2005-07-29

Zero Unemployment Economic System



Introduction

There are two forces at work in our world today - the forces of individuality and the forces of community. The practice of economics and economic policy can quite easily fit into both categories depending upon one's political view; the Laissez-Faire free market policies as typified presently by the United States of America and the theories of the Austrian school of economic thinking; and the Communist or Socialist beliefs as typified by the Soviet Union and the theories of Karl Marx.

It is my assertion that neither system will work when applied to their logical conclusions. The Free market economy has caused so much poverty and inequality in its midst, while the Communist system has proven no match for the flexibility and productivity that is an integral part of the Capitalist system.

The solution lies in the middle of the two. But rather than seeing the two forces as opposites, we must see both as complementary - they need one another to survive. This is not based on some idea that "Good" and "Evil" must co-exist and somehow learn to live in balance.

When it comes to understanding how a market economy works, I prefer to view capitalism as though it were fire. Fire is extremely useful, but it is dangerous if it is out of control, and next to useless if it goes out. Fire can only be useful when it is contained and controlled, and allowed to work freely within its own limits. Fire cannot be used if one does not recognise its behaviour, nor its danger. Capitalism is like fire. Left to its own devices it runs out of control because its very nature is chaotic and consuming. But fire can't be useful if you are continually dousing it with water. Communism and Socialism, for all their good points, have in practice acted to douse the fire and have not benefited from it.

The purpose of this paper is to present an alternative Labour market model that combines the principles of Socialism with the natural workings of Capitalism. Hard-line proponents of one or the other belief will find this paper unappealing. I believe that if this model were applied on a national or even international stage, it will inevitably lead to full employment, higher economic growth rates, an eradication of poverty and a severe reduction in crime and warfare. Not many Economic theories or models (with the exception of extreme Marxism and Communism) would declare that about themselves, so it is with much trepidation that this paper be produced.

To introduce myself, my name is Neil Cameron. I live in Waratah in the city of Newcastle, New South Wales, Australia. For the past 8 years (1995-2003) I have studied economic theory at an amateur level. This alternative labour market model was developed in 1997-1998. Because of its natural political and economic consequences, combined with my lack of formal training in the field of economics, I felt that it could not possibly be right. Since then I have developed other theories and ideas on different aspects of economic policy. Some ideas I discarded as I learnt more about this subject. Fortunately (or maybe unfortunately), the original labour model could not be disproved by my own knowledge or skills. I am writing this paper to explain the simple details of this model, as well as potential problems with it, in order for it to be published, disseminated and critiqued amongst academics and experts.


The function of the Labour Market as a Market

It seems strange to describe the Labour Market as a Market - after all, doesn't it describe itself properly initially? The reason why I have pointed this out is that many who try to solve Labour Market problems (notably unemployment and low wages) have promoted solutions that seem to ignore the fact that it functions as a market.

All markets work on the basis of supply and demand. When demand is high and supply is low, the price for that commodity increases. When demand is low and supply is high, the price for that commodity decreases. The exact same principle works in the Labour Market. Each human being, sadly, has a commodity called labour, and they can sell their labour to those who wish to purchase it (their employers). Moreover, the market rewards people who are skilled in areas in which there is high demand and short supply with higher wages. The same principle applies to those who have generic or universal skills that are easily procured by the marketplace - their labour costs less.

In most other areas of the economy, the market functions quite efficiently this way and with a minimum of complaint. The Labour Market, however, is different because of ideas like equality and fairness make market-based operations difficult for both suppliers and buyers of labour. This is because human beings are different to all other commodities - our society views people with an infinitely higher regard than, say, petrol or newspapers. This is the view that people are valuable and the economy, supposedly, exists to benefit both individuals and communities. This is the idea espoused by Marx and modern-day Socialists, who argue that social concerns must co-exist alongside economic concerns. Marx and other proponents of Socialism have pointed out that poverty and low wages are linked, and that steps must be made to ensure that the poorer people of society share in the benefits that a growing economy has.

The problem with many of the solutions proposed by those from this position is that they ignore the basic function of the marketplace. Since the Labour Market is a market, these solutions have not worked.

The first flawed solution was to ensure that a law exists to determine what the minimum wage should be. Most Western countries have this law because of the influence of politicians and lobby groups sympathetic to Socialism. Although the law exists to make things fair for workers, it circumvents the normal operation of the marketplace by arbitrarily setting a minimum price for a particular commodity. If buyers of labour (employers) feel that they cannot afford to pay this minimum price, then they are not compelled to buy at all. The result is that an oversupply of labour exists, but laws prevent buyers from determining the price necessary to use up this labour. What this inevitably leads to is unemployment.

Evidence for this can be found in a present-day comparison of the Labour markets of the United States with those in Western Europe. Western Europe, with higher minimum wage laws, has a much higher level of unemployment and a much higher proportion of long-term unemployed when compared to the USA. Moreover, the last 10 years have shown that the USA is capable of lower unemployment during periods of economic growth than Western Europe.

The second flawed solution was to ensure that those who were unemployed received a level of Government benefits to ensure that they were kept out of abject poverty. Again, this idea was proposed by those who have sympathies with Socialism. Unfortunately, this compounded the problem outlined in the first flawed solution by creating a competing situation to wage-earning. By being on unemployment benefits, unemployed people are given a choice of earning money by doing nothing or earning more money by working.

While I am not against the idea of unemployment benefits per se, their existence in an economy with high levels of unemployment ensures that a large proportion of the workforce are given incentives to not work. While each individual is different, it has caused long term welfare dependency amongst many people with a lower socio-economic status.

So while these two solutions were created to help the lower wage earner, they have actually acted to make it worse for them by ignoring the basic functions of the market. If I were to use my "fire" analogy from the introduction, these solutions ended up dousing the fire rather than controlling it.

Given that these solutions do not work, perhaps we should abandon them and follow the opposite direction? This would involve a reduction in the minimum wage level (and maybe even its eradication) and a reduction in unemployment benefits. Sadly, these solutions will not work either.


The Market is always unfair

The market places value upon a commodity because it finds that commodity useful. When it comes to the Labour Market, the same principle applies. Unfortunately this means that those who cannot produce the more valuable types of Labour are punished with low wages.

It is a myth propagated by proponents of Laissez-Faire style economics that people are paid more because they work harder and smarter than others. In terms of physical and mental effort, there are plenty of low-wage paying positions that are far worse than those endured by the modern entrepreneur or CEO. While this myth seeks to promote the idea that those who are rich deserve to be rich, it also promotes the idea that the poor are poor because they deserve to be poor.

While I believe that we cannot circumvent normal market behaviour, I do believe that people are equally valuable. It is important, therefore, to create a solution that takes into account both normal market behaviour and the needs of the poor in our society.

The market rewards those with certain skills and punishes those with other skills through the manipulation of wages. It has nothing to do with effort or intelligence or fairness. In this sense the Market is brutal and is inherently unfair. Perhaps we should dispense with the Market altogether?


The benefits of Capitalism

Perhaps the best way to examine the benefits of Capitalism is to examine the results of its alternative - Communism. It is now well over a decade since the collapse of the Soviet Union, and economic theory since then has followed a very strict free-market line. But was Communism really as bad as it has been portrayed?

Modern-day proponents of Communism point out that the inherently dictatorial structure of the Soviet Union ensured its downfall, and that a more democratic form of Communism can succeed if given a chance. This will not do.

The real problem with Communism is that it ignored the power and necessity of markets. After the revolution in 1917, Lenin himself had to resort to a market-based economy in the 1920s to provide the resources needed to eventually lead to collectivisation in the 1930s. With supply and demand determined by committees and politicians, the Soviet economy grew until it reached its peak in the 1970s. From that point on the economy stagnated, partly as a result of recalcitrant members of the Politburo, and partly because Communism as a practice had reached its limits.

In his book "Imperial and Soviet Russia" (1997, Macmillan London), David Christian, former lecturer in World History at Macquarie University, said this about the collapse of communism and the triumph of capitalism:

"There is no stable balance of planning and markets. Instead, there is a wide range of systems in which one of these two elements dominates the other. And looking back from the end of the twentieth century, it appears that systems in which the market dominates are best at sustained growth." (Pg 433)

Hearing Dr Christian myself while at Macquarie University in the late 1990s was quite informative. He himself studied in the Soviet Union and held Communist beliefs. While he has certainly abandoned Communism as an economic force capable of competing with capitalism, he nevertheless laments the fact that capitalism is unable to provide the Socialist outcomes that Communism attempted to provide. During one of his lectures, Christian pointed out that capitalism was able to be far more flexible and productive than Communism because the market was more efficient at punishing waste and inflexibility than a planned economy.

This is not to say that Christian supports capitalism. He admits that he has no alternative system that can compete, but that Socialist outcomes must come from another source, as yet undevised, that will re-assess the necessities of economic growth proposed by both Communism and capitalism.

Australian economist Clive Hamilton has helped to promote the idea that capitalism is flawed in that consumption and material goods are unable to provide satisfaction in most people. This is an interesting theory and one that I am eager to examine further. I have only discovered Hamilton's theories recently, so I must go on with this paper without him.

Nevertheless, higher levels of production have led to an increase in the availability of basic needs for people within mature market economies. While it is good to question the basis of satisfaction within capitalism (as Hamilton has done), the basic fact is that poor people who live in mature market economies have a higher standard of living than most people who live in third world countries. The example of countries like Japan and Korea need to be pointed out. Both nations had low standards of living by Western standards at the end of the Second World War, but the combination of industrialisation and the free market allowed both countries to progress to comparatively high levels today. Japan, in particular, has come a very long way since the devastation of 1945 - and this because they were able to harness the power of capitalism, despite its many faults.

One of the arguments put forward by free-market proponents is that free trade and globalisation will inevitably benefit poorer nations more than richer nations, and that the key to eradicating world poverty is to encourage stability in third world governments, while at the same time encouraging the rule of law within a free market framework. This argument does contain many flaws, but it is a powerful one, and must be pursued and fought for if only for the reason that it will bring these nations out of poverty.

No other theory of economics has yet to replace the practice of free-market capitalism in terms of promoting growth and riches. Communism is fatally flawed, yet we must not ignore Socialist outcomes when we consider the benefits of the free market. The fact is that while capitalism works marvels, it also has serious side-effects, namely the disparity of wealth and the fact that those with money have the most power in society. Since many believe in equality rather than monetocracy, something has to happen within capitalism to ensure that its terrible side-effects are reduced or even eliminated, while still accepting its substantial benefits. This can be achieved through government intervention.

The relationship between government and non-government markets

No economy exists outside the influence of government, not even the most Laissez-Faire of nations like the United States. Indeed, it is the workings of the Federal Reserve Bank and its Federal Open Market Committee (FOMC) that can act to inflate or deflate the economy accordingly. Since 1945, the world economy has stood upon the pillars of Keynsian Fiscal Policy and, later, Monetary policy. Both have been very useful in controlling inflation and promoting long-term growth, but both have never been successful in achieving full employment over a long period. Without government intervention in these areas, national economies would be severely restricted.

Governments, from the 19th century onwards, also realised that the free market is incapable of providing certain services that a nation needs. The free market cannot provide an effective standing Army, universal health care, universal free eduction or an effective way of maintaining law and order. As a result, many nations, under Socialist principles, provided these services for the good of the community, and raised revenue from taxes to pay for them.

Since the 1970s and the influence of economists like Milton Friedman and Friedrich Von Hayek, many market-leaning politicians have been arguing that governments need to be "smaller" to allow the free market to work more efficiently. Thus, for these proponents, taxation and government services are "evils" that need to be eradicated in the name of liberty. The result of this has been a slew of economic reform in nations like the United States (under Ronald Reagan), the United Kingdom (under Margaret Thatcher) and, to a lesser extent, Australia (under Bob Hawke and Paul Keating). This has become so accepted today that it is almost a mantra to those who are its proponents - privatisation, deregulation and less government spending.

This is not to say that these things have not worked. Deregulation and Privatisation have increased efficiency and decreased waste in many industries because they have been exposed to market-driven activities. The result has been cheaper goods and services and an increase in the buying power of people who live and work in these economies.

The assumption, however, is that government will always be wasteful and inflexible while the market will always be efficient and dynamic. Anyone who has examined in detail the wasteful activities of companies like Enron in America or HIH in Australia will realise that this is not the case. Nevertheless, the effects of Privatisation and Deregulation has generally led to higher economic growth.

The fact still remains, though, that the market cannot provide services that the whole community needs equally. Economic resources have to be collected from tax and distributed to schools, hospitals, fire departments, the armed forces and to police officers. Even if some level of privatisation occurs within these areas, the "user pays" system cannot work properly, otherwise only the rich will be able to afford the benefits that we all enjoy now. Moreover, the social costs of anarchy, low educational levels and bad health will inevitably turn into financial costs that will be borne by the economy as a whole. It is far more cost-efficient to ensure that these services do remain equally available to all people, despite the inequality of taxation required to pay for them.

Governments do have a place within a market economy. Government cannot replace the market, but neither can the market survive without government. Government cannot have its direct (fiscal) effect or indirect (monetary) effect without dealing with money from the marketplace. Taxation to pay for government services is therefore a given. People may not like it, but without tax there will be no government services they can benefit from.

Since the government can provide essential services, they can also provide the basis for wage equality. Not through ineffective wage laws, but through a direct intervention in the labour market.


The Full Employment solution: The Universal Wage Subsidy

You may have realised by now that everything I have written above has been building up to something. Originally I called this idea "Free Market Income Redistributing Economics", or FMIRE for short. Yes, a terrible name, and opponents of this idea would have had a field day in reinterpreting the "F" part of the abbreviation.

I have avoided using the terms "The General Theory of...", mainly because I do not wish to seem arrogant enough to compare myself with Maynard Keynes, but also because my idea is not a "theory" per se - it is merely an "engineering" principle based upon a theory. This idea may be all mine (it was certainly thought up by me, although others may have discovered it as well), but it is not the discovery of a new "theory". It is simply based upon what has been discovered before.

The idea of a wage subsidy has been around for a long time, and has been abandoned mainly because it distorts the normal function of the marketplace. Whether the subsidy is for goods, services or labour costs, it has tended to work against market behaviour. I am not, however, proposing what has gone before, I am proposing something new - a universal wage subsidy, that is, a minimum wage paid by the government to every single employee.

Critics of this idea will continue to argue that it still distorts the marketplace. This may be true, but we must also remember that there is something that works exactly the same way as a wage subsidy except that it takes money away from wage earners - this thing is called income tax. It is essentially the same principle, except that tax is taken away as a proportion of a person's income, while a subsidy is a flat payment to a person's income.

Many critics would still argue that taxation is a distorting factor as well, but these experts would also adhere to a more libertarian view of government and work towards a Laissez-Faire economic system. Given that taxation is expected in a modern functioning economy and that taxation is not seen as a distortion of the marketplace because its effects are universal, then it can also be argued that a universal wage subsidy (whereby all working people receive a flat payment from the government) will have no effect either.

The germ of this idea occurred around Christmas 1996 - or at least as a result of it. During that time I was working as a storeman and packer in between my first and second years at University. I worked for a labour hire company - they were my employers, but I worked for their customers. Every week I would get my time sheet and fax it to my employers, who would then pay me my wage. They would also bill the company I worked for for my labour, but they would naturally charge more in order to make a profit - the difference between the wage they paid me and the money they received from the company I was working for.

I applied this idea to the national stage. What if the government acted as a gigantic labour hire organisation? Moreover, what would happen if a person could only work for the government? This was not communism, but it was a situation in which the government would be paid the person's wages, and then the government would pay the employee. The difference would be that they could actually pay more or less according to how much money the employee made. If their wage was high, then they would be paid less. If their wage was low, then they would be paid more.

As I pondered this idea, I originally believed that it could probably work in getting the long-term unemployed a job. After a qualifying period (say 18 months of unemployment), the unemployed person could then apply for jobs at a lower than minimum wage rate (and thus be cheaper and more likely to be hired) but still get a decent wage granted to them by the government. Over time, the government would pay them less and less, which would happen alongside their growing employability (those who work longer are more likely to be employed when they change jobs than those who have been unemployed a long time).

It was then I hit on the idea that a universal income redistribution could not only increase the wages of the poorer sections of society, but could actually eliminate unemployment altogether and increase the participation rate. This would occur if the minimum wage laws were scrapped and employers were able to hire people for whatever price they wanted to charge, even ridiculously low amounts like one dollar per hour. But rather than hurting these low wage earners, because income is redistributed they end up getting a lot more than they would have had they only been paid the low amount in the first place.

So I set about thinking - how should wages be redistributed? The answer was deceptively simple.

Because each working person would be employed by the government (since the government is a labour hire organisation), all their wages would be paid by the company they work for to the government. The government tallies up their wages and then pays them 50% of what they earned. If they earned $200 that week, then the government pays them $100; if they earned $1000 that week, the government pays them $500. So now the government has exactly half of their wages. What does it do with them? It then divides all the money it has gained by how many people are employed, and gives that basic amount to everyone. Perhaps the best way to explain it is to use some examples.

Let's say that our economy consists of three people who work 40 hours per week. Jane, who earns $350 per week, Peter, who earns $1200 per week, and Tom, who earns $700 per week. The government then takes half their wages. Jane is given $175, Peter is given $600 and Tom is given $350. The government now has $1125. It divides it by three - $375 - and then gives that amount to each of the three. Jane now gets $550 for her week's work (175+375), Peter is given $975 (600+375) and Tom is given $725 (350+375).

Notice that Peter is still earning the most, but he has also lost the most. Jane still earns the least but she has gained the most. Tom's wage has only gone up by $50 because he is earning slightly less than the average of the three employees. This model still allows the market to reward those who have higher earning capacity, but it gives a very generous "floor" which the lowest wage earners can enjoy. Market operations still occur - the most qualified is paid the most while the least qualified is paid the least - but through the intervention of an income redistributing tax we can ensure that the lowest paid workers are given a decent wage, while still allowing higher wage earners the benefits of being richer.

As I thought about this concept the other day I realised two things about it - firstly, by creating a generous absolute minimum wage, won't it naturally create a corresponding maximum wage? And secondly, won't this concept discriminate against higher wage earners and act as a disincentive for them?

There is no doubt that such a major change in incomes will lead to radical changes in the Labour Market. The fact is, however, that wages will be set by employers - they can choose how much or how little they can pay their employees. While this idea will create a "floor" for a minimum wage, the price will not be paid by employers - but by all employees. So to mangle the analogy a bit, we can assume that while the floor is solid, there is no ceiling - higher wage earners will always earn more, but they will earn less than what they would have before.

As far as this idea being a disincentive for earning higher wages, what I can say is that our current system acts as a disincentive for lower wage earners. While higher wage earners will earn less for their work, they will be earning more overall anyway. The only way that high wage earners would be discriminated against would be if there was some reversal policy present in the concept that would end up paying lower wage earners more than higher wage earners. That policy would be ludicrous. I do not believe that in order for the poor to become rich then the rich should become poor. I do think that poverty can be determined objectively, and that all steps should be made to ensure that people are taken out of poverty. If this happens then I do not care how much more money the rich have.

A summary of the system

Just in case my prose was too difficult, let me just summarise the The Zero Unemployment Economic System.

  • Minimum wages are scrapped. Employers can pay employees as little or as much as they want.
  • All employees work for a single government run labour-hire organisation.
  • When employers employ people, they are actually employing the services of the labour hire organisation.
  • Employers pay the employee's nominated wage to the government.
  • The government then pays 50% of that wage to the employee.1
  • The government then tallies up how much money it has collected and then divides it by how many contributing employees it has.
  • The government then pays the employee that fixed amount of money.
  • All people who earn more than the average wage will have a net loss of income.
  • All people who earn less than the average wage will have a net increase in income.
  • In all cases, no wage earner will earn less than the fixed amount of money the government has determined.


Why will this system lead to Full Employment?

If this system is applied within a modern industrialised economy, the result will inevitably be full employment. Firstly, because wage rates are so low, an unemployed person can easily negotiate wages with a potential employer, who can employ them accordingly. Many of the financial constraints that employers have in employing people can be met by the government (such as sick leave, holidays and so on), thus making it even cheaper for people to be hired.

Secondly, it is to be assumed that since everybody will have the opportunity to work, that unemployment benefits would cease. With no disincentive to work, all unemployed people can both find work, and have no financial reason to avoid it.

It is important to realise that while Full employment is possible under this system, it will not inevitably lead to the "job for life" scenario enjoyed by previous generations. Permanent long-term employment by one employer may not be achievable, but at least permanent employment by multiple employers can be. In this sense, wages will always be available, even if employment by one single employer may not.

It is also important to realise that, because the lowest wage level is so high, people will opt to work rather than not to work. In countries with low wages, there is still a significant problem with people who are still in poverty while working - which is in itself a disincentive to work. If this system is followed, then a person will be compelled to work because of the great incentive to do so.

The knock-on effects of this system

As you may have already realised, the knock-on effects of this system are considerable. If it can be proven to work, then not only will it ensure Full employment and the eradication of poverty, but it will also make major adjustments to how an economy and a society will function. I have made short comments about important areas below

1. The Participation Rate

If an economy has Full employment then there will be an increased demand for labour. This demand will be met, in part, by a return to the workforce by people who are currently out of it. In Australia, the Participation rate hovers between 60-65%. This means that approximately one third of people of a working age are not actively working or seeking work. There are a variety of reasons why this is the case, and these reasons have been adequately explained by experts in that field.

It can be assumed that if there is Full employment and an increased demand for Labour, then people who make up this non-working proportion of an economy will opt to work. I am not an expert in how participation rates work, but my belief is that it would exceed 70% under this system.

2. Wage increases

If the economy has Full employment then there will naturally be a disparity between supply and demand. With supply drying up, the demand for Labour will ensure that labour costs will increase. This augers well for the system because the more money people are getting, the more money is gained by the poorer elements of society through income redistribution. The advantage of this is that, as labour prices increase, so too does the wages of everyone in the economy.

3. Economic growth

Full employment coupled with a high participation rate and a market capable of setting its own price for wages will ensure that there will be significant increase in economic growth. This in itself is not necessarily a good thing (as per Clive Hamilton's thinking), but it does ensure that the benefits of economic growth are distributed more equally

4. Part-time work

Because this system is flexible, people can opt to work as much or as little as they wish. It is obvious that people who work part-time should be paid less, even by the government. If the redistribution rate is set at, say, a 35 hour week, then people who work only 20 hours only receive 57.1% of the money they would have been given to them by the government. This system should encourage part-time work for all people who wish to sacrifice wages for time.

5. Retired people

Retired people will also benefit from this system. Naturally with zero unemployment even the labour of retired people would be in demand. This will be very useful if the economy has a large amount of retired persons due to low birth rates. It will ensure that retired people can work as hard as they wish, and still receive the benefits of their pension or superannuation - they will not have to rely solely on the younger generation to provide enough resources to support them.

6. The "Sea change" principle

"Sea change" was a popular Television show on Australian television about a woman who opts to move to the country for a better lifestyle, yet sacrifices her wage to do so. Since full employment will ensure jobs, people may feel less constrained about moving to a country location. Employers and businesses may even be forced to set up in country areas to take advantage of the lower wages people will be prepared to work for.

What this will lead to is a probable movement away from urban and suburban areas into less populated areas. In Australia we might see the major cities losing people to the coast and inland towns as they seek a better lifestyle. There are naturally disadvantages to this, but I have to admit that it does sound quite compelling.

7. Flexibility and globalisation

Because wages will be determined by the market, an economy will have a greater flexibility in supporting a wider range of businesses and industries. Labour intensive industries, especially, will find this system a delight to operate in. Moreover, global economic shocks such as major recessions or wars will allow such an economy to be flexible enough to change its output accordingly. There will no doubt be negative effects, but the economy should "bounce back" relatively quickly because of the cheap labour available.

8. Taxation and government spending

Naturally I have presented this proposal as an untested model - one which did not include such things as taxation for government spending. The redistribution tax can be modified and increased to take into account income tax. In fact, it may even make it much simpler. I've given an arbitrary figure of 50% as redistribution. Let's increase that to say, 70% of a person's income. The extra 20% is then taken away to be used on government spending. In this sense. everybody is paying exactly the same amount of tax in dollar terms. This may not seem fair, but if such a tax would lead to unacceptable poverty then, rather than set up rules and investigations into eligibility and means-testing, the entire tax rate is upped again to compensate. When this happens, the poorer members of the workforce will be better off.

9. Environmental concerns

I believe that the world needs to drastically cut back on CO2 emissions or face the long-term environmental damage it will cause. I believe that all coal-fired power stations (as well as nuclear and gas) be replaced by wind turbines and solar panels on residential roofs. I also believe that cars should be powered by hydrogen and that alternative mass transit systems (such as subways, railways and bicycle ways) be adopted.

Unfortunately such a change in energy supply would cause a huge jump in electricity cost. Coal and Oil are far cheaper to use than the wind and the sun. What we need is an economic system that can absorb the costs of moving over to Green Power.

This system will ensure not only full employment, but much higher levels of economic growth. The negative impact of spending billions of dollars on Green Power can be absorbed by an economy that is running at the highest level.

10. Collective and Enterprise Bargaining

It remains to be seen whether collective and enterprise bargaining will be affected by this system. Naturally with no minimum wage, individuals can negotiate with prospective employers quite happily. But what about wage awards that have been worked out between Unions and Government and employers?

My initial reaction to this idea was to simply "scrap" the collective bargaining system, but that does not have to be the case. Unions and employers can still negotiate over wages, but with one interesting point - if workers are retrenched by a company then they will still be able to find work - maybe not at their previous wage, but they will never be unemployed.

The international effects of this system

Assuming that this system will work, it is now a good point to discuss its international implications. Specifically, how do poor third world nations benefit from both the system itself and those countries using it?

It is likely that this system will encourage an international currency and monetary unions between rich and poor nations alike. A poor nation and a rich nation - the former wishing to join with the latter in a monetary union - will negotiate over the specifics of the deal. In terms of finances, the rich nation has little to gain. But when both nations are joined into a monetary union, the combined economy will out-perform the two nations if they remained separate.

Care must be taken to ensure that the same rules and regulations apply to both nations, so that businesses and investors in the poor nation will be covered by the legal system of the rich nation. Once this has been done, the rich nation freezes its contribution rate to its own people, and gives the balance over to the poorer nation. Eventually, after many years, the poorer nation will have gained enough resources to have the same standard of living, and the contribution rate for both will go up together, as one unified economy.

On a related note, countries that run this system will be able to assimilate migrants and refugees quite easily into their economies. In fact, they might even be welcome, such would the demand for labour be. I have often thought of my own country, Australia, opening its borders to whoever wants to come here simply because more labour is needed.

How this system might be applied in the European Union and its expansion

Of all the economies in the world that would adopt this system, I would predict that the European Union take it up initially. Why? Because the EU is already a monetary union and is committed to Social Market economics, as opposed to the Laissez-Faire model of the USA.

There is, however, a great disparity in wages and conditions in the EU. Germany has some of the highest wages, while Greece and Spain have some of the lowest. If this system were applied to the EU (specifically the Euro zone and not in non-Euro EU member countries) then it needs to be done carefully.

As with my previous point about the international effect of the system, we must assume that individual nations might protest at this system because of the negative effect it would have. Again, the solution is the same - the contribution rate in rich countries is frozen and the balance given to poorer countries. As the poorer nations get richer, eventually the contribution rate will all go up together. Such a move may require some form of work permit to prevent poorer people from entering rich nations and getting jobs, but I will leave that one to the experts.


Potential problems with the system

While I have a great regard for this idea, I nevertheless concede that it needs to be tweaked and modified to prevent corruption. As a Calvinist, I believe in the theology of "Total Depravity" - that is, the belief that all mankind is capable of evil and is guilty of sin. When I examine the idea presented in this paper, I realise that steps need to be taken to ensure that the system is not abused. It therefore needs to be policed, and this will be an additional cost.

The first problem with this system is that at the higher end of the wage spectrum, we will have people who will attempt to gain monetary rewards without paying enough of the redistribution. In other words, they will attempt to hide their real income. I have no solution to this at present except that rich people should probably be subject to random investigations to ensure that this does not happen.

The second problem with this system is that at lower end of the wage system we will have people who will attempt to do as little work as possible to gain the same amount of money. The only solution to this that I can think of presently is for employers to gain some sort of permission from the government to employ people below a certain wage, and for investigations of businesses to ensure that wage earners are actually working.

The third problem that I can foresee is relationships with other nations who do not have this system running. If this system can be proven to work, then I predict that the United States of America be the last nation on earth to adopt it. Yet I can see that their relationship with trading partners who use this system will be strained, mainly because they will see wage redistribution as some form of subsidy that prevents their own people from competing equally. If trade embargoes ensue because of this system, then we must remember that full employment will still be a reality, and that industries will start up to take up the slack caused by this embargo.

The fourth problem is that the very rich will find it difficult to continue living in a country with this system running. It is likely that they will flee to live in countries which offer better conditions to rich people. Despite what some left-wing commentators might think, this is not a good thing. The only solution I can see for this is that the very rich be allowed some sort of leeway - say any money earned over six times the average wage will be taxed at a lower level, or maybe even not taxed at all.

The fifth problem is that while a lot of money is spent on wages, a great bulk of money is owned by businesses and corporations and will not be affected by the redistribution. Since it is wages, not company profits, that are redistributed, we can assume that this will be a problem. One solution is to raise business tax. Another solution, which I believe is better, is that some of the money that the government takes in tax is used to invest in the marketplace. This investment is then used as an additional means of revenue to income and sales tax. The idea here is that the people (as represented by the government) are investing in the market, and will all benefit over the long term as more and more money from dividends and interest is paid back to them.

No Conclusion

As you are no doubt aware, this work is only the tip of the iceberg and I do not have the skills nor the time to develop it in great detail. It may contain such basic flaws as to make it unworkable, in which case I appreciate any comments or thoughts. While I do subscribe to certain "left-wing" beliefs I am also rather conservative on others, so please do not assume that I fit into a certain political "box".

From my own experience and my own understanding of how economics works, I have yet to find the "fatal flaw" which will disprove this idea. I think it might revolutionise the entire world if it is applied judiciously, and make the world a far better place as a result.


From the Osostrian School Department



© 2005 Neil McKenzie Cameron, http://one-salient-oversight.blogspot.com/
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8 comments:

CraigS said...

Only skimmed through it. Good on you for having a newish idea.

I can see at least one major flaw -where is the incentive for low income earners, currently being paid less than the floor, to increase their wages? And what is the incentive for their employers to pay them more?

For example, the floor wage is $400/week. John the pizza cutter is currently paid $200/week (which goes to the government under your system). Where is the incentive for john to upgrade to pizza cutter grade 2, which pays $300/week? He will still be paid just $400/week.

Even worse. Jill the pizza cutter comes along and says she will do the work for $100/week. Thats no problem, as she will still get $400/week. John likes his job and says "You can pay me $50/week". Jill says "I'll work for $1/week!" and so on.

There is no incentive for them to negotiate a higher wage. In fact, there is a great incentive for them to negotiate a lower wage as it doesn't affect their pay at all.

One Salient Oversight said...

Craig,

Assume everyone gets $400 per week from the government...

John the Pizza Cutter Grade 1 earns $200 per week. $100 goes to the government, while he keeps $100. He then gets the $400 from the government. His total weekly wage is thus $500 per week.

If John is then upgraded to pizza cutter Grade 2, he earns $300 per week. $150 goes to the government, while he keeps $150. He then gets $400 from the government. His total weekly wage is thus $550 per week.

Let's say Jill comes along and is willing to do the work for $100 per week. $50 goes to the government and she keeps $50. She gets $400 from the government. Her total weekly wage is $450 per week.

John responds by negotiating downwards to $50 per week. That will result in his total weekly wage of $425 per week.

Jill says she'll work for $1 per week. Her weekly wage will be $400.50 per week.

There is certainly still incentive for higher wages - anyone who is offered more money for a position will be paid more. Although the 50% redistribution "punishes" wage earners, it does not discriminate - everyone's wage is affected by the 50% distribution. It's just that the below-average wage earners get more in the end, and higher than average wage earners get less in the end.

There's other things to take into account. John may be a very good pizza cutter while Jill is not. The pizza shop owner has to work out whether it would be better to pay more and get a quality cutter or pay less and have someone slow - is there any difference in the profit margin?

Moreover, the low wage earners could quite easily prefer a style of work that gives them better conditions for less wages.

For example, Jill has the choice of working as a Pizza cutter at $1 per week, or as cleaner for $10 per week. The cleaning job is yucky and dirty and the boss is a tyrant, while the pizza job is simple, the boss is friendly and she gets to eat leftover pizza. She thus prefers working for the Pizza place.

So unless the cleaning company gets a boss who is nicer and pays people a better wage, Jill will choose a lower-paying job. the result of this will be an adjustment in the wages of cleaners due to a scarcity of labour.

One Salient Oversight said...

A bit more on fictional figures:

If the government is paying $400 to every wage earner per week, then here are some basic figures:

$100 wages = $450 per week total
$200 = $500
$300 = $550
$400 = $600
$500 = $650
$600 = $700
$700 = $750
$800 = $800
$900 = $850
$1000 = $900
$1600 = $1200
$2000 = $1400

roomdog said...

Your criticisms of Free Market economy is nothing but polemic based hyperbole. The seperation of rich and poor has been decreased under Free Markets. A simple survey of history will show this to be reality. All economic systems prior to the free market put the vast majority of people in abject poverty with a very few ruling over the masses.

My biggest complaint about socialism is the same. There was a tiny elite ruling class and an overwhelming population of poor. Every system is plagued with abuse. Giving increased power to gov't is dangerous, if for no other reason, because it is given sanction to enforce law at the point of a gun.

One Salient Oversight said...

Roomdog has obviously not read the article - if he had he would discover that I offer a balanced critique of both the free market and historic socialist practices.

I am not proposing a system that eliminates the free market. The fact that I have accepted the power of the free market means I am more centrist than leftist.

But if a person from the right sees a certist proposal, they will criticise it as being too leftist... as per Roomdog.

TZ said...

Hi.

I followed the link you posted on the oz ideas wiki.

Well, you certainly have done some significant homework on this subject and I commend you for it.

I, like you, believe that the solution to many of the current economic issues are in the realm of the re-distribution of wealth.

I am also of a similar opinion about the depravity of our nature, and more specifically would draw your attention to the famous quote of Lord Acton - that ...
"Power tends to corrupt, and absolute power corrupts absolutely"

I think that maybe - for the oz ideas wiki anyway, that you might need to throw in a few "teasers" rather than just quoting the link to your blog. It is hard to be concise I know, but try - for the sake of the quick browser (who will more likely pass over your link, or be discouraged by the length of your artiv=cle).

Oh, this is my bane - that its so hard to explain fundamental and crucially important ideas without much qualification and justification!

I have a few "constructive" contributions to make and I will post them once I have given your proposals more thought.

Keep up the good work my friend (& perhaps my brother?)

TZ said...

Even though I love the fairer distribution of money in this proposal, the total amount of the money available is still tied to - and restricted by - the labour content of production.

Which does not address the fact that there will always be a shortage of aggregate purchasing power compared to the aggregate prices of the goods available.

This will always be the case until we realize that Marx was wrong, and that Labout does NOT produce all wealth.

In order for all citizens to aquire all the available products, there has to be an additional source of purchasing power which is not only and always tied to labour (which is only part of the cost of production).

Nicky T said...

Read through it. I have a BA in Economics. I am pleased that someone CARES enough to THINK about a moderate solution to the opposing forces of socialism and capitalism.

I liked that you have already addressed several counterarguments. One of my favorite past times is exploring potential pitfalls.

Concerns:

One, "corporate entities" could feasibly be paid an $X amount to regulate the 50% distribution as the company sees fit thereby regulating internal wage controls. They calculate wages and they know what real payment is going to be so they can floor as desired and pocket the rest.

Two, commission-based payrolls for salespeople. Performance based payment then redistribution could be a much huger penalty then just a couple of dollars. It creates a disincentive to produce more at higher levels aka diminishing returns.

Three, entrepreneur pay rates. Business owners who are actively providing jobs get a distribution (like salespeople) based on performance. If the business performs at a loss they OUGHT to be losing money, but then they will cut jobs. Will profit sharing still be off limits to the government? $1/week payments to numerous employees can suck the government teat increasing margins for the owner. Some businesses don't require more than unskilled labor; this seems like a dangerous subsidy. Business tax solutions means businesses that employ purely skilled labor have to be differentiated which incurs costs.

Fourth, along the same lines of government subsidy abuse is fiscal responsibility. Full employment means it becomes difficult to poach skilled workers (wage regulation). A smart skilled salary-seeker will only allow themselves to be employed by the highest paying companies in order to minimize on redistribution. Startup companies with business models that involve paying more for highly-skilled and less for low-skilled now have no weapon against larger organizations with better averages having been in the industry longer. Basically, it kills the entrepreneurial spirit and promotes bloating by larger organizations.

Fifth, considering government efficiency versus cost. I know that it is a generalization to assume that governance is an inefficient wreck, but it would be equal folly to assume they are a well-oiled machine. In any case, it will cost SOMETHING which means that the economic activity generated by said implementation must generate sufficient taxes to pay people in a government department. The issue, of course, becomes corruption within the system. While you proposed investigating some companies, who will be investigating the auditors that are bribed to let the companies slide?

These are questions that were raised in general from my head to yours. I fully support the idea of a moderated system and I think redistribution is a potential part of the process. At the very least abolishing minimum wage is a necessity. Paying "employment benefits" instead of "unemployment benefits" comes to mind.

Lately, questions about healthcare and unemployment are leading me toward "maximum employment" rather than "full employment" and similarly "maximum healthcare coverage" rather than "total healthcare coverage."

If there is anything social science should take from natural science it is that perfect systems are inherently imperfect and creating perfect models is great for making an estimate, but we're better off with reasonable expectations, proejctions, and policies. (namely, NOT seeking full employment. I callously suggest that the voluntarily unemployed be allowed to starve until they come to their senses)