Killing the Golden Goose, Government Style


In seeking to solve one economic plight or the other, government often makes the problem worse. It is a fine line between forcing people to give up part of their innovation and creativity, versus disincentivizing them to create anything at all. When government steps over that line, productivity stops, but it becomes very difficult to correctly deduce that the problem was indeed caused by government.



The story goes that a man once found a goose that laid a golden egg once per day. He considered himself to have enjoyed the greatest of good fortunes, but one day he began to become impatient and greedy. Why can't the goose do more? he thought. Finally, in a fit of rage, the man killed the goose thinking that he would find a plethora of golden eggs inside. But there were none, and the dead goose produced no more.

When I was in college, I had an Organizational Behavior class. In one of our lab sessions, the teacher assistant posed a scenario.

Suppose a member of your family is deathly sick. You have recently learned of a new medicine that, if affordable, would cure your family member's disease. But the price of the medicine is far beyond your ability to pay. What would you do under such circumstances? Should the government force the medicine provider to make his product available to all?

It's easy to say under such emotional circumstances, "Of course he should make his product available!" But here's another scenario.

Suppose a member of your family is deathly sick. You have recently learned of a new medicine that, if affordable, would cure your family member's disease. But the price of the medicine is far beyond your ability to pay. Government forces the medicine provider to make his product available to all, but then it becomes no longer possible for the medicine provider to recoup the costs required to make the medicine, so the medicine can no longer be produced.


There are far more effective and productive ways to solve problems such as the one described, but a major hurdle for of a lot of government-oriented individuals is that these solutions require interaction with real people rather than simply relying on the cold, calculated impersonality of government. For some, charity is a foul word, because it competes with the supposed benevolence of government.

Let's look at how a required minimum wage kills the golden goose. Business owners have in most cases have their businesses from nothing into something substantial. In most of these cases, the substantial businesses they now have are in large part due to the fact that they express their appreciation to their employees in the form of satisfactory wages.

I have a friend who works for a local metal foundry. He understands this economic principle well. He's noticed, however, that the substandard wages paid by his employer in nearly every case attract those with substandard skills. It has resulted in two predictable trends--low loyalty to the company, and a high defect rate. My friend correctly fears that his company's reputation will suffer and that the business will fail unless significant mid-course corrections are made.

Companies usually adapt or perish when it comes to wages. If they don't adapt by paying a wage that does attract loyalty and the necessary skill, they will kill their own golden goose.

Therefore, a correctly functioning economy does not need government to tell companies what wages they should pay. In fact, economies usually function incorrectly precisely due to the misinformed self-interjections of government into the process.

An easier way to kill the goose (than company stupidity) is when government tells a company that it has to pay higher wages. There are thresholds below which the marginal decline of business is very small if business is forced to raise its wages, but that threshold is smaller with smaller businesses and neglible with others. But government is not the best judge of where this threshold is. At any rate, the principle generally holds true. If a business is compelled by government to pay higher costs than it can afford in conjunction with the service it provides, the business will fail. In the case of innovators, such as those who create new medicines, machines, or high technology, if government lays down a wage ultimatum, the innovators often simply decide to create their product somewhere else.

Because the innovator craves success at producing a product that people will want, he will abandon an overweening government far sooner than letting his business reach the point of failure.

Minimum wages are important. But they can be achieved by people in their demand for them. If someone doesn't get the wage they're worth, they can usually find a higher-paying job.

Has there ever been a study of how many more businesses than usual close their doors after a minimum wage increase? I think the results of such a study would be interesting. But most individuals only look at the fraction of workers who survived the minimum wage increase.

If government intervenes, chances are that everyone's goose is cooked.

Comments

  1. All I have to say is well put Franky.
    As you know, I am in agreement in many ways with Capitalism. It is part of our heritage. Implementing a min wage definetly hurts that.
    I actually found out from my little brother, Dude, that they raised the min wage. In his adolescent ignorance (I would use innocence, but you know my brother) he thought it would be a good idea. I explained the same idea you did with your "Golden Goose" story. (Not as well, I'm not that good.) I put him as a business owner and asked him what he would think about a minimum wage. He apparently agreed with idea of no minimum wage. He just didn't understand it fully, because he said the same thing, pay people what they are worth and you get the best results.
    What I am trying to get at with the ongoing (probably inconsistent) rambling, is that even my 18 yr old brother, who has worked for both min. wage and for what he is worth, understands that a min. wage isnt all that great. And if he can understand it, why can't some of the "wisest" people we elect see this?
    I worry that we are getting little glimpses into the lives of our future generations, and a lot of things don't look well. I think I said something similar about France's future in another post...

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  2. A whole list of very interesting blog posts by two economics professors at George Mason University can be found here. Reading these can help clarify some of the thoughts expressed here about raising the minimum wage.

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