Strike and protest for a $15/hour minimum wage at a McDonald's restaurant. Fibonacci Blue/Flickr

Prosperity is the goal, not income

(Image credit: Fibonacci Blue/Flickr)

This article from CapX talks about something that I’ll be discussing a lot on this blog. There isn’t a good money quote from this piece, but here’s a good paragraph:

Moreover, prices of many important consumer goods have declined dramatically. Comparing the prices of everyday items in the 1979 Sears Catalogue with similar products on at the end of 2015, I found that the inflation-adjusted prices of bicycles, blenders, coffee makers, convection ovens, dishwashers, food processors, refrigerators, gas grills, home entertainment systems, gas stoves, microwaves, slow cookers, toasters, treadmills, television sets and vacuum cleaners fell by an average of 76 per cent.

So let’s say that you earn 100 credits a month, and your monthly spending is 50 credits on housing and utilities, and 25 credits on food. So you have 25 credits, or 25% of your monthly income left over. But now, due to a new law that was passed raising the minimum wage, your monthly income is now 1,000 credits a month. You think everything is great!

However, a year later, you notice something: everything has gone up in price. Your rent has gone up, your utilities have gone up, and your food has gone up. You’re still making 1,000 credits a month, however now you’re paying 600 credits a month for housing and utilities, and 300 a month for food. You have 100 credits left over, which is what you were earning every month a year ago, but now that’s only 10% of your income left over, instead of 25%. In absolute terms, you have more credits left over every month, but in relative terms, you have less than half of what it used to be. And to compound the issue, everything else went up in price as well, so you can buy fewer things with that extra income than you used to be able to. You make ten times as many credits as you used to, but you’re poorer now.

Why did everything go up in price? Simple: supply and demand. Since everyone has more credits, but the supply of goods didn’t change, people bid up the price of the goods available, resulting in a price increase. Thus, while the numbers used to describe the income received went up, there was no corresponding increase in the supply of goods that can be purchased with that income, so the prices adjusted to be relative to what they used to be (and in this poor guy’s case, even higher).

Let’s change up the situation a bit. Instead of receiving more credits a month, it stays at 100. This time, though, something happens to the goods that are purchased. We’ll say that a bunch of development companies built a lot of new houses and apartments over the course of the year. In addition, a new nuclear power plant came online, and new desalination technology has lowered the cost of treating ocean water to below that of using mountain runoff, which many new desalination plants are taking advantage of. Finally, advances in technology have increased crop yields, so that there is a larger food supply than there was last year.

What happens now? The supply of all these items has increased, but the number of people using these goods haven’t increase as much. Thus, the prices have gone down. Our guy is still making 100 credits a month, however the price of housing and utilities has gone down to 40 credits a month, and the price of food has gone down to 15 credits a month. He now has 45% of his income left over every month after buying the same or comparable goods as last year, meaning in relative terms, he has become richer.

In the real world, obviously, the situation can be more complicated, but to me that’s a knock on the real world, not on the law of supply and demand.

Money is just a number. What really matters is what you can do with that money. Being able to do more with your money is the essence of prosperity.

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