Wednesday, March 25, 2015

Economic Myth #1: Teachers are Underpaid

We all have our favorite teachers – the ones who showed us compassion, given us advice, and taught us valuable lessons both in and out of the classroom. As such, teaching is often referred to as a noble calling. One of my favorite examples of the sentimentalizing of the teaching profession is this comic version of Taylor Mali's half-rant-half-poem, “What Teachers Make.”


However, despite the rhetoric, teaching is also an under-appreciated profession. To explain, when it comes to remuneration, with the exception of the small handful of superstar teachers who become millionaires, most teachers are underpaid (supposedly).

Enter Robert Reich. For those of you who are not familiar with him, he is a former Labor Secretary who served under President Bill Clinton from 1993 to 1997. He is also a former(?) professor at Harvard's Kennedy School of Government. He has also starred in his own documentary, Inequality for All.

Recently, he posted on his Facebook page a supposed conversation that he had with “a wealthy businessman” who believed that American teachers were paid too much. During this discussion that he had with this businessman, Reich bravely defended the embattled American teachers. He said that a nation's human capital is more important than its financial capital; and that, therefore, “if we want talented men and women to become teachers rather than bankers, we need to pay them far more.”

This Facebook post was a reinforcement of a similar post that he published last year in his blog when he championed teachers' “worth.” Not too surprisingly, the arguments he used sounded suspiciously a lot like Karl Marx's discredited and debunked labor theory of value, which is an economic theory that argues that the economic value of a good or service is determined by the total amount of labor required to produce it.

Can you imagine if this were actually practiced? Can you imagine how much it would cost to pay for a single pencil? Considering how thoroughly the labor theory of value had been discredited and how long it has been since it had been discredited, Reich is either pretending to be unaware of this fact for a political reason, or he is truly clueless.

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Furthermore, Reich does not seem to have any idea how prices for commodities – yes, labor is an economic commodity just as anything else – are determined, which is one of the first basic principles that is taught in any semi-respectable Economics 101 class. And I think it is very bizarre that he doesn't seem to know how different laborers' wages are determined considering the fact he used to be the Secretary of Labor! If a former Secretary of Defense did not know where Iraq was located on the map, you'd be a little concerned, too, wouldn't you?

One of the core tenets of economics that Adam Smith introduced to the world is the paradox of value, which is also known as the diamond-water paradox. The question goes like this: Considering the fact that water is vital for life whereas diamonds are not, why are diamonds more expensive than water?

Maybe she's to blame?
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The premise behind the question is certainly true. Water is vital for the preservation of all life as we know it. The popularity of diamonds, on the other hand, is the result of a marketing campaign gone wild. So why the huge difference in price?

That is because when individuals make decisions, they consider the additional cost and the additional benefit that would result from making the decision. This additional cost and additional benefit that people have to consider is known as Marginal Costs and Marginal Benefits respectively.

The important thing to keep in mind is that whenever a person decides to buy anything, he always has to consider the specific price that he is paying for a specific good that he is buying at that time. And then he has to consider how much additional benefit that he will get from enjoying that additional good, which always comes at an additional cost.

However, things change drastically if people were not buying a specific good at a specific price, but rather buying ALL of a particular good at the same time.

For example, if people all over the world simultaneously decided to buy ALL the drinkable water in the world, then yes, due to scarcity of drinkable water, the price of water would skyrocket. The price of diamonds would seem like child's play at that point. In fact, if that were to actually happen, unless your first name was Bill and your last name was Gates, you would never be able to go anywhere near a cup of water. That is, unless you had an army of very angry machete-wielding psychopaths behind you.

That might be enough to get into the Coco Bongo, but for a glass of water? Please.
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Fortunately, however, people never behave this way (here's to hoping that a nuclear apocalypse doesn't break out any time soon). In reality, individuals purchase a specific amount of water or a specific amount of diamonds at any given time. Therefore, what comes into play is subjective value, a concept that Reich cannot seem to get his head around. What subjective value states is that the value of any good is determined by the importance an individual places on that good, which is obviously different for every person.

Now, because we do not have to worry that the next bottle of water that we purchase will cost us tens of millions of dollars, unless we are literally fighting for survival in the remains of a nuclear wasteland, the truth of the matter is that most people value diamonds more than they value a bottle of water. If you want proof of this, try giving your girlfriend a bottle of Evian instead of a diamond ring when you propose to her. And then tell me how saying “But honey, water is vital for life whereas diamonds are not” goes for you.

So now we know why diamonds are more expensive than water. Thus, using that example, we can apply it to Reich's argument that bankers ought to be paid less and teachers ought to be paid more. After all, as Taylor Mali said, teachers make a difference. So why do teachers earn so little compared to bankers?

Like the water-diamond paradox, when we think about why teachers are paid less than bankers, we have to think about marginal costs, marginal benefits, productivity, and subjective value.

If people had to collectively choose between employing ALL teachers and ALL bankers, most people would (hopefully) think that employing teachers would be more beneficial for society. Thankfully, however, no one ever has to make such a choice in reality. After all, if such a choice was made and teachers were paid as much as hedge fund managers, or more, then practically no one would be able to afford to go to school.

Or if the choice came down to teachers versus farmers, then practically no one would be able to afford to eat.
And after we take into consideration marginal costs, marginal benefits, productivity, and subjective value, whether we like to admit it or not, for reasons that range from marginal value that both professions provide for society to simple supply and demand, society in general values the services provided by bankers more than it values the services provided by teachers. Just like it values diamonds more than it values water. That is why there is such a big difference between what teachers and bankers earn.

Going back to Reich's Facebook post, it is therefore easy to see that by insisting that teachers are paid too little and asserting that a nation's human capital is more valuable than its financial capital (never mind the different marginal values that each profession brings to different people), Reich is attempting to force an objective viewpoint  his objective viewpoint  onto others. Seeing how people value things differently at different times and under different sets of circumstances, Reich is not actually making an economic argument, but rather a political one; and an irrational one to boot.

And I do believe that there is a word for that sort of behavior – demagoguery.

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18 comments:

  1. Seems like you only have one viewpoint of you own. Boy, you suck.

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    1. Stop! Your intellect is too blinding!

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    2. He's mocking you..

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  2. Basically, your reasoning is circular, which is often the case with conservative thinkers. Things are the way they are and if things could be better some other way then they would be but they aren't because the world we have is the best one that is possible ... um, really? You didn't actually say that last part, but I think it is implied.

    ' [...] society in general values the services provided by bankers more than it values the services provided by teachers [...] That is why there is such a big difference between what teachers and bankers earn. '

    You realize that what it sounds like you are saying is that bankers make more than teachers because society values what they do, and the reason we know that society values them more is that they get paid more … see?

    I get your supply vs demand argument, but value is determined by other things beyond scarcity. People also like diamonds because they are pretty - more specifically, rich people like pretty diamonds and that skews the equations enormously because when the demand is determined by the very rich, the prices will reflect what rich people are willing to pay.

    And not every banker makes more than every teacher. There are some teachers, possibly employed in the private sector and possibly not, who will take home more than a senior executive officer at a small town savings and loan.

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  3. Hedge fund managers generally work for the very wealthiest people, and like corporate lawyers and fine art auction houses and real estate brokers specializing in mansions, they are positioned at the confluence regions where large sums are moving from here to there. They assist in the movement of that money but they can also just as easily serve as a barrier, give preference to this one rather than that - they are gatekeepers, and so they can extract what they are able and the sums they extract tend to reflect the large amounts of capital in movement ...


    NOT the intrinsic value of whatever labor they perform by pushing some papers and opening a door.


    One other way to measure the value of something is by the effects of its absence. If suddenly all teachers disappeared and none could be found for the span of a generation – gosh, where would our future hedge fund managers come from or our CEOs of Saks-Goldman or the corporate law giants or the real estate tycoons … of course, we’d also lose a generation of doctors, engineers, tech innovators, artists and Harvard law professors.


    I guess that is why we tolerate so much riches falling into the hands of people who are actually quite worthless to society at large, because it means that some will also go to the people who do things that actually contribute in a positive to everyone.

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    1. “Things are the way they are and if things could be better some other way then they would be but they aren't because the world we have is the best one that is possible.”

      Well, you got the first part right. Things are the way they are. That much is true. But I am not sure if I implied that the world we have is the best one that is possible. I think you and I know that this is NOT the best world that is possible – though I am pretty sure that how we define “best” might be different.

      “You realize that what it sounds like you are saying is that bankers make more than teachers because society values what they do, and the reason we know that society values them more is that they get paid more … see?”

      Well, it's true.

      “I get your supply vs demand argument, but value is determined by other things beyond scarcity.”

      You are right. Scarcity is not the only thing that determines price. There are other factors such as demand inelasticity, irrational exuberance (think Beanie Babies), government interference, competition, etc. However, I did mention all of these things, except that I put them under one very broad category – subjective value.

      The reason I brought up scarcity was to show what would happen in an extreme situation when consumers decided to buy ALL goods of a particular kind at the expense of ALL alternative goods of another kind. But that was really just an academic argument, really, because, as I said earlier, unless we are trying to survive in a barren nuclear wasteland, that is not a choice anyone actually faces.

      And also, you are right that there are some teachers who do make more than bankers. I was only going with Robert Reich's definitions.

      “NOT the intrinsic value of whatever labor they perform by pushing some papers and opening a door.”

      If being a hedge fund manager was so easy, I wonder why there isn't an oversupply of people wanting to be hedge fund managers. Then I am sure that hedge fund managers would make about as much money as a typical fast food worker does.

      “One other way to measure the value of something is by the effects of its absence.”

      Yes, that is the definition of scarcity.

      “If suddenly all teachers disappeared and none could be found for the span of a generation...”

      Firstly, I love that you're making a “going John Galt” argument. Secondly, sure, things would be bad if ALL teachers decided to quit their jobs and go on strike into perpetuity. But just like no one in reality is making a choice between employing ALL teachers and ALL bankers, no one in reality is making that choice either.

      “I guess that is why we tolerate so much riches falling into the hands of people who are actually quite worthless to society at large...”

      Firstly, what is there to tolerate? Does the fact that someone earns a lot of money mean that someone has to earn less by default? If that is what you're saying, I'm afraid that I have bad news for you. Not only is that untrue, it is also the basis for all of the economic fallacies in the world.

      http://www.americanthinker.com/articles/2011/12/the_ows_zero-sum_game_fallacy.html

      Secondly, like Reich, by calling a particular profession worthless, you are offering an objective value, your own, to everyone else. In economics, subjective values rule, not objective ones. Objective values only matter in philosophy and politics. So that is a different topic altogether.

      “...some will also go to the people who do things that actually contribute in a positive to everyone.”

      That sounds like trickle-down economics. Do you subscribe to that theory? I am asking because I thought I made it quite clear that not only is trickle-down economics wrong, the theory itself does not actually exist. At least no one supports it.

      http://thekoreanforeigner.blogspot.kr/2015/03/trickle-down-economics-redux.html

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  4. I hate this blog.

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    1. When you have no intelligent arguments, pout! Thanks for reading.

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  5. Let's amuse ourselves a little.
    Let's assume tomorrow we double the teachers wages. What will happen? A lot of shit will happen that is what.
    1. Private business will either have to increase their prices for students (rich people happy), or increase the students in one classroom (how we put 40 students instead if 20 in a classroom, nobody happy) and fire half of their teachers, or simply close the school .......
    2. Public school; will either need increased funding from taxes, yeay MORE taxes!! or gain put more students in one class and fire half the teachers .....

    No matter what, the direct result of doubling wages would mean an equal percentage of teachers will lose their jobs, and it will immediately also have an effect of adding that same percentage of students to a classroom.

    And these are the negative effects of the cost side only!!!

    Teaching is a LABOUR intensive activity, not an intellectual intensive activity, which means that if you make it more expensive, you have to sacrifice something else.

    The only way we can increase the wage of teachers is if we can increase their productivity. If one teacher can teach 10 students with a minimum required "quality", and one teacher can teach 20 students achieving the SAME quality, it is obvious that Teacher A should earn less then Teacher B. But we all know that in practice, all teachers achieve similar effects, and therefore the current situation can only improve for teachers if their productivity increases, or if MOST people are willing to pay more.

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    1. Exactly. Raising productivity is the only way to increase wages. Marginal benefits, marginal costs, marginal utility, total utility, comparative advantages, subjective value... these are all conveniently missing in Robert Reich's sermons about inequality. How Bill Clinton thought that it made sense to appoint such a man who is this devoid of economic knowledge as Secretary of Labor is stunning. But then again, I suppose it is politics we're talking about.

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    2. John, I want to thank you sincerely for responding in such a characteristically dismissive way because I think I mentioned privately that I have a lot of stuff on my plate in the short term here and if it turned out that you were willing to seriously engage the topic I’d have to invest some time on the project here – appreciate it, man, I really do.

      So. This is how you respond to my pointing out the circularity of your argument: ‘Well, it’s true.’

      Huh? (Circular arguments are always true, of course, it’s just that they don’t tell us anything.)

      Just as an aside, it seems that Ayn Rand is allowed to do a thought experiment regarding the disappearance of an occupational category but when I do it I have to somehow justify it with ‘reality’ … hmm? How does that work? And how does pointing out the literary allusion advance our understanding? What I mean about dismissiveness.

      And let me applaud you for the astute cherry-picking of what to respond to – I’ll point out once more, the professions with the highest earnings tend to be those in most direct contact with the wealthiest among us – it’s about position, where one is at the moment that large sums start moving around. And that has nothing to do with the social utility with regard to the larger society.

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    4. I’ve always felt that the salaries of educators ought to remain comparatively low but almost certainly not for the reasons you might: I’m convinced that the best are attracted to the profession from idealism and the desire to make their part of the world better than when they found it. (I don’t include myself in this, by the way, although I want to think I improve people’s lives by my work – rather, it’s just something I am good at, better than other things I’ve tried, and so I get satisfaction along with the money.)

      I’m not sure if students are better off if people undergoing teacher training occupy their minds with deciding what color their first BMW is going to be after they graduate, which is something we know happens in the medical and legal professions – most people I know who aim for the career know they will never be rich and that is okay with them.

      Still, wouldn’t it be interesting if young kids saw their teachers driving home in a car that was just as rad and cool as the one being driven by the 19-year-old crack dealer in their neighborhood … heck, those students might find a way to respect their teachers and even respect education as well.

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    5. “Well it's true. Huh?”

      I am not sure what more to say about it. They are valued more, so they get paid more. And because they are paid more, we know they are more valued.

      Are you asking me to go into deeper reasons as to why they are valued more? If so, the simple answer is that people value their services they provide. And what are those services? Well, we'd have to go into each specific person and each specific service they provide. But at the end of the day, people will always pay for what they want.

      “Just as an aside, it seems that Ayn Rand is allowed to do a thought experiment regarding the disappearance of an occupational category but when I do it I have to somehow justify it with ‘reality’ … hmm?”

      When Ayn Rand talked about captains of industry all going on strike, she was writing a fictional novel. A novelized version of her philosophy, yes, but a fictional novel nonetheless. We, on the other hand, were talking about the economic choices that people make in real life. At least that was what I was talking about. If you had brought it up as an aside, I was unaware. Stop being so overly sensitive.

      “And let me applaud you for the astute cherry-picking of what to respond to”

      I typically only respond to the bits of your argument that I find most wrong. I don't need to respond to things that we agree on. Yes, those who earn the most money tend to be those in most direct contact with the wealthiest among us. But does that make their job easy?

      “And that has nothing to do with the social utility with regard to the larger society.”

      I am not sure at all where you are going with this. Are you saying that being close to the rich has nothing to do with social utility? If so, I don't see how being far from the rich has anything to do with social utility either. I don't see how proximity of any kind to any particular economic class alone would be meaningful in any way. And, again, I was making an economic argument. I am not talking about social utility, but economic utility. I have already defined utility in the economic sense. Perhaps you ought to explain what you mean.

      But if you also meant economic utility and accidentally said social utility, then you need to show proof that hedge fund managers do not contribute to the economy or benefit the larger society.

      “I’ve always felt that the salaries of educators ought to remain comparatively low but almost certainly not for the reasons you might.”

      I have never said anything ought to cost so much. I only said that the cost of anything depends on varying factors. If I ever had to make such a final statement about how much anything ought to cost, I would say that a good ought to cost the market price. But of course, the market price always changes depending on varying factors.

      “...most people I know who aim for the career know they will never be rich and that is okay with them.”

      Tell that to Robert Reich.

      “Still, wouldn’t it be interesting if young kids saw their teachers driving home in a car that was just as rad and cool as the one being driving by the 19-year-old crack dealer in their neighborhood...”

      If in that example you mean that teachers are paid enough to buy and drive such cars, it would be interesting, indeed. That would mean either tuition or taxes would have gone up and very few people would be able to afford to go to school or there will be a lot of really pissed off people taking to the streets. Or it would mean that a significantly large proportion of society would have agreed to pay teachers a significant amount of money either via tuition increases or tax hikes, which would reflect a kind of human society that I would not be able to recognize. Either way, it would certainly be interesting.

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  6. Did Robert Reich really say that people who aim at a teaching career believe they will get rich? Where did he say such a thing, and what would motivate him to? Didn’t he really say:

    ‘If we want talented men and women to become teachers rather than bankers, we need to pay them far more.’

    He's talking about what society needs to do, not what people entering the field expect to happen. Now, I admit that this IS a political choice, but I don’t see anything wrong with it, and by the way it was very cute to toss the word ‘demagoguery’ in at the end with absolutely no reference or justification given. You are welcome to discuss the dismal science all day long but for anyone who wants to see the world become better, the art of the possible is the better choice … don’t you think?

    Hey, how about this as a way to make a better world: show kids that being smart is better than being dumb, offer salaries that pull smart and creative people into the classroom, and start treating educators as expert professionals rather than servants looking after the kids.

    Oh, and I still don’t know why Ms Rand is allowed thought experiments but I am not – her ‘fiction’ was didactic so she was engaged in just the kind of conversation we are. Isn’t it really just the fact that you’d rather not engage the topic of how important teachers are?

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  7. ‘Yes, those who earn the most money tend to be those in most direct contact with the wealthiest among us. But does that make their job easy?’

    I’ve had to work in direct contact with some very rich people so I know they are not easy to be around – oh well, that’s not what you mean, either, is it? Still, are we saying that compensation for work is truly predicated on how HARD it is? Really?

    If so, then proportionality comes into play, doesn’t it? Is a portfolio manager’s job really 20 times more difficult than a high school teacher’s? Is it really 150 times more difficult to be a CEO?

    Again, the disparity comes as a factor of position, where someone exists within a larger environment, not because of anything to do with the work itself.

    Teachers work in one of the few professions where the community around them can vote on whether they get a raise or not. (Actually, I wonder why free-market advocates seldom acknowledge this or see anything odd about it.) However, because their salaries are released from the vagaries of the market, society has the option to reward them at whatever rate is felt at large to reflect how important we feel they are … and it is clear that whatever mumblings are often made about it, the fact is that in America at least, education is not highly-valued at all.

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    1. You said, “...most people I know who aim for the career know they will never be rich and that is okay with them.”

      I replied, “Tell that to Robert Reich.”

      How did that become “Did Robert Reich really say that people who aim at a teaching career believe they will get rich?”

      I don't think even Reich is arrogant enough to think he knows what the personal presumptions of individuals are. But he certainly wants them to be richer. Of course, Reich never says exactly how much more teachers ought to be paid. But if we go back to that Facebook post, he says that the average pay for investment bankers and portfolio managers is around $1,200,000 a year. He also says that high school teachers earn an average of $56,260 a year. So, it's true that he never says exactly how much more teachers ought to be paid. Then, does that mean that it is safe to assume that he meant that teachers ought to be paid $56,260.25 a year? Somehow, I don't think raising a teacher's salary by a quarter is what he meant.

      So who the hell knows what he meant? He never gives a specific amount. But he does love to compare teachers' salaries to that of investment bankers a lot. So you'll forgive me I think if that is the benchmark that he is going with.

      And for your satisfaction, here is the definition of demagoguery: “an appeal to people that plays on their emotions and prejudices rather than on their rational side.” http://www.vocabulary.com/dictionary/demagoguery

      Is that justification enough for you?

      “...show kids that being smart is better than being dumb...”

      Is there anyone who is advocating for the further dumbing down of society?

      “...offer salaries that pull smart and creative people into the classroom...”

      If a privately-run school wishes to pay its teachers more than the market wage rate, I see no problem with that. I'm not sure if it would be as easy for a public school to do that considering they can only do so via elections.

      But how do you propose that the high salary that will be offered will stay high? We have to keep supply and demand in mind. If there is enough money to be made, it will attract more people willing to do the work. And when the supply of teachers goes up, well, the wages offered will not be so high anymore.

      “Oh, and I still don’t know why Ms Rand is allowed thought experiments but I am not.”

      Did I say that you were not allowed to engage in thought experiments? Engage away to your heart's content, Robert. But if you are going to do that, just be aware that we are communicating via social media where our innermost thoughts might not be that obvious to the other. I was talking about reality and you chose to meander to some other place. I am sorry but I'm not psychic.

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    2. “Isn’t it really just the fact that you’d rather not engage the topic of how important teachers are?”

      Why would I want to engage in that topic? It would be a rather straightforward and very short topic. You think teachers are important, and I think teachers are important. End of discussion. Did you expect me to say any different?

      You'll keep in mind that I originally said “...society in general values the services provided by bankers more than it values the services provided by teachers.”

      That is not the same as saying “teachers are not important” or “teachers ought to be paid less,” you know.

      “Still, are we saying that compensation for work is truly predicated on how HARD it is?”

      Of course I am not saying that. I already said that the labor theory of value has been debunked a long time ago. My comment “But does that make their job easy?” was in response to your original quote about “pushing some papers and opening a door.”

      How much a person is remunerated has nothing to do with how hard they work. I think my original blog post already made that clear enough. Marginal cost, marginal benefit, marginal utility, supply and demand, productivity, and subjective value are involved when making such a decision.

      “...the disparity comes as a factor of position, where someone exists within a larger environment...”

      Is that truly the only factor that influences how much someone earns?

      “I wonder why free-market advocates seldom acknowledge this or see anything odd about it.”

      How is it odd? Aren't those schools where people vote on teachers' wages government-run schools? Don't democratic governments have to be responsible to the people? If teachers don't want the public to vote on how much they get to earn, perhaps they ought to consider working for private schools. And though free-market advocates might not have tackled this particular point with the public school system (at least none that I know of) free-market capitalists have long acknowledged the many problems of public schools and have therefore advocated the privatization of schools.

      Perhaps you will oppose privatization. Fine. That is your prerogative. But don't assume that we've kept our mouths shut about public education.

      “in America at least, education is not highly-valued at all.”

      Nonsense. Of course education is valued. It's just valued less than other things. Going back to the water-diamond example, sure people value diamonds more. But no one is saying they don't highly value water.

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