Frozen Transparency

Suppose we have ten bars of soap and ten people. Everyone gets a bar, everyone’s happy. Then, for some reason, we have two more people show up, thus meaning we do not have enough bars for everyone, despite the fact that each person wants a bar of soap (demand has increased without increasing supply). There are only four ways this situation can be resolved:

1. Increase the cost of soap.
2. Increase the amount of time before a person gains access to soap (as time is a resource, this is really just increasing its cost).
3. Make more soap (which may or may not be an impossibility).
4. Mandate the cost of soap (in both money and time) along with the amount of soap, thereby creating a mandated shortage. Or rather, accept that you have a shortage, and that access to soap is essentially chosen by lottery.

It doesn’t matter what economic system you’re working under, those are your only four options. No amount of law or pandering can change this fact—it can only change which option is chosen by the market (by making some of them illegal). “Market”, in this case, being used in a very abstract sense, to account for theoretical communism.

So understand my cynicism when people—especially politicians—describe a “solution” to an “economic problem” but completely ignore this fact, if they don’t outright claim it false. I would love to see a legislature attempt to actually repeal the Law Of Supply And Demand. I would then like them to follow by repealing the Law Of Conservation Of Energy.

Soap really is a good product to talk about when discussing economics. It has a great many properties that are desirable to have: it’s universally known (except for a small group of people), it’s a product that people can easily think about making and wanting, and it’s a relatively universal want (again, aside from a small group of people). But this time, let’s talk about making soap. Not the actual process, mind, but the economics of it.

Let us say that in our fantastic little playground for economics, soap essentially comes in two grades: 2$ soap and 4$ soap. Let us also ignore the population and the price-setting, and just assume that this is what the prices would be based on the money of the population and so on. So now, let us consider the salaries of those who make the soap.

Suppose you own the factory that makes soap. You have an employee (Adam) that makes one bar of the 4$ soap each day. He’s good at it, and his work is high-quality (which is why it’s 4$). His value to you is 4$ a day, because that’s how much money you get because of him; his salary is therefore 4$ a day. (Tangent: yes, there are taxes and raw materials and profit to be considered here; I ignore them at my own peril for simplicity). He’s happy, and you’re happy—well, aside from the fact that his salary is so high. The employee knows the value of his work, so he demands his salary be that.

So you hear about this other employee (Bob), who happens to come from a different city. He says that he would be willing to work for only 2$ a day, instead of 4$, but he produces 4$ soap! So you hire him and fire Adam, which increases your profit margins. So Bob comes, and for a while, he’s making soap worth 4$ for only 2$ a day. His value to you is still 4$ a day, so you’re paying him below his value—but Bob, upon moving to a new city, talks to people. He learns that the actual value of his work is 4$ a day. So he finds another factory that will pay him 4$ a day, because that’s what the value of his work is. You’re short two employees (or you start paying him 4$ a day).

Instead, let’s say there’s a third employee (Charlie), who also comes from that same city, and makes the same claims. You hire him, but then you find out he was lying: his soap is really only worth 2$ a day. It doesn’t seem like that big of a loss, because you’re only paying him 2$. His value to you is 2$, and that’s his salary—you’re just short that salary of 4$.

On the other hand, if you went to Adam and told him that you’d pay him 2$ a day for his 4$ soap, he would either tell you to get lost, or he might sign on—but start making 2$ soap. After all, that’s all you’re paying him, so why bother making his soap any better? He’s working at what he’s worth.

The point I’m rather awkwardly trying to get to here is that in general, people will find jobs where they are paid what they are worth, and people will perform in their jobs with work worth what they get paid. If you pay someone 2$ a day, they will produce 2$ soap. If you pay them 4$, they will produce 4$ soap. You might have someone you pay 4$ a day produce 2$ soap, but I guarantee you that you will almost never see someone who makes 4$ soap getting paid 2$ a day. They’d just find a company that pays them what they’re worth.

So my rhetorical query is thus: are there any jobs out there where we’re assuming a fungibility of employee that doesn’t exist, and is therefore severely impacting the quality of the product? Or places where we’re paying people a low salary in order to “save money”, but end up receiving an inferior product?

I’m sure if you think about it, you can come up with some.

Suppose there are ten people. Person one has 1$ in free money, person two has 2$ in free money, and so on, so person ten has 10$ in free money.

Let us then assume there is soap (a good for which it can be assumed that everyone wants it), but there are only seven bars of it. All ten people want soap, but only seven will get it—so how do you determine which seven?

The way a market would determine—this example being both contrived and overly simple, admittedly—is to set the price of the soap such that only seven of the people can purchase it. For example, each bar of soap would be 4$. The bottom three people cannot buy it, even though they want it.

But now, suppose people want everyone to have soap. Some might claim it’s even a human right to have soap (though this right didn’t exist prior to there being soap)! The question then becomes: how do we guarantee that everyone has soap?

“Aha!” go some politicians. “Since the price of soap is 4$ a bar, all we need to do is give people money so they can afford it!” So they give everyone 3$, which means that everyone can afford it. But there are still only seven bars—so the price of soap goes up to 7$ to compensate. That person who had 6$ (and so was decidedly middle-class) was previously spending 66% of their income on soap. Now, they are spending 77%.

Of course, that 3$ given actually has to come from somewhere, so let’s take 3$ from each of the top three people, and give it to the bottom three. So now our money range is: 4,5,6,4,5,6,7,5,6,7. But we still only have seven bars of soap! The price would then probably become 5$—enough for eight people to afford it, which means that one gets short-shafted. Or it might be 5.50$, so some people have to sell off family heirlooms to get that extra half-dollar.

Alternatively, the politicians could simply regulate the price, and make soap cost one dollar. There are still only seven bars of soap, so that means that we have a shortage of soap, since only seven people (out of ten) have it—even though everyone can afford it!

The real problem here is that there are only seven bars of soap; if we had ten bars, there would be no issue whatsoever. The price would probably be 1$ (the price enforced by the government), so everyone could afford it, and there would be no shortages. The question then becomes: why are there only seven bars? Is it possible to produce more?

In the case of soap, yes, there is. However, that’s about the point where they find out that the government limits the number of bars of soap that can be made. So the government is trying to solve that which is already the cause of the government, and people still lose out.

How do you make sure everyone can afford soap? Get rid of government caps on the amount of soap that can be produced—then you produce enough soap so that everyone can have a bar (I didn’t discuss sharing for simplicity). Once you reach that point, you might either get a soap monopoly that still overcharges, or you might get a competitive marketplace that pushes the cost of soap down to 1$ a bar—but at least you have enough soap for everyone.

By the way, if you replace “soap” with “medical care”, and “bar” with “doctor”, you have a grossly over-simplified view of healthcare in the United States. (Yes, the situation is far more complicated than the AMA intentionally limiting and reducing the number of doctors—that’s why I said “grossly over-simplified”.) So maybe we ought to stop talking about health insurance, and start talking about why medical care is so expensive in the first place. Might it be because of a lack of supply?