Financial Literacy: Billionaires who can’t afford to buy a loaf of bread.

by on August 3, 2009
in Economics, money

Everything has a “trading value” and it is expressed as a price.  This includes the value of human labor, regardless of whether it is of the menial type, such as hammering nails, or intellectual labor, such as a performing rock star or a concert pianist or a novelist or a scientist.  The value of any given labor is determined by those who purchase the product of that labor, i.e. a newly constructed house, a repaired dishwasher, going to a movie, or a new prescription drug developed through scientific research.  The value of all labor is expressed as a price.  The price of labor is its compensation, whether in the form of hourly wages, salary, commissions, royalties, percentages of sales or profits, or whatever.

Even money has a value, and like every other traded commodity, the price of money fluctuates.  The reason for this is that money has no intrinsic value; it has no value in, and of, itself.  The only value of money is in its function as a medium of exchange.  The value of money is measured by its Purchasing Power (PP).  Obviously there is a big difference between a dollar that will buy you a whole loaf of bread and a dollar that will only buy you two slices of bread. 

The value of money, i.e. it’s Purchasing Power, goes down as prices go up.  Again, if the price of a loaf of bread went from $1 to $2, one dollar now only has the ability to purchase 1/2 loaf of bread.  This is called inflation.  Inflation debases, or reduces the Purchasing Power of the dollar.  When the price of labor inflates, wages go up, but the wage earners standard of living does not go up, because the Purchasing Power of every dollar of his wages went down.  Continually increasing wages is always a part of an overall inflationary spiral, where the price of everything goes up, and the value or purchasing power of the currency goes down.

The key to improving the overall standard of living is not by raising wages, but by raising productivity.  Then the cost of everything goes down in real terms, and every dollar trades for greater amounts of goods and services.  An increase in productivity results in raising the Purchasing Power of your dollar.  This is not inflation.  This is real growth.  Increases in productivity are achieved, not because people work harder, but because technology automates more and more activities.  Human labor is still required, but more goods are produced for every hour of input.

A grasp of this concept will help you to appreciate why government’s insistence on periodically raising the minimum wage does not improve anyone’s lot in life.  It temporarily and artificially inflates the price of labor without any matching rise in productivity.  It raises wages as measured in dollars, but without raising the Purchasing Power of those dollars, it only succeeds in devaluing or cheapening those dollars.  Minimum wage legislation is nothing more than a cheap, symbolic gesture to buy votes, and it contributes to an inflationary spiral.  Legislating an increase in the price of labor is no different than legislating a lower price of bread; they are efforts to force trading at fixed prices, rather than letting the prices fluctuate according to the agreements arranged between two or more free trading partners.  When governments attempt to force trading and fix prices, they create “black markets” which is where people do what they really want to do anyway.  When governments legislate minimum wages, one of the unanticipated results is frequently people buying and selling their time and services “under the table”.  This is a form of a “black market”.

So remember, when dollars go up, productivity must also go up, or your dollars become worth less in their ability to purchase.  How rich would you feel with a wheelbarrow load of dollars that didn’t have enough purchasing power to buy a single loaf of bread?  This type of thing has already happened!  Listen to it here

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