Monday, February 20, 2006

Part 18 - Hyperwage Theory

Hyperwage Theory Part 18

Hyperwage Theory Part 18

Hyperwage Theory Part 18

Before we proceed I’d like to share with you these emails. I have received many reactions from readers here and abroad and almost all of them support my theory. There are a few who have questions for clarification. But printing them is another ego trip. So far, I received only two negative reactions which I quote below. This was forwarded to me by a reader. I don’t know these letter-writers personally, but it seems they are not economics students by they way they argue their disagreements, but one never knows. Remember John Maynard Keynes: The difficulty lies, not in the new ideas, but in escaping from the old ones.

The first letter comes from a certain “Trust your instinct. This hyperwage theory is all rubbish.”

The second letter is from a certain “Don’t waste your time on this paper. It’s junk. I don’t know this guy, but he sounds crazy, or at the very least, so full of himself. The last paragraph of page 32 says it all. To wit:

‘One day, I just got tired of all these economics nonsense and said to myself: ‘I am a genius. I will start from ground zero. Zero-based theory. I will ignore the fact there are a million economists ahead of me. I will identify the problems of the Third World. I will….’

A legend in his own mind. A self-proclaimed genius. In short, a nut-case who can not stop praising himself. Send this paper to psychiatrists. They are in a much better position to analyze it. On second thought, they may have to talk to the man himself to find out what’s wrong with him.”

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The hardest person in the world to convince about Hyperwage is the Street Strategist. After all, being the inventor of the Hyperwage Theory I faced the prospect of eternal ridicule and there was nobody with a ready set of answer for my tough questions. And there were no empirical validation.

Forthwith, I became my own devil’s advocate. And I tell you, it’s not easy to match the Street Strategist as devil’s advocate.

And so I started the process of theory development. There was one thing I learned in freshman algebra that I have been using ever since and the fact I still use it today somehow justifies the flat one I obtained in the subject. It is one type of mathematical proof called reductio ad absurdum.

Those of you who have been my disciples for the last five years are familiar with this. First you assume that a statement is true. Second, you make conclusions out of that statement. Third, if the conclusions result into an absurdity, then the original premise was wrong in the first place.

Let’s have an example. Premise: The U.S. is an expensive country with the price of gasoline being US$0.58 (P32.33) per liter. In the Philippines, the price is only P30.03 per liter (June 30, 2005 prices). But it takes only 6.74 minutes for a US minimum wage worker to pay for a liter of gasoline while in the Philippines it takes 49.70 minutes. Therefore, it is absurd to claim that the US is more expensive than the Philippines. That’s reductio ad absurdum.

Using reductio ad absurdum, I tried to destroy both Hyperwage Theory and modern economic theory, and lo and behold: Modern theory collapses while Hyperwage stands on its own.

Quick question, if modern theory is good, can you name to me how it solves the brain drain problem?

You’ll be amused at all the useless solutions they are proposing.

With Hyperwage, its very simple. By paying the world market price for labor, we don’t have to go abroad anymore. In fact, the Russian nuclear scientist would be queuing up to visa to the Philippines to conduct research at hyperwage salaries near the beaches of Palawan.

How does modern theory address inequitable distribution of wealth? Well. they all have this non-sense about taxation, regulation etc to tax the rich and give these to the poor. Good in theory but in practice, corruption swallows our taxes.

What is the Hyperwage solution? Instead of paying taxes, the companies pay this money to labor as wages, after all wages are tax deductible. Instead of going to the company as obscene profits and to the government as objects of corruption, that money is given to the the people, directly, thus creating a strong middle class who can afford to buy and double the market size for cars, create entirely new markets for computers, and amusements, and many other economic activities.

And remember, with a high marginal propensity to consumer, the gross national income of the economy will be multiplied by a factor. If the MPC is 80%, the income multiplier is 5, meaning for every P100 million pesos spent by domestic helpers the country earns P500 million.

Of course, bigger salaries means bigger taxes and more value-added transactions subject to taxes, which means the government actually earns more. With each helper earning P20,000 (instead of only P2,000) can you imagine the millions of new additiona transactions subject to VAT?

Again, this is jumping the gun; I’m just giving you a taste of things to come.

But that’s just to give a flavor of my hypothesis: Hyperwage is a far more logical theory than the existing economic theory and policy adopted by Third World countries.

When I started to develop the theory for Hyperwage, I devoured many economic textbooks hoping to find some validation.

But it was a failure. Every textbook I read warned of hyperinflation, truckloads of useless paper money, and catastrophic unemployment. I found no validation at all.

Yet, if hyperwage is not the solution, then why are the geniuses of the Third World migrating to obviously hyperwage countries? And why are hyperwage countries creating new technologies, new products with little hope of collapsing due to the specific reason of high wages?

After all, Intel designed and manufactured CPUs in a hyperwage country like the US. Similarly, Nokia dominated the worldwide cellular phone industry from a tiny but expensive country such as Finland?

These companies became giants in their hyperwage countries before they dominated the world. The success of these companies have nothing to do with exploiting the cheap labor in China. These companies are in China or Vietnam or the Philippines for profit maximization not for survival.

And don’t tell me that we don’t have capital, after all, we have almost any natural resource, and by the way, Microsoft is a multi-billion dollar company which does not require natural resources.

Anyway, going back to validation, I couldn’t find any.

Until the day I accidentally read about the Card-Kruger study. The CK 1994 study as revisited in 1999, is that one empirical study that I needed to support Hyperwage. Not necessarily that I needed that for myself, but for my detractors. Because, as I have mentioned, in theory, Hyperwage is self-consistent, unlike modern economics.

Stark contrast
Yet, again, modern theory clashes with Hyperwage in its interpretation of economic facts and principles.
The CK study is one such battle. Unfortunately, for the First World economists, the CK study is a fluke, even dismal research, and even an exception that should not be generalized.

This is the reason why CK is controversial. Can you imagine that? I finally found an empirical research yet it’s not supposed to be a credible study? The validation I needed was under attack.

So there you have it. On one hand, a research that is considered controversial and even debunked by many economists. While on the other hand you have Hyperwage Theory which predicts the results of the CK study.

Now, guys, hear me out, guys.

Under Hyperwage Theory the CK study is not surprising. It is not controversial, it is not dismal. Rather, Hyperwage predicts the outcome of the CK study. In other words, the conclusions of the CK study are a natural, direct, logical, and normal consequence of the Hyperwage Theory.

In fact, I propose a much larger increase. The New Jersey increase was only 18.8% under an already hyperwage regime. I propose a 1,000% increase in a still hypowage country.

Therefore, Hyperwage seeks a greater increase. If the First World economists are already shocked at an 18.8%, can you imagine their reaction to Hyperwage?

Again, such a 1,000% increase does not have to happen in a single step. And by the way, 1,000% increase is not applicable to all levels of the job sector but only to the domestic helpers.
CK for Third World

Why is it that Hyperwage predicts the outcome of CK study, while the ordinary modern economics abhors it? As I have mentioned many times before, First World economics is inflation-centric. Yet, even a 20% minimum wage increase is still absorbed by their economy. In 1996, the same thing happened in Pennsylvania.

The Street Strategist is braver the CK study. I propose a minimum wage for this country that increases ten-fold their salaries.

The CK study is controversial because the effects are not really that extraordinary. They found a slightly faster increase in employment figures. The question of whether such increase resulted in faster employment growth seems to be the focal point of the controversy.

However, the question of where such increase should result in a negative employment rate is an even greater important point for me. Why? Because the economists and businessmen in this country predict a negative employment growth.

Thus CK is important because: It destroys the prediction of negative growth, and also it posits a surprising result that growth actually is not negative, not zero, but positive.

The CK study should be studied by all Third World economists or by First World economists intervening in Third World countries.

But before you forget, Hyperwage Theory is infinitely a more controversial proposal. If you dislike CK, wait till your hear of Hyperwage.

Lack of theory
Let me remind you of one thing: CK is not a theory but an empirical study. And Card and Kruger merely performed econometric and time series analysis without a theory to prove.

On the other hand, the Street Strategist has a theory looking for econometric validation. Like many theoreticians, I don’t really need a validation but it would be good to have one for the peace of mind of detractors.

Thus, when Card and Kruger meet the Street Strategist, there is no assurance that the two camps will come to a meeting of the minds.

I’m pretty sure CK will find me crazy.

When I think about it, this where the Street Strategist differs from the experts. CK, for example, found results that go against conventional wisdom, and stopped at that.

The Street Strategist goes against conventional wisdom even without results to back him up.
If only CK have been less brainwashed by their academic PhDs. Can you imagine if they had thought of the Hyperwage Theory first before they arrived at the New Jersey conclusions?
They would have been Nobel Prize winners by now.

Surprising validation
But then again, probably, that Nobel Prize is reserved for the Street Strategist. One thing for sure, the letter-writers above don’t have original ideas enough for them to win a Nobel Prize within their lifetimes.

At least, Hyperwage, no matter how crazy, is original.

When I was developing Hyperwage, I never expected I could bring it to a level of thought that can respond to theoretical negative attacks. I thought I would be all air, no substance. I thought it was enough that I had a topic for arguments during drinking sessions.

Then I have found some validation in CK 1994. It was a validation breakthrough in the sense that the self-consistent logic of Hyperwage found an ally in such a famous study.

But a few months ago, while continuing my research by reading a history of economic thought, I found a theoretical basis that supports Hyperwage as well. It is an obscure theory that answers the question: Will Hyperwage result in unemployment?

And I tell you, it blew my mind. Really, it did, and I shall discuss this exciting re-discovery next time.

Before I go, let me leave you this thought: A PhD is useless if your mind is just a copy of the experts before you. Do not be contented with absorbing the contents of other people’s brains. It is a far greater endeavor to develop the originality of your own mind.
(Thads Bentulan, Sept. 1, 2005)
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