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Basically, ‘doing business’ means obtaining sustenance by being useful to other people.
As opposed to hunting/picking/growing your own food, building your own shelter and using pelts to cover your back.

‘Doing business’ obviously implies trading. Raw materials are being transformed to fit the needs of the intended customers, transported to where they are needed and offered to those who might buy them.

For this process to take place, ‘business’ needs far more than entrepreneurs, customers raw material and workforce.

It needs a suitable environment.

It needs roads, markets – not only ‘stable’ but also safe, and – maybe the most important thing, it needs the right kind of ‘popular sentiment’.
For business to work as intended, people need to have faith in each-other.

Yep, faith!

Who would eat in a restaurant without trusting that the cook hadn’t spit in the soup?
Who would buy a car to drive their children to school without actually believing that the car had been built as it should have been?
Who would even drive on a two way road without believing that the drivers going in the opposite direction will stay on their side of the road?

And do you really think that German farmers of yore – who had enjoyed a relative safety while working their own land, living at the bosom of an extended family and being personally acquainted with all the members of the community,  would have gladly come to the ‘unknown’ city to become industrial workers  during Bismark’s ‘reign’ without the ‘safety net’ extended by the Chancellor?

Taxes are the manner in which we pay for all these.
But they are much more than this.
The willingness of the people to pay taxes means that they have faith that the money will be well spent. That they have faith that those in charge will spend the money wisely and that, in the end, those in charge will be held accountable.

Whenever any of the parties involved in this deal – or both at the same time, no longer trusts the other to do its part of the deal – or tries to use their position to access undue benefits… things go south. Way south.

Just as it happens in any other deal.

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Sometimes yes.
For instance in an economy where cash is readily available some employers might be tempted to split the compensation they give to their employees in two parts. An upfront one – which gets to be reported to the IRS – and a behind the counter one, that is settled directly between the employer and the employee. If a minimum wage is enforced the state knows for sure how much will be the taxable part.
Or in a situation when enough of the employers get together, form a cartel and start lowering the wages so much that the ordinary people end up dying of hunger.

Otherwise…

In fact there are many opinions about how this concept imposes undue constraints upon the economy. Some say it discourages job creation, others say it makes it a lot harder to start a new business and so on…

While all these opinions have their merits, just as the concept itself has its own, I think the situation is a little bit more complicated than this.

For starters I’m going to introduce the concept of ‘priming’.
“Priming refers to the incidental activation of knowledge structures, such as trait concepts and stereotypes, by the current situational context. Many studies have shown that the recent use of a trait construct or stereotype, even in an earlier or unrelated situation, carries over for a time to exert an unintended, passive influence on the interpretation of behavior.”
In other words an established mind set influences both the way we see a certain situation and the decisions we make in certain circumstances.

Minimum wages do exactly that. It both sets our minds in a certain way and establishes a certain set of circumstances.

First of all it tells us that it’s OK to compensate labor as little as possible and then settles an ‘acceptable’ minimum.

I see some of you fretting: “And what’s wrong with paying as little as possible? Are you nuts? I have a bottom line to worry about here!”

Precisely. You should take into consideration the whole picture – the bottom line – instead of short-sightedly aiming your efforts towards short term cost cutting.

Henry Ford taught us a very valuable lesson more than a hundred years ago.
By paying each of the workers more you might end up lowering your aggregate labor costs on the medium time frame.
But there’s more. What Ford did created the conditions for a mentality change. Receiving more money prompted workers to start planning ahead. On $2.25 a day Ford’s workers could afford to work for 3 days a week and spend the rest drinking. On 5 bucks a day they realized they could raise a family. Things changed dramatically. They stopped skipping work and this is how the famous American working middle class was introduced to the world.

The advent of minimum wages turned back the wheels of history. Blue collar employees were returned to the condition of working beasts whose work is no longer evaluated on an individual basis but compensated according to some opaque calculations made by government bureaucrats.
The companies no longer compete among themselves for the best available talent; they just hire anonymous ‘industrial operators’ from a pool of undistinguished semiskilled, disheartened laborers.

The entire economy suffers, from lack of solvable demand and an increasing apathy that doesn’t bode well for the future.

Also, demography doesn’t help any.
I keep hearing that individuals should improve their skills if they want to live better and that mature people who see working for McDonald’s as a life-time career cannot ever expect a ‘decent’ life style since McDonald’s jobs are for students trying to earn some pocket money.
Well… things have changed a little since people who tell this story have been in college.
In those times families had three or four children and about half the jobs were in manufacturing. That meant that the father was the bread winner, mother stayed at home and the students manned the burger joints.
Nowadays most manufacturing jobs have been exported to China, father and mother are both working, part time, in the unglamorous part of the service sector and no longer venture to have more than one or two children.
That’s why McDonald’s has become a lifetime career. For lack of eligible students, first and foremost. Thirty years ago blue collar workers could afford to send their children to college and the students went to McDonald to work for pocket money. Nowadays blue collar workers no longer afford to make many children and don’t have the money to send them to college.

Increasing minimum wage won’t change much. It would only convince the people at the bottom of the society that there is no way out and the CEO’s that there is no need to make any fundamental change in the way they manage the ‘work-force’.
Until employers will start considering their employees as partners instead of adversaries things will remain just as they are now. Or get even worse.

PS. How come so many of us constantly forget that most of the clients – after all they are the ones who keep the economy afloat – are employees?

Deflation ‘for dummies’.

azizonomics

Consumer prices may not be deflating as quickly as Labour’s electoral chances did earlier this month, but — even after £300 billion of quantitative easing — price deflation for the first time in more than half a century is finally here. The Bank of England continues to throw everything at keeping prices rising at close to their 2 percent target. Yet it’s not working. And this is not just about cheaper oil. Core inflation has also been dropping like a rock.

I argued that “deflation was looming” for Britain last year, and feel a little vindicated that it has come to pass. But I don’t feel at all gratified about the thing itself.

In a highly indebted economy such as Britain’s — where private debt dwarfs government debt — deflation is a dangerous thing. Past debts — and the interest rates paid on those debts — are nominally rigid. Unless specifically…

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