It seems like you have just reinvented the criticism “if you can extract almost all the value from each transaction (aka ‘exploitation’), you will shortly be rich”. Well, yes, but the point is that a market with competition generally prevents you from doing that. As someone pointed out, if you make 100 loaves then you have created 100 dollars of value; the question is how those 100 dollars are distributed. You construct an example where the baker is able to capture 99% of the value he created; good for him, but it relies on your construction of the price. Seeing the baker get rich, won’t a bunch of other people decide that bread-making can’t be that hard, make some loaves, and sell them for 98 cents? And so on until the price of bread is equal to the cost of production plus the smallest profit anyone is willing to live with, which in your example seems to be a penny.
This kind of “stuff gets cheaper, everyone benefits” advocacy is why I wrote that comment to begin with. The free market can’t be always pushing down the price of all goods (measured in other goods), that’s a logical impossibility. There’s no magic force acting on one conveniently chosen side of each transaction. Why isn’t the same force pushing down the price of labor then, making labor cheap in terms of bread, instead of making bread cheap in terms of labor? Oh wait, maybe it is. Maybe all these forces are acting at once and going into weird feedback loops and there’s no reason why the end result would be moral in any way. That’s my point.
That might work sometimes, but sadly market advantage isn’t always connected to moral worth. For example, land supply is even more fixed than labor. If market advantage goes to the side with fixed supply, then most salary increases will be eaten by landlords raising rents. (Which pretty much happens in some places.) Also I’m not sure making labor is harder than e.g. starting a tech company. If market advantage goes to the side that’s harder to make, then tech companies will use non-tech labor for cheap. (Which also happens, see Uber.) Like I said, immoral forces acting all at once.
Land supply is fixed but land supply isn’t the problem with rising rent. The problem is the number of flats. Toyko’s rents didn’t rise in the last decades but rents in a place like San Fransico rise because the government enforcing zoning regulations that prevent the building of new housing.
That could be because Japan’s population and economy aren’t growing much. In any case, even if rent isn’t a good example, there might be other bottlenecks in the economy besides labor, so labor won’t always win.
Tokyo’s population and economy are growing even when that’s not true for Japan on the whole. The political decision to get rid of zoning regulations is quite clearly responsible.
Of course, there are resources that are scarce and then the market puts a high price on it but there’s no way around scarcity. If the resource is really scarce you can’t give it to everybody.
...Which amounts to fixed supply. Not sure how you’re contradicting anything I’m saying. The point isn’t about land, the point is that there’s no law of economics saying the price of labor must go up relative to other goods.
The free market can’t be always pushing down the price of all goods
You are looking at the wrong thing. Specifically, you’re looking at exchange ratios (“prices”) when you should be looking at how much value gets produced and how much human input/labour does that value need (aka “the productivity of labour”).
Maybe all these forces are acting at once and going into weird feedback loops
Let me try again, in all caps. REALITY CHECK.
there’s no reason why the end result would be moral in any way
“there’s no reason why the end result would be moral in any way. ”
This is wrong. The reason is that everyone is doing what they want, which is, on average, more likely to benefit people than having to do what they do not want, since people typically want to do things that benefit them and avoid things that do not.
The above is, in fact, the basic but extremely simplified reason why no one yet has been able to come up with a better system.
The free market can’t be always pushing down the price of all goods (measured in other goods), that’s a logical impossibility.
And yet that seems to be precisely what has happened.
However, supposing we hold tech progress and capital investment constant, then yes, we’ll reach a steady state in which prices as a whole cannot fall further. But that still does not demonstrate that it is possible to maintain the sort of high-value-extraction transactions you outline for any great length of time. If the profit of bread is high then it will fall as people enter the market; this will, yes, slightly raise the profit of all other occupations, holding technology and capital steady. But the eventual equilibrium has all the profit rates being the same. Otherwise investment flows from the low-profit ones to the high-profit ones.
It seems like you have just reinvented the criticism “if you can extract almost all the value from each transaction (aka ‘exploitation’), you will shortly be rich”. Well, yes, but the point is that a market with competition generally prevents you from doing that. As someone pointed out, if you make 100 loaves then you have created 100 dollars of value; the question is how those 100 dollars are distributed. You construct an example where the baker is able to capture 99% of the value he created; good for him, but it relies on your construction of the price. Seeing the baker get rich, won’t a bunch of other people decide that bread-making can’t be that hard, make some loaves, and sell them for 98 cents? And so on until the price of bread is equal to the cost of production plus the smallest profit anyone is willing to live with, which in your example seems to be a penny.
This kind of “stuff gets cheaper, everyone benefits” advocacy is why I wrote that comment to begin with. The free market can’t be always pushing down the price of all goods (measured in other goods), that’s a logical impossibility. There’s no magic force acting on one conveniently chosen side of each transaction. Why isn’t the same force pushing down the price of labor then, making labor cheap in terms of bread, instead of making bread cheap in terms of labor? Oh wait, maybe it is. Maybe all these forces are acting at once and going into weird feedback loops and there’s no reason why the end result would be moral in any way. That’s my point.
Because labor is in relatively fixed supply given that it takes decades to grow and child into an adult and educate it.
On the other hand, it’s relatively easy to grow more wheat and make more bread.
That might work sometimes, but sadly market advantage isn’t always connected to moral worth. For example, land supply is even more fixed than labor. If market advantage goes to the side with fixed supply, then most salary increases will be eaten by landlords raising rents. (Which pretty much happens in some places.) Also I’m not sure making labor is harder than e.g. starting a tech company. If market advantage goes to the side that’s harder to make, then tech companies will use non-tech labor for cheap. (Which also happens, see Uber.) Like I said, immoral forces acting all at once.
Land supply is fixed but land supply isn’t the problem with rising rent. The problem is the number of flats. Toyko’s rents didn’t rise in the last decades but rents in a place like San Fransico rise because the government enforcing zoning regulations that prevent the building of new housing.
That could be because Japan’s population and economy aren’t growing much. In any case, even if rent isn’t a good example, there might be other bottlenecks in the economy besides labor, so labor won’t always win.
Tokyo’s population and economy are growing even when that’s not true for Japan on the whole. The political decision to get rid of zoning regulations is quite clearly responsible.
Of course, there are resources that are scarce and then the market puts a high price on it but there’s no way around scarcity. If the resource is really scarce you can’t give it to everybody.
Tokyo’s population has grown and is growing, but that seems to account for most of Tokyo’s economic growth, not zoning regulations, since Tokyo’s GDP per capita shows fairly anaemic growth from 2001 to 2012 (can’t immediately find a longer time series).
I didn’t want to argue that the lack of zoning regulations produced economic growth but that rent is stable despite grows.
Ah, OK, I read your “political decision [...] is quite clearly responsible” as referring to your previous sentence, not your previous comment.
...Which amounts to fixed supply. Not sure how you’re contradicting anything I’m saying. The point isn’t about land, the point is that there’s no law of economics saying the price of labor must go up relative to other goods.
You are looking at the wrong thing. Specifically, you’re looking at exchange ratios (“prices”) when you should be looking at how much value gets produced and how much human input/labour does that value need (aka “the productivity of labour”).
Let me try again, in all caps. REALITY CHECK.
That entirely depends on your morality.
“there’s no reason why the end result would be moral in any way. ”
This is wrong. The reason is that everyone is doing what they want, which is, on average, more likely to benefit people than having to do what they do not want, since people typically want to do things that benefit them and avoid things that do not.
The above is, in fact, the basic but extremely simplified reason why no one yet has been able to come up with a better system.
And yet that seems to be precisely what has happened.
However, supposing we hold tech progress and capital investment constant, then yes, we’ll reach a steady state in which prices as a whole cannot fall further. But that still does not demonstrate that it is possible to maintain the sort of high-value-extraction transactions you outline for any great length of time. If the profit of bread is high then it will fall as people enter the market; this will, yes, slightly raise the profit of all other occupations, holding technology and capital steady. But the eventual equilibrium has all the profit rates being the same. Otherwise investment flows from the low-profit ones to the high-profit ones.