Suppose low-skilled Bob immigrates to the US. Because Bob is unaccustomed to a high standard of living, he finds himself quite content to share a two-bedroom apartment with 3 other immigrants and to live mainly off rice and beans. Living meagerly, he is able to undercut his equivalent unskilled American worker by X dollars. This means, if Bob is being paid Y dollars, his American counterpart is either unwilling or unable (by virtue of debt) to do the same amount of work for less than X + Y dollars.

Excluding Bob’s use of government services, and the amount of money he pays in taxes, are we better off economically with or without Bob in the job pool?

The American worker who loses his job due to Bob is worse off by X + Y dollars. However, the employer of Bob now pays X dollars less than she used to, while receiving approximately the same level of services, so the employer is better off by X dollars. Moreover, the immigrant is better off by Y dollars, since without the job, he would be making zero dollars.

So the net effect is X + Y - (X + Y) = 0. Although the net effect is zero, the Y dollars kept by the employer will eventually lead to a reduction in the fees the employer charges to customers, which means those Y dollars end up being redistributed to a great many people. However, the effect is counterbalanced because the American worker was spending Y more dollars than Bob, leading to a reduction in income for those business or individuals he chose to spend the Y dollars on.

If you look closely at the equation, you can see that if the grumbling American worker leaves the economy, the net effect becomes positive. So the solution to the immigrant ‘problem’ appears to be to open borders to immigrants and deport American workers who lose their jobs!

Actually, nothing so serious is required to achieve an effect that many would consider positive. If the American worker is retrained, he can move to a higher paying field not supplanted by the immigrant — which improves his condition at the expense of others in that field (their salaries decrease due to higher supply, all other things being equal).

That’s wealth redistribution, free market style.

Worshiping as I do at the shrine of the blessed and holy Green Circle of Joy and Lifegiving, I am always at least slightly piqued when non-believers blaspheme the name of the Revered One. For a while, this blasphemy came in the form of attacks on how much the Great One paid to the farmers it employs to grow coffee beans (see, if you’re not easily offended, this article on Fair Trade Coffee).

In abstract, the idea sounds great. Demand that coffee farmers be paid more (or try to legislate it, if you happen to live in California), and in so doing you will increase the quality of life for those workers whose fruits bring you such great delight. Unfortunately, attempts at micromanaging the economy in this way are doomed to fail, in ways that may not be immediately obvious. Let’s look at why, in this particular case.

Let’s imagine that government goes several steps beyond fair trade prices and forces every buyer of coffee to pay 1000% more than they are currently paying, so coffee farmers can enjoy the ‘good life.’ This would lead to an increase in the price of retail coffee (but not by 1000%, since there are many other costs built into the retail price of coffee). So suddenly that Venti at Starbucks costs $2.10 instead of $1.90, while a can of Folgers goes for $10 instead of $9.

There are two possible outcomes in this scenario. Either the consumers are willing to pay the increase, with no decrease in consumption (Option A), or they decrease their consumption of coffee (Option B) in response to the higher prices. We’ll look at each of these options separately.

Option A. Assuming coffee is a powerful drug, we might expect that increasing the price of coffee by a modest amount would have little or no effect on consumption. In this case, consumers buy the same amount of coffee they did before, only they pay more. Since they’re spending more of their disposable income on coffee, this implies they are spending less money on other luxuries. Perhaps they are going out to eat less. Perhaps they buy fewer clothes. Maybe they see fewer movies a year or skip out on supporting the local music scene. No matter what they cut, however, they will be cutting—and this cut will lead to reduced demand for whatever they were formerly consuming, leading to some combination of layoffs and salary reductions in the affected producers. Thus, for Option A, paying the coffee farmers a higher salary comes at the expense of other people’s salaries or jobs. In effect, paying the coffee farmers more makes them richer at the expense of others.

You can argue this is good or bad, but you should be aware that it will happen assuming Option A, and that the most affected group is likely to be the service industry, whose workers already have relatively low incomes.

Option B. Assuming coffee’s hold over people is not so strong to prevent them from altering their buying decisions, we might expect that if coffee costs more, people will buy less of it, so that their level of spending on coffee remains constant, even as the price of coffee increases. If people are buying less coffee, this in turn implies that there is a need for fewer coffee farmers, all other things being equal. Thus, increasing the price of coffee makes some farmers richer, but causes others to lose their jobs.

Now let’s assume that not all things are equal. That, for example, these farmers use organic farming methods or even go one step further in avoiding the use of farm equipment. In this case, we might need just as many farmers as before, or perhaps more, to produce a lesser amount of coffee. Since having more farmers would tend to decrease their income, let’s assume that the number of farmers would remain unchanged.

In this case, the consumers are not spending more (their level of spending remains fixed, as per our assumption), but farmers are making more. Did we get something for nothing? Is this a win-win situation? Not at all. Recall that while the consumers aren’t spending more, they had to decrease their coffee consumption in order to keep their spending constant. Presumably, a person who buys coffee does so because consuming coffee increases their quality of life. By tinkering with the price of coffee, we end up making farmers richer at the expense of the quality of life of coffee drinkers.

Therefore, assuming Option B, fixing the price of coffee would either cause some farmers to lose their job, or merely transfer some quality of life from coffee drinkers to coffee farmers.

In the latter case, one might argue the loss of quality of life for the coffee drinkers would be made up for by the knowledge that coffee farmers have a higher standard of living. I would argue that those for whom this is true are already paying at least fair trade coffee prices (that, or they just haven’t been exposed to the movements). If this is true, then legislating an increase in coffee prices would only result in a loss for everone affected by the measure (except some farmers).

So to summarize, the possible outcomes of legislating increases in coffee pricing are as follows:

• Coffee farmers make more but other workers in other professions make less or lose their jobs.
• Some coffee farmers make more but other coffee farmers lose their jobs.
• Coffee farmers make more but coffee drinkers experience a decrease in the quality of their life by reduced consumption of coffee.

None of these outcomes seems to be particularly desirable. No doubt many will champion the third, but this is a matter of subjectivity. Do we want one group of society to have the right to force a decrease in the quality of life of a second group, for the sake of a third? Who gets to decide what is a good tradeoff, and what is not? It needn’t stop at coffee. How about a mandatory price increase for milk and socks, so farmers and factory workers can enjoy a higher standard of living? Even if you manage to avoid the first and second outcomes, and somehow end up with just as many workers as before, you still can’t get something for nothing. Someone is going to suffer, and in the milks and socks example, it’s much more likely to be those without a lot of money to begin with (since coffee is, after all, not a necessity).

A side effect I haven’t mentioned of artificially increasing the price of a good is that it will make more people want to get into the business of making that good. Why grow peas for pennies a pound when you can grow coffee beans for ten times the amount? In this case, we need to ask the question, who decides who gets to grow the beans? If the market decides it, then because the market cannot decide based on price and quality, it will decide based on quality alone. So those farmers who are blessed with better soil or better climate, or who put in an extra 40 hours a week to ensure superior coffee beans, are going to get the contracts. It’s easy to imagine this evolving into ’slave labor’ conditions where individuals work for 120 or more hours a week, simply because if they don’t, someone else will, due to the inflated coffee prices.

Low wage problems are never solved by market tinkering. I think a better solution is job redistribution through training. But that’s a different post for a different time.