Gareth Morgan, Director of Gareth Morgan Investments
In his missive on the demerits of unfettered markets (NZ Herald December 20), Auckland University economics lecturer Tim Hazeldine argues the case for government intervention in the labour market. He suggests that unlike in the market for dead fish, an intervention such as a stipulated minimum wage, as a necessary protection for the working poor. Setting the minimum wage above the rate which would clear the market leading to an excess supply of labour (unemployment), Hazeldine doesn't see as necessarily bad, as it can be addressed by another intervention; either one from the welfare state – the unemployment benefit, or one of his unspecified feats of magic which comprise "complementary steps .. on the supply and demand side of the labour market to get employment rising with wages..".
Lest this be seen as setting one intervention to catch another, Hazeldine argues that the minimum wage establishes a floor below which work cannot be bought and this is a necessary intervention to avoid exploitation. Better those who cannot find work because they have to price themselves too high, are paid to be idle even with the associated social, health and economic costs that state engenders. His other intervention potions apparently will fix that side-effect eventually.
The core of the Hazeldine case is that governments must intervene to produce better outcomes, "better" being loosely defined as rising wages and employment levels. One need be totally anti-intervention to conclude that there exists a hazard of intervention overkill, the result of which is more likely to be sub-optimal outcomes in all respects. Given the complexity of market forces, government prone to this would be more common than government which always gets its interventions right. An example can illustrate.
Consider the market for economics lecturers. On the demand side customers seek their services to both learn something about economics as a field of inquiry in its own right, and also to assist them gain necessary accreditation for the career path they wish to pursue. On the supply side, one would pursue this craft so long as one could add value to the client, that is provide them with a service they are prepared to pay sufficient for the lecturer to be bothered doing it.
Now consider the reality. On the supply side a government intervention determines that lecturers' wage rates are set in a lockstep system, driven only by seniority. The same structure prevails across Faculties within a university and across Universities. This wage control need not deliver, indeed has very little chance of delivering, the wage rate at which the market clears – where the supply of lecturers equals the demand for them.
If the wage is set too high then we get a proliferation of economics lecturers. Supposedly the University will opt for the very best and the surplus will opt for the dole or even re-train for some other career. Set too low, the wage will deliver a shortage of economics lecturers and in order to meet the market, universities may have to lower the standard of lecturer they employ, or restrict entry to the courses.
But the intervention in the market for economics lecturers is even heavier handed than this. On the demand side, the client only pays a fraction of the cost of supplying the services rendered by economics lecturers. The clients agent, the taxpayer-funded University Grants Committee pays the bulk. The UGC (like RHA's) can at best, only proximate this. Importantly, what economics lecturers are paid bears virtually no relation to the demand for their services, except insofar as that demand bears a relativity to the demand for other university courses which compete for the overall funding budget.
This then is a case of a market that is so distorted that its primary signals – prices which flex in response to both the market supply of economics lecturers, and the market demand for their services – do not get through. Under such distorted circumstances there is ample scope for exploitation. For instance, consider what is to stop the leadership of an Economics Faculty simply hiring economics lecturers which have sympathetic political leanings. Indeed life would be more comfortable for all, if that were the case. At least it would save any distasteful disagreements in the staff common rooms.
What might be the student response to this bias ? At best it would be slow – graduates who found that their "qualification" was not as useful in the marketplace as they had been led to believe would pass the message and the supply of students would dry up. But geographic barriers to competition – one university only in each major town – might restrict the ability of economics students to attend an out of town university. This would leave them with having to choose another subject, a change which might reduce the size of the local economics faculty, but certainly cannot encourage a competitor to start up, given the monopoly supplier/funder situation. Market disciplines here are so muted that distortion will persist.
From the above, the extent of the distortions which government intervention can impart on a market should be apparent. If you concur, then congratulations you know more economics than Tim Hazeldine's economics courses can deliver and it only cost you 70 cents.
It turns out, that the market for economics lecturers would be much more efficient and impose less of a burden on the rest of the economy if it did take on the attributes of the market for dead fish after all.