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Commentary: An economic parable and election truisms

This article first appeared in the St. Louis Beacon, March 22, 2012 - Bear with me if you’ve heard this one because the purpose of the present recounting is not to belabor the tale but to examine the lessons it teaches.

A contractor has fallen badly behind on a project. Anxious to avoid the penalties and interest delinquency would entail, he summons two able craftsmen to pull his pork from the fire. His proposition is straightforward: Work the next 30 days at $500 a day. No days off; no benefits — just $500 paid at the end of each shift.

The first tradesman accepts the deal, anticipating a guaranteed total payday of $15,000. The second mulls the offer and suggests an alternative rate of compensation. He’s willing to start work for 1 penny on day one, provided his wages are doubled daily. The desperate contractor agrees. Which man struck the better bargain?

At the end of the first 7-day work week, the conventional laborer has earned $3,500 while his innovative counterpart has garnered exactly 64 cents. By Day 14, the first guy has been paid $7,000 while the second has socked away a grand total of $162.56.

Fortunes, however, are about to change. By the end of the third week, the $500-a-day worker has made his anticipated $10,500 but his iconoclastic co-worker has now taken in a cumulative $20,813.68 — including $10,485.76 for the last day, alone. And things only get better for the math major after that.

After 28 days, the salaried employee has earned a total of $14,000 but the penny-shooter has now raked in a whopping $2,663,382.90. In the last two days of employment, the first worker makes $1,000 while the second takes home $8,053,063.20. Final score = $15,000 to $10,737,423.61. It pays to calculate.

As an exercise in mathematical reasoning, this unlikely fable serves to demonstrate the difference between arithmetic and geometric progression.  The former simply adds up while the latter grows exponentially.

Economists often use parables like this to illustrate fundamental principles to their students. For academic purposes, such tales have a limited utility. Problems arise, when we venture beyond the classroom and attempt to explain complex and dynamic reality with truisms wrought from fiction. Misguided efforts of that nature helped the study of economics to gain its reputation as the “dismal science.”

Our penny-ante millionaire makes for an interesting read but don’t look for him on a job site anytime soon. His first problem is that absent outside resources, he would have starved to death during his first week on the job. People who trade their labor for subsistence cannot afford exotic gambles because they can’t survive the incubation period before the bet pays off.  As the saying goes, “It takes money to make money.”

And if our intrepid visionary somehow managed to struggle through without a meal ticket, do you really think any sane contractor would consent to pay a laborer more than $10 million for 30 days work? He was either going to be laid off or bankrupt the company but in either case, he wasn’t about to be paid.

In the real world, the prosaic $500 a day drone had the better deal by far.  Not only was he generously compensated for his work, but he also actually got paid. 15,000 real dollars beat theoretical millions every time.

If crackpot ideas that look good on paper but collapse under the harsh light of day were confined to math puzzles, they wouldn’t much matter.  Unfortunately, our economic myths tend to have some very tangible consequences in the real world.

We know, for instance, that reduced tax rates create jobs. All these new jobs generate tax revenue so the government actually takes in more revenue by lowering taxes. Although this has failed miserably every time it’s been tried, the theory has attained the status of revealed truth on the American right.

We also know that the free market is a self-regulating entity. Governmental oversight reduces market efficiency and stultifies innovation. The disastrous economic collapses of 1929 and 2008 combined with a variety of scandals involving the Enron Corp., the savings & loan industry, Bernie Madoff and a host of kindred scoundrels would seem to argue otherwise, but that’s the way it works in the textbooks.

It is also understood that people who earn their living by investing should be taxed less than those who labor. All those investments infuse the market with capital, which in turn creates — what else? — jobs! Under this theory, men will descend into the bowels of the earth to dig coal even though their wages are taxed as ordinary income. But millionaires will shirk their patriotic duty to acquire more wealth if their profits are taxed at the same rate as coal-miners' paychecks.

The economy figures to be the central issue of this year’s campaign season.  To the extent that Republicans are able to divert their focus from the metaphysics of human conception long enough to discuss it, it probably will be.

As you listen to the various remedies proposed to lower unemployment, try to remember that out here in the real world, employers hire people because they need them. Good wages generate demand for products and thus fuel the need for more jobs. The theory isn’t elegant, but reality rarely is.

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