Economics 101 & Public Square

Prices, Income, and Education

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These last few weeks I’ve been trying to answer a very thoughtful question Moody Radio’s Janet Parshall asked me on her radio show.

Basically, Janet wanted me to answer why teachers are not paid more if training our children is such an important job to society.

When thinking about this question, I find it helpful to first think through the larger biblical framework.

The Bible speaks to the scarcity present in our world when it speaks of the Fall in Genesis 3: 17-18:

Cursed is the ground because of you; through painful toil you will eat food from it all the days of your life. It will produce thorns and thistles for you,and you will eat the plants of the field. 

God’s admonishment to Adam in this passage describes the incredible level of scarcity mankind will now have to wrestle with as a result of the Fall. Because the world we live in after the Fall now only has scarce resources, we need to know how to allocate those resources in the most productive way.

  • Markets are imperfect tools that nonetheless help us overcome some of the scarcity we face.
  • The problem of resource allocation is a knowledge problem; not one person knows everything we need to know about functioning in a market economy, i.e. how to best allocate scarce resources in productive ways.
  • In the context of scarcity, prices and incomes operate as signal devices: they reflect relative scarcities, and help bring together the most willing suppliers with the most willing demanders.

So how can all this help us to understand the large wage differences between professions?

Principles of Price & Income

Here a few points that can help us get a grasp on the situation:

1. Markets portray value based on how consumers assess it.

2. Markets force suppliers to give people what they demand. That is why you see the goods and services you do on store shelves – consumers, by purchasing those products, told producers to put them there.

3. What is the alternative to markets? A planned or managed economy. But, if you accept the knowledge problem – that no one person has the all the knowledge necessary to allocate scarce resources to their most productive use – this becomes a problematic alternative:

  • Planning cannot get us a moral price or salary, because no one has the knowledge to know what that price or salary should be, or what are the various gifts, talents, and comparative advantages of all citizens in a society.
  • In planned economies, managers are forced to guess at prices, or prices are set by the whims of leaders. This is usually accomplished by force, and even then, it is an inefficient means of allocating scarce resources.

4. The more you serve people, the more markets will reward you. Let me clarify what I mean by “serve” and “reward.”

  • Consider Microsoft: Bill Gates “serves” hundreds of millions of clients with his product, and gets “rewarded” for everyone he serves because a transaction is made each time. You have a technological need. Microsoft serves your need by offering a product or service, and you reward them by purchasing that product or service.
  • In the same way, every time you watch a sporting event on T.V. or purchase a ticket to a game, you are rewarding an athlete for his or her service they provide to you on the field.

This last point gets at what makes the issue of teachers’ salaries so complex. The transaction aspect has been taken out of education.

Prices, Income, and Education

Making education compulsory and free distorts the ability of markets to place a higher value on the work of teachers because we have eliminated markets in the arena of education. We cannot bring together the most willing suppliers and the most willing demanders. Thus, the knowledge problem persists.

Since education is provided by the state without a price, we cannot regulate the quality and quantity like a market would. We cannot reward teachers the way we think they ought to be rewarded for their services. There is no mechanism to do so.

Markets give us what we tell them we want. We want children’s movies with great animation – and the market gives it to us. Look at all the movies produced by Pixar and DreamWorks.

Just one of these animated movies serves a wide audience who value that product enough to pay to see it. That is why those involved in the movie’s production command such a high salary. They are being rewarded for their work by everyone who paid to see their film.

The market cannot discriminate. It does what consumers indicate they want it to do, via their purchasing behavior. Until we stop wanting Sunday football games, the market will continue to serve us by providing them.

In the future I’ll dive into alternatives to market solutions regarding the knowledge problem, scarcity, and low salaries – and assess how well these alternatives work.

What do you think? How should prices and salaries be set in our economy? Leave your comments here

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