Comment: The Fool - No Pain No Gain

Friday 11 August 2017

Introducing our new monthly column from 'The Fool'. Don't expect marketing speak, don't expect a rosy feeling inside, and don't expect to like him (we're not entirely sure about him ourselves). Only expect this - every month, he'll bring you the unvarnished truth from the heart of the finance industry.

Here’s one for you.

You have a yearning for a prosciutto, parmesan and rocket sandwich (drizzled with triple pressed extra virgin olive oil, obviously), but find that, horrors of horrors, you have run out of Sourdough bread.  When you go to the supermarket (sorry, you have a beard, artisan bakery/delicatessen/fair trade macramé coffee shop), you find that there are two identical loaves on offer. One, we’ll call it Loaf A, is priced at £1. The other, Loaf B, equally full of crispy, slightly tart, tangy, goodness, is £1.50. Which one do you buy?

Being the conscientious consumer that you are, you subsequently discover that the company who produce Loaf A pay their bakers £5 per hour, whilst those who produce Loaf B pay theirs £7.50 per hour, and hence their product is more expensive. Remember, the loaves are identical, and this is just between you and me, so nobody is going to judge you, but which one do you buy the next time that wholesome sandwich craving comes upon you?

You like to think you’re a decent person, but 50p is 50p, so you take Loaf A home, and, quite quickly, the producers of Loaf B are faced with some difficult choices. They can:

1. Cut their costs so they can match their competitors price
2. Make their product noticeably better to justify the higher price
3. Rapidly go out of business (making their bakers redundant)

Hey comrade, we’re not communists here. The bakers who work for the Loaf A company are free to go and get a job with Loaf B company. Their pay would be higher, but that’s only really going to be worthwhile if the company are still in business, which they’re probably not, because nobody is buying their loaves.

So Loaf A company sells all of its product, and because the workers see profits rising, they get into a bit of negotiation with their employer, and, because there’s more cash to go around, they get a wage rise to £6 per hour. If the company are going to maintain their profit margin, this means the price of Loaf A also has to rise (come on, it’s taken five paragraphs for that to slip in), but they will continue to sell until somebody else comes along, offering the same quality product for less dough (I’m trying to exercise restraint, honestly I am).

Ladies and gentlemen, I give you the capitalist system.

The consumer dictates the products they want, and the price they are willing to pay to satisfy their demand. More importantly, they also, albeit indirectly, dictate the price of production (including wages) that can be borne by producers if they want to shift their product, and make sufficient profit to stay in business. How’s that new £400 Samsung 4K ultra HD TV working out for you, by the way? (2012 Average monthly base wage for Chinese factory employee supplying Samsung - USD$251). Picture good, yeah?

Pictured: There's no better way to discuss capitalism than how the baking industry manages dough, according to The Fool.

The point of greatest utility for everybody, both consumer and producer, is where maximum demand and maximum supply meet, at what we call the optimal price. In a perfect world, this would be the point at which no excess resources are used, because companies adjust their production to supply exactly the maximum amount demanded, and employees continue to turn up to work for a wage they deem sufficient. The system continually adjusts, and everyone’s a winner.

Until of course somebody within government decides that, actually, £6 per hour is an insufficient wage for a baker (or anybody else) to survive on, and that bakers should in fact earn £7.88 per hour (ignoring the fact that bakers are still turning up to work because they feel £6 per hour is a sufficient reward for them not to seek alternative work elsewhere). It’s a noble aim, of course, to ensure that everyone has sufficient income to get by, but an arbitrary figure dreamed up by a government department has little to do with the economic realities of supply, demand, and most importantly, the value created by that employment.

Despite what the internet might tell you, the basic fact is that ‘low’ wages are not a product of worker exploitation, corporate greed or any other such nonsense. It’s because there is an over-supply of willing labour chasing too few jobs, and squeezed margins because we all want cheap stuff.  

Trying to put in place a minimum wage is the answer to the wrong problem. What one person believes somebody else needs to earn has nothing to do with what economic value that person’s employment creates. Wages eventually adjust to reflect economic conditions, and artificially raising pay above the market level is likely to increase the supply of labour (and supress future wage pressure), rather than reduce it.

Bakeries are still functioning because sufficient people are turning up to work at £6 per hour (despite the fact that unemployment is the lowest it has been for years). So why are the government suggesting that we take action that creates inflation, which drives further calls for the minimum wage to rise, and actually disproportionately punishes those lower earners, who spend most of their earnings on the basic necessities, who we are supposed to be helping?

Politicians would do well to remember that Beardy might still vote for you even though you’ve spent most of the last year debating internal reform, policies and procedures, and other nonsense that is of no discernible benefit to his life. But don’t count on his support if you force him to switch to supermarket brand cheddar, and white sliced.

Who's The Fool?

Connect magazine's insider in the finance industry sits at a desk somewhere near you. He's unspinnable, unbiddable, and strictly anonymous.

Definition

The Fool - A privileged position held at an ancient king or queen's court; the fool was not taken seriously by the high and mighty, but was the only person able to speak the truth to power.