Rasmusen Weblog

...1a. Market Wages. Andrew is thinking of hiring Paul to pick apples for him. For each hour of Paul's labor, Andrew will earn $25/hour after paying for materials, capital, and so forth, but before labor costs. Paul is willing to work for no less than $12/hour, because that is what Sam would otherwise pay him. Thirty other people are willing to work for as little as $10/hour.

Should Andrew hire Paul, and if so, at what wage?

1b. Hiring Christians. To Situation 1a, add that Paul is a Christian, and the other 30 people are not. All 31 will make $25/hour for Andrew, though, and Paul does not know Andrew.

1c. Bargaining. Take Situation 1a, but change it so that nobody else but Paul is available to work for Andrew. Paul is a very bad bargainer, as Andrew knows, so Andrew will be able to make him one take-it-or-leave-it offer.

My first point is that I'd like to see scholars tackle narrow, precise, situations like these rather than vaguely discuss whether corporations have social duties or employers should be generous to their employees. But I have substantive thoughts too.

1a. Market Wages. I think Andrew should pay $10/hour and Paul should keep working for Sam, which is the pure market solution, maximizing social wealth. Consider the possibilities.

First, Andrew could pay less than $10/hour. He would get no workers though (unless they are generous because altruistic, a point we'll pass by), so the $25/hour opportunity would be lost, poor stewardship of the opportunity God gave Andrew.

Second, Andrew could pay exactly $10/hour, the market wage. Many workers would be willing to work for him, though none would be eager and though Paul would stay with Sam. He would earn $15/hour in profit.
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Third, Andrew could pay between $10/hour and $12/hour. He would have many workers eager to work for him. This is equivalent to paying $10/hour and donating a little extra. The best recipient for charity, however, unlikely to be the worker he hires instead of one of the thousands of other people in the community, many with no job at all. Thus, this wage is worse than paying $10/hour and giving the extra profit to a carefully considered charity.

Fourth, Andrew could pay $12/hour and hire Paul. This would be a bad thing, because Paul was earning $12/hour with Sam already, whereas the other 30 applicants's outside opportunities were only worth $10/hour. They would would have been delighted to get the job at the $12/hour wage; Paul is merely indifferent. It is wasteful, therefore to give the job to Paul-- it fails to maximize social wealth.

Or, Andrew could pay more than $12/hour to one of the thirty-- which is bad because of the charity argument above-- or to Paul-- which is bad both because of the charity argument and because of his good alternative job with Sam.

1b. Hiring Christians. It should make no difference that Paul is a Christian. It is still wasteful to give him the job. Note that it is not even doing him a favor to give him the job at $12/hour instead of to someone else at $10/hour-- Paul still gets no positive benefit from moving.

Here, note that in the method of hypotheticals we cannot change the hypothetical in midstream without comment. It might be that Christians are more productive than non-Christians, for example, but if that were the case we need to change the hypothetical to say that Paul would generate not the usual $25/hour revenue for Andrew, but $28/hour. Or, it might be that if you pay a worker more he is more productive-- but that's not the current hypothetical; it is introducing an entirely new consideration. You can do that, but answer the questions for the current hypothetical first.

1c. Bargaining. This is the interesting case, because efficiency is not at stake. Any wage between $12 and $25 will induce Paul to take the job, and will maximize social wealth. Tentatively, I say Andrew should make an offer of $12/hour to Paul-- the bare minimum. An offer of $25/hour would result in the same creation of wealth-- the surplus of $13/hour that arises from switching Paul from working for Sam to working for Andrew-- but it would give Paul control of the $13 instead of Andrew. If Andrew thinks he will spend the money better than Paul, he should therefore act to get it for himself.

Here we are depart from the realm of conventional economics, which does not question the value of spending and only tries to maximize the amount people have to spend. What would "spend the money better than Paul" mean?

What is decisive is whether Andrew thinks he would spend the money better in furthering God's work than Paul would. Andrew, for example, might donate it to his church, whereas he might know that Paul will spend it on fast cars and fast women. Or, Andrew might know he will spend it in good ways, but he does not know how Paul will spend it. Or, we could even consider the extreme case, in which Andrew knows that he himself tends to misspend money-- perhaps he is impulsive, or susceptible to con men-- but Paul is also a Christian and very good with money. Even in that case, Andrew is just indifferent about bargaining hard and getting the $13/hour for himself and bargaining soft and leaving it with Paul, because even if he bargains hard, he can just give back the money after the bargaining process is over.

It is very important to start with cases like 1a to 1c, cases of individual ethics, because society is built on top of individual decisions. Ethics before politics. Possibly the biggest single problem in the literature I've seen on Christian economics is that it jumps, instead to the political questions, questions such as whethere there should be a minimum wage. But we are now ready to go there, with hypotheticals 2a, 2b, and 2c.

2a,b,c. Andrew is not a Christian, but Charles, the king of this country, is. Should James force Andrew to pay a particular wage in any of the above scenarios?

I think King Charles should not force Andrew to pay any particular wage to Paul, because what I concluded above was ethically best for Andrew was also what he would do as a non-Christian pursuing self-interest. The only way in which Andrew's behavior depended on his being Christian was in how he would use the profit he earned-- donating it to his church, or to a poor person, or whatever. King Charles might want to intervene in that spending-- by imposing taxes on Andrew and diverting his money to a worthy recipient-- but not in the wage he pays.

Someone who does not think the Christian Andrew should pay the same wages as a selfish employer, however, cannot jump immediately to the conclusion that King Charles should force Andrew to do the Christian thing. It will take some extra reasoning to get there. This is like the distinction between an ethical requirement that a person be faithful to his wife and a legal requirement. Even if you conclude that adultery is sinful, it requires more argument to reach the conclusion that it should be a crime, and a crime even for those who do not believe it is sinful.

Liberals, in particular, will have to squirm a bit, I think, in explaining why King Charles should require the non-Christian Andrew to pay high wages on pain of imprisonment but not require him to attend church regularly. (Catholic conservatives are more likely to be consistent and accept mandatory church.)

It is worth noting that King Charles has, in fact, imposed laws affecting the hypotheticals. Minimum wages are clearly relevant. There might be a minimum wage of $27/hour, in which case a profit-maximizing Andrew will hire nobody. Or there might be a minimum wage of $12/hour, in which case he will hire someone, but as far as profit goes he would as willingly hire Paul-- an inefficient outcome-- as one of the other 30.

An interesting wrinkle is that if there is a minimum wage of $12/hour and Paul is a Christian, like Andrew, Andrew, though indifferent between Paul and the other thirty as far as Andrew's profits are concerned, should not use Paul's Christianity as a tie-breaker and hire Paul. It is still inefficient to hire Paul; Paul still gets no gain compared to staying with Sam, and the pagan thirty still love to get the $12/hour job. When price controls are imposed, employers often switch to using things such as race, religion, good looks, etc, as tie-breakers, but from a Christian point of view they should not.

Speaking of which, however: American law also forbids hiring Paul just because he is a Christian. That is part of "civil rights" law. If you are hiring people because they are Christian brethren, and you are not a religious organization (churches are exempted from the law), then you are in violation of discrimination law. This kind of discrimination is very common, of course, just as it is common for Jewish employers to give breaks to Jewish workers and for Moslem employers to give breaks to Moslem workers, and it is innocuous, but it is illegal.

Let us move, though, to a third set of hypotheticals. Even though this has been quite lengthy already, it is quite important to keep in mind that every market has two sides, supply and demand, and we should check to make sure that our ethical rules don't result in contradiction when we apply them to both sides of the market. So now let us look at Paul, the employee's decisions.

3a. Market Wages. Paul is thinking of working for Andrew, to pick apples for him. For each hour of Paul's labor, Andrew will earn $25/hour after paying for materials, capital, and so forth, but before labor costs. Paul is willing to work for no less than $12/hour, because that is what Sam would otherwise pay him. Thirty other people are willing to work for Andrew as little as $10/hour.

At what wage should Paul be willing to work for Andrew?

3b. Hiring Christians. To Situation 3a, add that Andrew is a Christian, and Sam is not. Andrew does not know Paul.

3c. Bargaining. Take Situation 3a, but change it so that nobody else but Paul is available to work for Andrew. Andrew is a very bad bargainer, as Paul knows, so Paul will be able to make him one take-it-or-leave-it offer.

These are the same numbers as in (1a) to (1c). My answers would be that in (1a), Sam should not quit his current $12/hour job to work for Andrew for $10/hour or less, just out of charity to Andrew. If he thinks Andrew is deserving of charity, he should keep his current job and pay him cash. This remains true even if Sam is non-Christian. And in (3c), Paul should be a tough bargainer and hold out for $25/hour, just as Andrew would have held out for $12/hour in (1c), and by the same reasoning.

If, however, you went with a non-market decisions in (1a) to (1c), you may have a problem in (3a) to (3c). If, for example, you think that Andrew should have offered to hire Paul at the above-market wage of $15/hour in (1a), then do you also think Paul should have offered to work for Andrew at the below-market wage of $8/hour? How do they reconcile their contradictory desires? I think people have an impulse to say that the wage should be above the market level, at $15/hour, rather than below, but do you still believe that if Paul is much wealthier than Andrew? (Employers are not necessarily richer than employees- just think of pro baseball players whose employers are small shareholders in a corporation.)

I was inspired to think on this topic by the chapters by Stephen Bainbridge (in favor of wealth maximization) and George Garvey (not in favor) in the McConnell book. Professor Garvey quotes quite a bit from Leo XIII's Rerum Novarum (1891). I'll excerpt a little here from that encyclical:

40. The working man, too, has interests in which he should be protected by the State; and first of all, there are the interests of his soul. ...

From this follows the obligation of the cessation from work and labor on Sundays and certain holy days.

Daily labor, therefore, should be so regulated as not to be protracted over longer hours than strength admits.

45. Let the working man and the employer make free agreements, and in particular let them agree freely as to the wages; nevertheless, there underlies a dictate of natural justice more imperious and ancient than any bargain between man and man, namely, that wages ought not to be insufficient to support a frugal and well-behaved wage-earner. If through necessity or fear of a worse evil the workman accept harder conditions because an employer or contractor will afford him no better, he is made the victim of force and injustice. In these and similar questions, however-such as, for example, the hours of labor in different trades, the sanitary precautions to be observed in factories and workshops, etc. - in order to supersede undue interference on the part of the State, especially as circumstances, times, and localities differ so widely, it is advisable that recourse be had to societies or boards such as We shall mention presently, or to some other mode of safeguarding the interests of the wage-earners; the State being appealed to, should circumstances require, for its sanction and protection.

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57. To sum up, then, We may lay it down as a general and lasting law that working men's associations should be so organized and governed as to furnish the best and most suitable means for attaining what is aimed at, that is to say, for helping each individual member to better his condition to the utmost in body, soul, and property.

It's interesting that Pope Leo seems a bit dubious about the free market, but his favored solution seems to be Catholic labor unions rather than government regulation. Perhaps he was thinking of pre-industrial economies, not free, but dominated by power struggles, so he didn't trust the government (which might well be captured by employers), and wanted to strong labor unions to equalize the bargaining position of workers against monopsonistic employers.

It is worth keeping in mind that Rerum Novarum comes from the era in which the Roman Catholic Church was uncomfortable not just with free markets but with other modern things such as secular governments and elected governments . See my old post ofAugust 2003 , which I ought to update some day (it doesn't talk about elections vs. monarchies, on which seeIMMORTALE DEI (1885), just about whether church and state should be separate). Anyone citing papal encyclicals of that era in support of government regulation had better be ready to support other encyclicals less appealing to the modern mind.