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May 20, 2005

Comments

Hi Half Sigma
I would not interpret the fact that workers don't initially get paid their marginal product as a true market failure. It's a little like baseball: you only get paid the big money after a couple of great seasons. When a player first comes up, he will have to "prove himself". It's like that in the business world as well.

I agree that it is unlikely that someone fresh out of college would do well as an entrepreneur unless he had exactly the kinds of skills that help in the corporate world. A successful entrepreneur would have to sell his plan to the venture capitalist would will fund the venture.

Also, I believe that it helps to have a lot of market experience before creating your business. There is a lot of learning by doing in the real world. It helps to have done something remotely similar to the business that you are creating before starting out on a venture.

The free market is efficient, keeping in mind the usually unstated truth that individuals are fallible and non-omniscient. Unknown entities are always riskier than known ones, and (in my field at least) college education played less of a factor than on-the-job training. The employer is better off choosing someone who has shown able to learn on the job (which is much different from book learning) and succeed in doing the job required, rather than someone with a 4.0 GPA and no real-world experience. Is that unfair? As unfair as it is that 5'8" people are underrepresented in the NBA.

Trying to use this as some fault against libertarianism is like attempting to blame biology on the fact that genes determine to a large part one's destined height.

What's your solution, a government quota that requires businesses to hire x% of new graduates? That'll be efficient.

Scott, if the free market were efficient, then everyone would be paid exactly what they are truly worth, and anyone who has had any involvement with a real workplace knows that this is false.

I didn't say anything in my post about what government should or shouldn't do. However, let's note that government regulations which prohibit employers from giving IQ tests to job applicants increases the inefficency of the market because an IQ test is a simple way to learn a lot about the job applicant. Studies show that IQ test scores are highly correlated with job performance.

Some government regulations could increase efficiency. By applying the same rules to all employment relationships, employees know what to expect. The employee isn't suddenly surprised when his new employer tells him he must work 20 hours of paid overtime every week or be fired.

"Scott, if the free market were efficient, then everyone would be paid exactly what they are truly worth, and anyone who has had any involvement with a real workplace knows that this is false."

And what wise oracle determined "true worth"? Is it what the person thinks they should earn? In that case you are right, few people outside of the entertainment industry are being treated 'fairly'.

Maybe when you can define true worth (besides being what the employer and employee agree upon), I can understand the point you are trying to make with regard to market inefficiency.

"However, let's note that government regulations which prohibit employers from giving IQ tests to job applicants increases the inefficency of the market because an IQ test is a simple way to learn a lot about the job applicant. Studies show that IQ test scores are highly correlated with job performance."

I'm all for reducing government interference in the market; what we have now is certainly far from a free market. But I'm not sure what libertarians would argue with you on this. Your initial post seemed to imply that because our current situation is less than ideal, this is a point against the libertarian position.

Heck, I *wish* we got paid based on our IQ scores!

"Some government regulations could increase efficiency. By applying the same rules to all employment relationships, employees know what to expect. The employee isn't suddenly surprised when his new employer tells him he must work 20 hours of paid overtime every week or be fired."

Can you give some examples of government regulations that would increase efficiency? I can certainly see how regulations (which require oversight, which requires money and manpower) could make things better for the people who keep their jobs after a business has to fire some to meet government requirements and maintain a profit. But I don't see how this is more efficient, for any definition of it I'm familiar with.

Scott said: "Can you give some examples of government regulations that would increase efficiency?"

Scott Adams, the creator of Dilbert, wrote in one of his books that modern business has transformed from oligopoly to confusopoly. The goal is to confuse customers so they are unable to make informed choices. He used the example of the phone companies who used to advertise they have the "lowest rates", yet they NEVER said in their ads what the rates actually were.

Yesterday, I pulled into a parking garage in Arlington. No where was there any sign anywhere telling me how much the parking garage might cost. On the way out, I'm zapped with a $6 charge (for a lousy one hour of parking in a completely empty garage). This is a typical example of how a business makes unconscionable profits by tricking people into paying amounts they didn't intend. If I knew the stupid lot was $6, there was some parking meters across the steet where I could have parked for a dollar.

Hi Half Sigma
I agree that the type of regulation that is most likely to produce an improvement in the market are situations in which you force business to reveal more information. Companies will try to mislead the consumer and if there are no laws, firms discover they can be successful at being tricky. I have often thought that disceptive advertising is short-sighted but I see it all the time.

I bought a cell phone last month and it came with a rebate. Those are always a ripoff. We filled out the paperwork and sent it in. I never expected to get anything back. It turns out we did get a check but it was only for 1/2 the amount we deserved. Am I going to fight this? I'm happy we got anything. But I wish rebates were outlawed.

There is misleading and there is lack of details. If a business says "if you purchase X you will only have to pay Y" and in fact you pay more than Y (after reading the fine print and finding nothing to account for the extra), then that firm is breaking the law. A consumer does have the right to expect contracts, informal and formal, to be met.
There are some things that needn't be made explicit; a restaurant doesn't have to have menus printed that say "our food is not poisonous", because the fact that they sell stuff meant to be ingested means that it isn't poisonous, since rational people don't intentially poison themselves. But there's nothing inherent in the idea of 'parking garage' that stipulates what the cost will be. Whose fault is it that you used a product when you didn't bother to "read the contract" or park somewhere else until you knew the conditions for using that garage? Would it have been nice if the cost was in large neon signs before you entered? Sure. Are there prohibitive costs to set up a competing parkage garage? Of course - city land isn't cheap, even if you can get the zoning for it. Does this mean that garage took advantage of you? Only because you let it. Caveat Emptor.

Making informed choices cannot be taken from you, but you can choose not to be as informed as you should be. And by 'you' I mean everyone. I still regret getting my Pontiac Grand Prix...

Scott said: "Whose fault is it that you used a product when you didn't bother to "read the contract" or park somewhere else until you knew the conditions for using that garage?"

It's the fault of the parking garage for making the contract difficult to find.

Let's suppose the spot was worth $2, given that's what other garages in the Ballston area charge during off hours. So I was ripped off by $4.

It would have taken more than $4 worth of effort for me to figure out that the garage was a ripoff. And I had an appointment that I wanted to be on time for. You may say, "so you paid for the convenience of saving time." That's not true. Because I didn't know how much the garage cost, I had no idea what I was paying for.

This is an example of how the party with greater information uses this to screw the party with less information. In this case, the relevant information is the cost of parking. The parking garage knew it, I didn't.

Caveat emptor doesn't make for an efficient market, because an efficient market requires that both sides have as much information as possible. And an efficient market results in the best allocation of scarce resources. Otherwise people waste valuable time trying to look for the terms of the contract.

So we see, government regulations (in this case a regulation that parking garages clearly post prices at all entrances) can help to ensure that both parties to a transaction are informed, and thus make for a more efficient market and benefit the economy.

"Caveat emptor doesn't make for an efficient market, because an efficient market requires that both sides have as much information as possible. And an efficient market results in the best allocation of scarce resources. Otherwise people waste valuable time trying to look for the terms of the contract."

Should this also apply when the shoe is on the other foot? Where a corporation is the buyer and an individual is the product, and such individual applies for a job? Should all medical history be made available, DNA screening required? A worker who has an above-average chance to become unable to work for health reasons, is not worth as much as a worker with no medical issues.

I'm not judging here, I want to know if the principle of "all information must be made available" is consistent, and if not, why not.

Scott said: "Where a corporation is the buyer and an individual is the product, and such individual applies for a job? Should all medical history be made available, DNA screening required?"

Last job I had, I DID have to give them a urine sample. Which I think is pretty obnoxious. This just shows the lack of barganing power that workers have if they have to put up with these kinds of requests. I bet the CEO never had to give a urine sample, even though his bad health or drug habits would cause the company a lot more harm than those of a lowly worker.

I've previously endorsed bringing back IQ tests, which is a great way for an employer to guage the quality of work that a person is capable of, much more so than any currently existing medical tests, but unfortunately IQ tests are outlawed by the government.

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