(L120 & 125) The Broken Window Fallacy: Minimum Wage Requirements

Why wouldn’t someone voluntarily offer you a job at twice today’s minimum wage?

Story time! Let’s say that a small business opens up selling handmade jewelry and other goods in the middle of a New Hampshire town. Let’s also say that the current minimum wage in New Hampshire is $10.00 an hour. At this rate, the business owner can really only afford to hire 5 employees (in total). So the owner hires his employees, and business is alright; they are new in town, so large profit margins and excessive foot traffic are not to be expected.

After about 6 months of being open, business is rapidly growing. The owner is finally getting out of the red, and into the black! There is so much business in fact, that the owner needs to hire more workers just to keep up. He decides to add 2 more people to the team; it won’t quite cover all of his needs, but because of the high minimum wage, it is all that he can afford right now.

The night that he interviews for his two new employees, a woman comes in asking for nearly $20.00 an hour. Her skills are extensive, and she would be able to bring brand new products into the shop without any training whatsoever. Not only would she save him time, but she would make him money! He thinks back on his other employees; no prior knowledge or skills, no new ideas, nothing even nearly as valuable as this employee would be worth to him. If it were up to him, he would be paying his employees exactly what he deemed their skills to be worth; maybe that would mean $8.00 an hour for a cashier, $8.75 an hour for an opener and a closer, etc. However, since he was forced to overpay for their basic services due to government intervention, he cannot afford to hire this valuable and worthwhile prospective employee.

In short, he is in need of two more workers. He would be able to afford both the above average woman and another cashier/clerk if it was not for minimum wage requirements. With these requirements however, he must choose between superior product and a shortage of man power, or basic work and enough workers to scrape by. In the end, a shortage of workers is just not something that a business (owner) can afford, and so he must kiss this great opportunity goodbye. This issue could have been completely avoided had he and the employees been able to come to an agreement on a fair hourly wage without government intervention or mandate.

When an owner is forced to pay someone more than they’re worth, they lose out on opportunities to hire higher quality employees for a greater cost. This is the broken window fallacy; the seen and the unseen. While we do see that an average worker is being paid very well, we do not see that a better worker is being paid less than they deserve or not being hired at all (because of the average worker’s forced wage).

(L65) Some Answers Must Wait

I will sell my business when it makes a profit of [$??] a year, so that I can [??].

There are a few reasons why I cannot yet accurately provide an answer to this question.

The first being the fact that, I have no idea how much money I would be putting into this particular business to get it started. Would it be out of pocket, or from loans? How much money will I have ultimately paid in interest on those loans?

The second reason being that if my business is doing good enough to sell, that may just be all the reason in the world NOT to sell it! After all the hard work, sweat, and tears, I am just going to sell the polished business? I don’t think so! I will make more money owning the business myself than I will selling it. However, when it is time for me to retire and my days are almost done, it is more likely than not that I would pass this business in my family. This business is my legacy, and I will only leave it in the hands of those I most trust to upkeep my morals and standards within it.

There are plenty of reasons to sell a business, and while I cannot predict the future, I can be nearly sure that something I pour my lifeblood into will not so easily be bought.

(L70) Labor Unions & Price Inflation

Do Labor Unions Cause Price Inflation?

Labor unions and the people who assemble within them cause great price inflation; this is probably done unknowingly by most, due to the fact that the people making up labor unions are ever so self centered. Some of the things most focused on by labor unions include minimum wages, mandatory hours, overtime pay and social security payments. In personal efforts to secure a higher pay for a minimum number of hours, labor unions have run the money supply of their employers nearly dry. In order to compensate for this lack of income, business owners are forced to jack up the prices of their goods and services. As hours grow and wages rise by force, prices will also be raised by force. The single-mindedness of labor union supporters is causing a worsening of their own economic situation. Labor unions are the product of selfish, uneducated and economically ignorant individuals; they do nothing but worsen the very situations that labor-unioners are trying to get themselves out of!

(L80) The New Deal & The Industrial Revolution

1.) Evaluate this claim: “The New Deal was a wise series of government actions that healed the problems afflicting the economy.”

The New Deal was a series of atrociously planned government actions that resulted in a famished, unemployed, and economically unsound people. The National Industrial Recovery Act for example allowed each industry to draft production codes for itself; this meant minimum wages, minimum prices, hours of production, specific production methods, etc. The claim backing this decision was that what businesses really needed was stability, rather than competition. The result of acting on this claim was basically stomping out smaller businesses on a major scale. Big businesses, having multiple locations and bountiful resources were in no competition with smaller businesses in the sense of service; however, the one area small businesses could compete in was prices. With new codes preventing small businesses from competing with prices, most perished by the hand government intervention. It was stated by UCLA professors Harold Cole and Lee Ohanian that “the abandonment of these policies coincided with the strong economic recovery of the 1940s”.
Another “wise” government action attached to The New Deal was the Agricultural Adjustment Act. This time, the government decided to stimulate the economy and raise food prices by destroying crops that had already been planted and grown. Acreage limitation was also implemented, and pigs were slaughtered needlessly to raise pork prices. This caused about 2 million tenant farmers and sharecroppers to become jobless, and to top it all off it was soon discovered after the fact that the United States was not producing enough food to sustain the population, even at a minimum subsidence level diet. What a way to heal the economy, way to go government intervention!

2.) How was the standard of living affected by the Industrial Revolution?

In short, the industrial revolution created numerous opportunities for workers that hadn’t previously existed. Before the industrial revolution, workers could have either made a profitable living through agriculture, or by gaining the tools necessary to enter into an independent trade. After the industrial revolution however, there was newly made space in the economy for a work force of people who were able to do neither of these things; factory work employed many people who would have otherwise suffered because they did not have the resources to meet the needs of the economy.

(L35) Becoming a Business Owner Vs. Being a Minimum-Wage ‘Lifer’

Would I rather start a small business or become a minimum-wage apprentice to a mentor? Why?

To me, the answer to this question is simple, actually obtaining the goal however is a whole other story. Personally, I would much rather start my own small business than become a minimum-wage apprentice to a mentor because owning a business means that you have the chance to make so much more money. It also means that becoming successful will make your voice heard, not only to your employees, but to the community you serve. A business is a legacy to be passed on whereas a menial job in which you never work your way up can flood your life with regret, and misery. Founding your own business means having the power and freedom to create something you love; something that makes you proud and others proud of you. It would be a dream come true to own my own business one day; I would be guaranteed work, and a successful businesses offers security that no minimum wage job ever could because a founder/owner is not easily replaced.
Now, don’t get me wrong; everybody has to start somewhere. A mentor is a great place for anybody to begin their journey to owning a small business, but I don’t believe it can offer the same rewards. If your goal is to become a manager, start under the best manager you can find and stay there! But if your goals lie elsewhere, don’t be afraid to get some training before hitting the world on your own either. You can always learn something from somebody else, no matter whether they’re above and below you on the work chain.

(L40) Government Intervention in The United States

1.) Explain the basics of the Austrian theory of the business cycle. What is the difference, in terms of consequences, between lower interest rates that result from the saving choices of individuals, and lower interest rates that are achieved artificially, by a government-established central bank?

The Austrian theory of the business cycle basically dictates that in a free market, there is communication between the consumer and the producer which is translated through interest rates. As long as interest rates are not interfered with, they will read correctly to producers and allow them to meet the needs of their consumers reliably. However, when interest rates are interfered with and pushed down artificially by the central bank, there is no longer clear communication between producers and consumers. This lack of economic coordination creates conflict, and makes society poorer because labor and physical resources have been misallocated. The results of government intervention and false interest rates are recession and depression plagued upon the people.

2.) What are some of the pitfalls of industrial policy?

Industrial policy is what it is called when the government favors certain industries through subsidies, cheap loans, and other specific assistances. One of the biggest downfalls of industrial policy is the fact that it diminishes incentive within the favored business firms to be entrepreneurial. Another large issue with industrial policy is that it eliminates competition to a certain degree, and makes it more difficult for newer firms to compete against pre-established, government supported firms.

(L30) Do You Have What It Takes?

When asked the question of whether or not I have what it takes to become an entrepreneur, I can surely answer yes! I know that I have what it takes because just last year (my junior year), I started my own dog walking and pet sitting business. I serviced myself to my neighbors because I was living in an apartment that was animal friendly, and many dog owners had to leave during the day to go to work. I had multiple clients, and business spread mostly through word of mouth. I made up colorful and informative flyers that would catch peoples eyes as they were leaving the parking lots and getting their mail, and introduced myself to other dog owners when I was out walking dogs. As business picked up, I also began making and selling different types of dog treats, and giving them out to neighbors with my name and business information on them to reel in more clients. Being an entrepreneur takes perseverance, creativity, and interaction skills. It also involves budgeting both time and money. These were things I knew when I began, but learned much more about through experience.

My Small Business: A Sole Proprietorship (L80)

The reason I have chosen to run my dog walking business Love-On-Four-Legs as a sole proprietorship is because, first of all, this is not a legal entity. It is the simplest form of business one can create; since my job is so small and simple, I don’t need to buy many supplies, and there is no reason for me to go through with making a company bank account, or hiring employees. I am the only one who interacts with the animals I walk/babysit, and I accept full responsibility and liability. I also am the one who makes, and bakes the treats, as well as being the person to distribute them. My boyfriend Carmine allows me to use his address (for my business) and he also allows me to use his kitchen. I do not plan on making a career out of this business, because dog walking simply isn’t how to make a good living. However, this whole experience has been more than enriching – between meeting new people and animals, making friendships that last beyond work, and being able to spend time outside socializing in the neighborhood. It has all been just beautiful, and I have had so much help along the way from friends and family. In time, I have a feeling this will become more of a hobby than a job, but the small income helps for the time being, and it is a good place for any young entrepreneur to start!