth century, and other such examples. However, surely the most common occurence of a cartel, or collusion in order to withhold supply in order to raise prices is one that people just don't like to point out. Maybe because they are supposed to be nice, benevolent things. The most common attempts at forming cartels are unions.

Think about it: Unions are when suppliers of labour get together so that they can threaten to strike unless they get a better wage. Ultimately the idea of "collective bargainning" with union negotiated wages rests on this power of striking, that is the threat to withhold supply unless the price rises. This is classical, typical cartel behaviour.

Now, libertarians believe that people have a right to form unions. Unions may well occur in free markets - which is not to say that they can effect general wage levels, because they will not be able to charge monopoly prices. The reason why people should be free to form unions, is because if one person has a right to withhold his labour, by virtue of owning himself and hence his labour, if follows that a large number of people have the same rights. On utilitarian grounds, though, people sometimes fear the power of unions "in restraint of trade." I think they are wrong to do so, because cartels are inherently unstable in a free market economy.

Why is this the case? For at least two reasons. Firstly, the most obvious, if you were a businessman and you, with reasonable certainty, knew that your competitors were going to keep their prices high, or raise them, though costs, say, were falling, what would you do? Cut your prices, of course, and take business from your competitors. A cartel agreement provides this certainty, by definition: It is when a bunch of your competitors, and you, get together and announce to each other that you will fix prices. However, you don't know if anybody else will also stick to this agreement, so perhaps it is not so certain. So, suppose you don't know whether your competitors will keep their prices high? Again, you will reduce yours, so that you don't lose business to them in case they cut prices too.

So, either you can be certain they will stick to the cartel agreement, in which case you don't. Or you can't be certain they will stick to it, in which case you don't. Either way it simply is not rational for you to abide by the cartel agreement.

Secondly, though, the new, higher price will attract new suppliers to compete with the established suppliers in that industry. The cartel would then be forced to compete with these new suppliers, and could only do that by reducing prices.

However, moving away from a free-market, a cartel can be made more stable if these instabilities are removed. What the cartel needs is a means to ensure that members will abide by the agreement to keep prices high - that means a method to enforce the cartel agreement. But what is also needed is a way to stop new competitors selling at less than the cartel price.

Unions have accomplished both these things. Cartel agreements are strengthened by unions threatening to withhold benefits or legal support or protection, etc, for members that cross picket lines. They also support legislation preventing employers from hiring "scabs," or even to force workers in a particular workplace to join a particular union. In fact, many unions workers are also professional workers, meaning that workers in that industry must be licensed, and the licensing authorities are usually staffed by members of that industry, probably unionised.

However, one of the most effective ways of enforcing the cartel agreement is for the government to simply enforce the cartel price, and make it illegal for members of the cartel to sell at less than the monopoly price. This is precisely what the minimum wage does.

Milton and Rose Friedman wrote, in Free to Choose, that

These laws are defended as a way to help-low income people. In fact, they hurt low-income people. The source of pressure for them is demonstrated by the people who testify before Congress in favour of a higher minimum wage. They are not representatives of the poor people. They are mostly representatives of organized labour, of the AFL-CIO and other labour organisations. No member of their unions works for a wage anywhere close for the legal minimum. Despite all the rhetoric about helping the poor, they favour an ever higher minimum wage as a way to protect the members of their unions from competition.

The minimum wage is a means of ripping off employers by enforcing a cartel agreement.

Thursday, May 08, 2008


Home secretary, Jacqui Smith, decided, yesterday, that cannabis should be reclassified from a class C to a class B drug.

Smith justified her decision by highlighting the strength of "skunk" strains of herbal cannabis now widely available.

Last week, Gordon Brown warned of the "more lethal quality" of much of the cannabis now available, described it as a gateway drug, and said that the reclassification was needed to "send a message to young people that it was unacceptable".

The home secretary told the Commons today: "Reclassification reflects the fact that skunk, a much stronger type of the drug, now dominates the cannabis market."

She said it accounted for 81% of cannabis available on the streets compared to just 30% in 2002.

The average age of first use is 13 years old and young people may binge on skunk in the same way as alcohol, trying to achieve the maximum effect

This story comes hot on the heels of another, however, that smoking marijuana might help prevent cancer. This does not come from someone with a great history of supporting cannabis use, but from UCLA medical school professor Donald Tashkin, who

was the lead investigator on studies dating back to the 1970s that identified the components in marijuana smoke that are toxic. It was Tashkin et al who published photomicrographs showing that marijuana smoke damages cells lining the upper airways. It was the Tashkin lab reporting that benzpyrene -a component of tobacco smoke that plays a role in most lung cancers- is especially prevalent in marijuana smoke. It was Tashkin's data documenting that marijuana smokers are more likely than non-smokers to cough, wheeze, and produce sputum.


Tashkin's team interviewed 1,212 cancer patients from the Los Angeles County Cancer Surveillance program, matched for age, gender, and neighborhood with 1,040 cancer-free controls. Marijuana use was measured in "joint years" (number of years smoked times number of joints per day). It turned out that increased marijuana use did not result in higher rates of lung and pharyngeal cancer (whereas tobacco smokers were at greater risk the more they smoked). Tobacco smokers who also smoked marijuana were at slightly lower risk of getting lung cancer than tobacco-only smokers.


As to the highly promising implication of his own study -that something in marijuana stops damaged cells from becoming malignant- Tashkin noted that an anti-proliferative effect of THC has been observed in cell-culture systems and animal models of brain, breast, prostate, and lung cancer. THC has been shown to promote known apoptosis (damaged cells die instead of reproducing) and to counter angiogenesis (the process by which blood vessels are formed -a requirement of tumor growth). Other antioxidants in cannabis may also be involved in countering malignancy, said Tashkin.

So, it is nice to know that our own Home Secretary may well be putting us more at risk of cancer than we need otherwise be! So why the fear of "skunk" that has lead to the reclassification? There have been claims that it can be linked to schizophrenia amongst regular users. If use has been increasing amongst our nation's youth, and this link with mental illness is real, then this may indeed be a problem. However, returning to the Guardian article,

The ACMD chair, Professor Sir Michael Rawlins, refused to criticise the home secretary, saying that the ACMD's recommendations were based entirely on harmfulness - but that the government had the right to consider other factors.

He said: "We don't take into account 'the message', we don't take into account policing priorities; we are obliged by law only to take into account the harmfulness.

"The government may want to take into account other matters. That's their right; they are the government. We are only an advisory committee and from time to time governments, for their own reasons, may wish to ignore the advice."


His council heard evidence that the potency of homegrown herbal cannabis tended to be two and a half times that of imported resin. But they said users now often moderated their intake.

They were also told that the incidence of new schizophrenia cases reported to GPs had gone down, not up, between 1998 and 2005, indicating a weak link between increased potency and use in the past two decades and mental health problems.

Since cannabis was downgraded in 2004 the proportion of young people using it has fallen each year from 25.3% in 2003-04 to 20.9% now. Among those aged 16 to 59, the proportion over the same period has fallen from 10.8% to 8.2%, according to the British Crime Survey.

Libertarians believe that people should be free to do as they choose with their own person and property as they want. That means free to put it at risk if they think doing so is worth the benefits. Here we have two opinions - and it is common in serious medical matters for patients to seek a second opinion. But in this case, as in so many others, the government has decided to try to prevent people from following the second opinion and is trying to force you to accept its preferred opinion. It has decided that it, and not you, should be the one that decides when or when not it may be worth putting your body at risk. It is, thereby seizing control of your body. And yet so many people seem to find this fact so less nauseating than I.

How sad.