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The Exploitation of Entrepreneurs

Politics / Government Intervention Jun 18, 2010 - 07:28 AM GMT



Best Financial Markets Analysis ArticleAaron Smith writes: In our society of victims, entrepreneurs are blamed for many of the hardships that ail our economy. Whether it is because of high prices, low wages, or substandard economic conditions, they are often accused of exploitation in their quest for profits.

The real victims in our economy, however, are usually not workers who voluntarily enter contracts to sell their labor nor consumers who voluntarily purchase products and services but instead entrepreneurs who are involuntarily subjected to the not-so-invisible hand of our government caretakers. Somehow, it seems completely reasonable to overtly exploit entrepreneurs for their resources in the name of preventing the potential exploitation of anyone else.

Legislators often garner popular support for measures that exploit entrepreneurs by citing ostensibly alarming data: Exxon Mobile made $45.2 billion in profits in 2008 when gas prices eclipsed $4.00; they're price gouging! The average compensation of Fortune 500 companies in 2009 was $9.25 million, yet they're paying unskilled workers only $7.25; the minimum wage is too low!

While drawing such illogical conclusions wouldn't score a teenager any critical-reading points on the SAT, it does help legislators get bills passed in Congress.

A recent victim of the government's crusade against entrepreneurs is American Samoa, where in 2007 Congress dictated a 61% increase in its minimum wage as part of the Fair Minimum Wage Act, despite forceful pleas to the contrary from the island of 65,000. As the Wall Street Journal recently reported, StarKist, one of Samoa's largest employers, will reduce its Samoan workforce 60% by 2011, which they directly attribute to the new wage floor. Unfortunately, they are not the only ones scaling back in Samoa; Chicken of the Sea closed its operations last September, forcing over 2,000 additional Samoans into unemployment.

Congress's blatant disregard of the market has wreaked havoc on the Samoan workforce. However, the minimum wage has severe consequences for entrepreneurs as well — the businesses that haven't come into existence, the projects not pursued, and the lost productivity resulting from the Fair Minimum Wage Act are simply unquantifiable.

Still, minimum-wage advocates argue that price floors are necessary to guarantee a "fair" standard of living for all; however, it is inconsistent to denounce the effects of low wages on employees without equally condemning the effects of high wages on employers. After all, are there not struggling entrepreneurs who don’t know whether they’ll survive from one week to the next? Conservative estimates show that only 50% of new businesses survive five years or more. It is only logical, therefore, that minimum wage advocates should also support a maximum wage.

Consider the market for heart surgeons. Clearly, such a highly specialized field requires a great deal of education and skill. There are plenty of willing buyers and a limited number of sellers, which drives the average annual salary up to over $440,000. By commanding seemingly "excessive" salaries, aren't doctors exploiting employers? After all, a recent analysis of government data by Thomson Reuters showed that 50% of the nation's hospitals were losing money. Shouldn't the government intervene and demand that doctors offer their services for what the state determines to be a fair price?

The money saved from capping these salaries could be used to pay higher wages to less skilled workers, such as administrators and janitors; or better yet, the excess funds could be refunded to patients to lower the costs of their medical bills. In the realm of imagination, there are no limits to altruism.

Price floors and price ceilings are two sides of the same coin; both of them are economically irrational and morally unjust. In practice, the minimum wage only serves to exploit entrepreneurs by mandating how they're able to allocate private resources, much as a maximum wage would exploit employees by restricting the value of their labor.

Unfortunately, regulating expenses for entrepreneurs is not enough for government, as they also seek to regulate revenue. In the midst of two wars, a recession, and widespread debate over illegal immigration, Democratic Senators Mary Landrieu and Ben Cardin are sponsoring a bill to eliminate carry-on baggage fees such as the one that Spirit Airlines will begin levying in August, claiming consumers shouldn't be charged for transporting essential items. Their assertion is preposterous.

Generally, usage fees like these for carry-on baggage are associated with activities that increase variable expenses for businesses — as marginal consumption of a given product or service increases, so do the expenses incurred by entrepreneurs. Usage fees are simply a mechanism to adjust prices based on how much a customer consumes. Those who consume more will pay more; those who consume less will pay less. Such a system is both efficient and equitable.

Baggage fees, including those targeted in the Free of Fees For Carry-On Act, serve to charge passengers for consuming scarce resources such as overhead space, cargo space, and fuel, all of which increase costs. If legislators were to eliminate these fees, airlines would still need to recoup expenses incurred; thus, higher ticket prices would likely result. However, under this scenario, the aforementioned costs would be borne by all passengers, regardless of how much of a particular scarce resource they consume. Such a system is both inefficient and inequitable.

By mandating what airlines can charge for carry-on fees, lawmakers would be exploiting them for the ostensible benefit of their constituents. However, this absurd regulation will have little impact on what consumers actually pay, and it will only serve to socialize costs. Consumers are better off simply including anticipated fees as part of their economic calculations and purchase decisions.

The wealth generators in our economy, entrepreneurs, are often exploited by the wealth destroyers, government officials. Sadly, the Federal Minimum Wage Act of 2007 and the proposed Free of Fees for Carry-On Act are but two of a myriad of examples of how legislators exploit private business in the name of protecting their constituents. The only things they're truly protecting, however, are their seats in Congress.

Aaron Smith is director of knowledge management for YES Prep Public Schools in Houston, Texas. He is also a member of the Houston Area Liberty Campaign. Send him mail. See Aaron Smith's article archives.

© 2010 Copyright Ludwig von Mises - All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

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