Hyperwage Theory by Thads Bentulan. He also invented and copyrighted the term "Hyperwage" in 2005. The first part was published in May 2002 and continued in 2005. When this book was serialized for 33 weeks in 2005 in the newspaper BusinessWorld, he was called crazy. Now, 15 years later, the world economists are now parroting his idea that the secret to rescuing the economy is to raise the minimum wage.
Tuesday, January 17, 2006
Part 29 - Hyperwage Theory
Hyperwage Theory Part 29
Hyperwage Theory
Part 29
It is high time to recapitulate the secret and the beauty of Hyperwage Theory. The secret of Hyperwage Theory is that price modifies behavior. The beauty of Hyperwage Theory is its elegant handling of non-economic issues.
Yes, price modifies behavior. The other face of Hyperwage Theory is about using economics to solve non-economic problems.
While Classical economics and Keynesian economics are only concerned with unemployment, interest rates, monetary velocity, and other economic variables, Hyperwage Theory addresses these issues as well by standing on the shoulders of these two schools of economic thought, plus, yes, there’s a very big plus, Hyperwage Theory handles non-economic issues as a direct logical and natural consequence of the theory.
Classical vs. Keynesian
Assume an economy of 200 million consumers consuming 20 pounds of apple per capita annually or a total of 4,000 million pounds of apple at the price of US$0.23 per pound.
If the consumers have lower purchasing power due to loss of jobs for example, under the Classical model, the price of apples will go down to say US$0.19 per pound so as to maintain the supply-demand equilibrium. In other words, the 4,000 million pounds of apple will still consumed – same quantity - but the new price of US$0.19 will be the new price. Same quantity, new price. This is Classical economics.
Now Keynes observed that this is false. The price will still be US$0.23 because prices are sticky, and will not go down easily. However, the new demand will be lower, say, only 3,800 million pounds. For Keynes, it is the demand that will adjust first, not the price. This insight is revolutionary and heretical.
Same price, new quantity.
Of course in the long run, both demand and prices will have to change, but Keynes was tired of all this “long run” arguments. Keynes said: “In the long run, we will all be dead.”
Markov chains?
Keynesian economics effectively dismissed the ceteris paribus (changing one variable while holding other variables constant) assumption, and proposed an “all at once” approach to the macroeconomic equations.
However, you must be aware that the Keynesian equations are not to be solved “simultaneously” because there is some kind of a time sequence to the effects of Keynesian policies. Warning: Blind and wrong interpretation of Keynesian principles may lead one to conclude that the government can supplant market forces. This is wrong. Government provides the pump priming or impetus but must withdraw from the market once it has achieved that purpose.
Anyway, a thought came to me a few days ago. If Keynesian equilibrium is not to be solved simultaneously, is there another approach that the economists throughout the world have missed?
I remembered what I did in my marketing management class many years ago. I used Markov chains which are usually used in nuclear scattering processes in atomic reactions to analyze a marketing problem. Is it possible that Keynesian equations can be solved using Markov chains which are transitional probability matrices?
Guys, econometricians, I have just given you a lead. Why not use Markov chains to analyze Keynesian economics? I’m too old for that stuff. And I’m sure my mathematical ability is inferior to the new generation of math wizards.
Economic issues
I have written the “economic” aspects of Hyperwage Theory against the backdrop of Classical and Keynesian economics. At this stage, it must be clear in your mind, what makes Classical economics classical and what makes Keynesian economics Keynesian. If not, it would be difficult for one to analyze how Hyperwage weaves into these schools of economic thought.
Also, it must be clear by this time that Keynesian and Classical mechanics do not kick out Hyperwage Theory, and that only the unfounded fears of inflation, unemployment, and unaffordability prevent us from accepting Hyperwage.
Having demolished such unfounded fears, I see no major obstacle to Hyperwage being applied to Third World countries where the poor people are getting Third World salaries and paying for computers, cars, heavy equipment, aircons, cellphones, steel, oil, and other global goods and services available in this internet age at First World prices.
Hyperwage Theory engenders possible quantum jumps in economic activity and employment due to a quantum jump in purchasing power. This will catapult any Third World country into a positive upward spiral with greater demands for goods and services.
Again, the implementation could be staggered, and we could strategize a safety net during the transition period. However, let me remind you that minor increases in wages that merely serve to recover the loss of purchasing power is not the increase comtemplated by the Hyperwage Theory.
Non-economic issues
Whenever, the economics experts call Hyperwage Theory hogwash, I always reply: You are looking the economic aspects of the theory using your academic brainwashing. Forget about the economics, and look at the non-economic benefits. As an economist, how do you solve current real issues like doctors going abroad as nurses, or law graduates working as call center telesupport girsl, or teachers working in the Middle East as domestic helpers, or children growing up with mothers or fathers because the latter are working abroad, or people in the streets stealing manhole covers?
You know, the economists cannot answer these problems because these are non-economic problems.
There are no economic equations for these problems. The economists simply do a Pontius Pilate.
On the other hand, Hyperwage is comprehensive. It addresses both economic and non-economic issues. And the solution is very simple: Correct the mispricing of labor. And I’m proposing minimum wage for the poorest at P20,000 per month.
Price modifies behavior
This time we will be using economics (Hyperwage Theory) to solve non-economic problems. While you may think that I’m out of touch with reality in writing a theory while the rest of the world are facing real world problems. But come to think of it, what problems? Housing, unemployment, unequal distribution of wealth, brain drain, petty crimes, petty corruption, expensive oil, expensive computers, low productivity, lazy workers, inefficient systems, bloated bureaucracy, silent majority? Many of these are non-economic problems and our economic policies are scattered and confused. So many agencies doing projects resulting in more corruption and less impact on small number of beneficiaries. Very pathetic.
But price modifies behavior, and Hyperwage Theory banks on this weapon to finally attempt to propel Third World countries to First World status.
Hyperwage Theory addresses many “non-economic” and even economic issues with direct, proximate and logical connections, which current theories either address separately with separate isolated strategies, or never address at all.
Population control
How do you address population explosion? Guys, you won’t believe this but the United Nations spends tens of millions of dollars to address the population issue.
Stephen Hawking, one of greatest scientists of our time, was asked by CNN’S Larry King: “What worries you the most?”
Hawking replied: “My biggest worry is population growth, and if it continues at the current rate, we will be standing shoulder to shoulder in 2600. Something has to happen, and I don’t want it to be a disaster.”
Can you imagine Stephen Hawking being stumped by the population issue, or thousands of experts in the United Nations spending hundreds of millions in dollars solving this problem with no major result?
Let the Street Strategist solve this problem: Give the poorest of the poor the correct labor price. If you give the domestic helpers a minimum wage of P20,000, do you think parents will consider having four children with four maids as is common among the middle class?
No way. How can the parents afford four maids? Price modifies behavior. This is the reason why Hong Kong, Singapore and Japan and other First World countries have low birth rates. The Third World is growing 300% faster than the First World.
Did it ever occur to you what Hyperwage is a better weapon than any other UN program? The control is at the mother-father level, and it is a real control because helpers will be very expensive.
I am hurling a challenge at you: Find a more elegant, cheaper, more direct, more grassroots solution than that.
In other words, Hyperwage automatically addresses the non-economic issue of population explosion.
Or at least, even if Hyperwage will not solve the issue comprehensively, it will dampen the explosion.
Hyperwage tends to solve the problem rather than exacerbate it.
Did I warn you in the earlier chapters the solution to population explosion and low productivity is the same?
Tax evasion
What is our policymakers’ solution to tax evasion? If you read the newspaper they invent all types of rules and regulations. That’s good, but you know each new rule is a new source of petty corruption.
Furthermore, each rule is a new productivity-wasting procedure for compliance.
Let me tell you my solution. There are millions of middle-size and small businesses who evade taxes by under declaring their income in connivance with tax examiners. We can never eradicate this. Why not pursue a different strategy?
The solution: minimum wage of P20,000 so the sales clerks will get about P25,000 to P35,000 per month. Now, watch this line of thinking closely. Even if the owner cheats his taxes, he cannot cheat on the salary. Thus, the high minimum wage is actually a tax on the income of the business owner but instead of this “tax” going to the government where it will be subject to corruption, it is given directly to the workers. From business firms directly to the workers.
Therefore, never mind if owner does not pay these “taxes” to the government because he will simply evade taxes. As long as he is “taxed” in form of higher wages to be paid to his laborers, the entire economy would be benefited.
At any rate, the workers will pay more taxes because of their new high salariers, and more consumption taxes whenever they spend. There will be more sales because the workers will have to spend that money one way or another. The government will still get its share in the end.
But what if the owner cheats on the payroll? Guys, if your pay is worth one color TV set per month (P20,000) will you allow your employers to cheat? No way, one TV set or two aircons per month is too big to be cheated out of you. This time, the workers will be empowered to complain. The amounts are not negligible anymore.
And the government should be strict in enforcing the regulations, this doesn’t cost them more than not enforcing them.
Did you think in the beginning that Hyperwage is a good weapon in our tax collection process? Now, isn’t Hyperwage Theory elegant?
Cost consciousness
There are so many processes that we take for granted in our daily operations because the price of labor is cheap.
For example, without planning the day, many companies send out their messengers to do errands which are not critical to the business. Because if you pay only P4,000 a month, you can afford to have a messenger.
But if the pay is P25,000 for a messenger (P20,000 for the maids), the business owner will ask: Do we really need our own messenger or, should this person become his own Messengerial Service and he can charge us and other companies a per-transaction rate?
In this manner, we are cost-conscious, efficient, and the messenger has become an entrepreneur. Isn’t it elegant?
Instead of hiring an in-house xerox operator, all Vice Presidents do their own photocopying. The top executives of San Miguel Corporation always have this culture shock when they visit SMC Hong Kong.
No more one-to-one secretaries, no more pantry janitors, no more unnecessary costs. But don’t worry about unemployment because there will be more businesses and they can be employed under a different set of skills.
I have to go now but I will discuss more non-economic benefits of Hyperwage next time.
(Thads Bentulan, Dec 1, 2005)
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