Matthew Desmond is a professor in the department of sociology at Princeton University. He has a lot in common with his contemporaries at other ivy league schools. Namely, they all can not think straight. This does not stop parents from pounding on the door to let their children into these cesspools of intellectual thought.
The New York Times is running an article by Professor Desmond about the brutality of American Capitalism. His very first paragraph shows he does not understand economics 101.
Martin Shkreli was the chief executive of a pharmaceutical company that acquired the rights to Daraprim, a lifesaving antiparasitic drug. Previously the drug cost $13.50 a pill, but in Shkreli’s hands, the price quickly increased by a factor of 56, to $750 a pill. At a health care conference, Shkreli told the audience that he should have raised the price even higher. “No one wants to say it, no one’s proud of it,” he explained. “But this is a capitalist society, a capitalist system and capitalist rules.”
Prices are a result of supply and demand. Buyer and seller meeting in the market. This is depicted in the supply and demand curves of every economic text book written in the last 100 years. Desmond and Shkreli are both focused on the seller. The other half of the equation is the buyer. As things get more expensive people buy less of it. If the seller sets prices, why stop at $750 a pill? Why not $7,500 a pill? I own a 10 year old beat up car. I can post it online for an asking price of $1,000,000 dollars. No one would buy it. That is because I, the seller, do not set prices. The price is where the buyer and seller meet. He makes the same mistake again in the following passage:
…wages are depressed as businesses compete over the price, not the quality, of goods; so-called unskilled workers are typically incentivized through punishments, not promotions…
The first part is a bad restatement of the iron law of wages. It was popularized by Karl Marx. He actually stole it from Ferdinand Lassalle who called it the brazen law of wages. But since Marx hated Lassalle so much, he changed brazen to iron. It has been debunked so many times and is so obviously false by general observations in the real world, that it is scary someone actually still believes it. The idea that wages in the long run get depressed until the point of a subsistence level, flies in the face of everything that is observed. If it was true, than we would all be making minimum wage right now. The fact is a small percentage of workers make minimum wage and most people do not make it for very long. They become more productive and acquire more skills. This allows them to command a higher wage. Desmond believes employers set the price of labor. However, the other side of the equation are the employees. He can not see this.
He continues:
In the United States, the richest 1 percent of Americans own 40 percent of the country’s wealth, while a larger share of working-age people (18-65) live in poverty than in any other nation belonging to the Organization for Economic Cooperation and Development (O.E.C.D.).
First, his statement that the richest 1 percent owning 40 percent of the country’s wealth implies that he believes the economy is a fixed pie of wealth. Jeff Bezos getting rich does not stop me from getting rich nor does it make me poorer. In fact, Amazon lets me buy cheaper products. It has enriched me, the consumer. For more on the fixed pie fallacy see here.
Second, I actually followed the link “live in poverty”, which takes me to the OECD website. Here is how the OECD determines the poverty rate.
The poverty rate is the ratio of the number of people (in a given age group) whose income falls below the poverty line; taken as half the median household income of the total population. It is also available by broad age group: child poverty (0-17 years old), working-age poverty and elderly poverty (66 year-olds or more). However, two countries with the same poverty rates may differ in terms of the relative income-level of the poor.
I am going to show you the absurdity of this definition by giving two examples. One is society A and the other is society B. Assume the dollar amounts have been normalized.
Society A
In society A, there exist 1,000 people. The median household income is $5,000. Half of $5,000 is $2,500. Let us say that 100 people make $2,500. This gives a ratio of 100/1000= 0.1. This 0.1 is what the OECD considers the poverty rate for society A.
Society B
In society B, there exist 1,000 people. The median household income is $500,000. Half of $500,000 is $250,000. Let us say that 100 people make $250,000. This gives a ratio of 100/1000= 0.1. This 0.1 is what the OECD considers the poverty rate for society B.
Both society A and B have the same poverty rate. Which one is better off? In fairness to the OECD, they actually cover themselves with that last statement in their definition. Professor Desmond is either incredibly stupid for using this statistic or is being intellectually dishonest.
The article is filled with sophism after sophism. It is almost impossible to read.