4 ms·

Hey, I'd like to clarify a couple of points about prices on goods and commodities which I feel often are misunderstood. 1. Prices of goods and price of labour

Hey, I'd like to clarify a couple of points about prices on goods and commodities which I feel often are misunderstood. 1. Prices of goods and price of labour do not correlate. As in decrease/increase in wages do not lead to a change in price of goods. That feels counterintuitive, yet if examined closely you see that price of something is always at the point of maximum profit. So increase in price will lead to less sales and less profit regardless of labour cost. To give you an example - you run a SaaS business with annual $100 price for your most popular plan. You have profits enough to pay you and a couple of developers a salary. Your competitor has similar offering with the same price. Your developers demand a pay increase of 15% - which will put you at a loss. What options are for you without magically getting more market share, getting outside investment etc: A. Cave-in to the wage increase and operate at a loss. B. Increase price of your most popular plan which would lead to less profit and you will have to operate at even greater loss. C. Somehow fire developers and find new ones. This leads to the conclusion that wages and profit margins have inverse causal relationship. Price of goods is determined by supply/demand and non-market forces (regulation etc). 2. Price of labour has no causal relationship with productivity. Price of labour does not have any specific market differences from any other commodity. If the demand for labour is high and supply is low (think software developers) and no monopsony (one buyer market) then the price will go up. I live in Eastern Europe which became a major outsourcing hub in last 15 years or so. Salaries for devs have gone up at least 1000% (number of zeroes is correct) compared to time before outsourcing boom. If there is a monopsony - there is no competition for labour only one company hires people - then the wage would be as low as it can get regardless of productivity. Big employers like Amazon and Walmart can perform crazy fits of neo-taylorism without any kind of wage increase - because they can. If supply of labour increases - then wages will fall, regardless of productivity. The whole reason behind offshoring, outsourcing. 3. Why wages can rise in China: A. A lot of what they do right now demands a higher-skilled workforce which is not in abundance. Low in supply != high productivity. B. China is not only a big factory that supplies goods for the West. As profits are invested into institutions - new opportunities appear. Chinese goods were seen as cheap copies 30 years ago, now it is often price/quality competitive products such Oneplus phones, some of the Chinese cars or even market leaders such as DJI drones and gimbals. All of that requires skilled engineers, designers, marketing people. C. Non-market forces. CCP can pressure business owners to pay better wages or to better comply to labour standards. I'm not sure if that's happening to be honest but that's possible. As a sidenote: If you want to know more about the disconnect between wages and productivity you can read David Ricardo's magnum opus On the Principles of Political Economy and Taxation from 1817, it is not an easy read yet I think in many ways it yet be refuted (in good faith).

leetcrew 6y ago
in your SaaS example, that's only true if you're unlucky enough to be the only employer in your market whose devs are demanding a raise. if the devs at all your competitors are demanding raises at about the same time, it's more likely that all the prices go up, unless they are approaching the point where it's cheaper for your customers to just roll their own.
- eru 6y ago
  I'm not sure 'demanding a raise' even has any meaning without further context? People are always up for more money. The question is, I guess, what they would be doing different if they got that raise or not. (Ie stay on or quit, or join one vs another company etc.)
  - artem247 6y ago
    Sorry for poor wording - my idea was just to propose a situation where you have to pay your employees more somehow, like for example your lead engineer quit and new hire as a substitute will cost you 20% more. The real question is how the business can mitigate rising salary (and lowering of margins) and whether there is relation between labour cost and price of goods.
- imtringued 6y ago
  In my opinion, he overengineered his entire post because what he is saying is your product and the labor making the product are two separate markets. You are not the only employer in town, if another employer pays more then your employees are not going to stick around to produce <insert_cheap_trinket_here>. Meanwhile customers are in a different market, only willing to pay the current price, so raising prices will just decrease demand.
- artem247 6y ago
  I think it's where it gets interesting. Imagine a situation on the market where margins somehow are lowering for everyone (all employees demand higher salaries, natural disaster, anything). All businesses in the market raise their prices, except one, which keeps operating at a lower margin. It is easy to see what would happen next - the company that didn't raise prices makes much more than before and all competitors suffer losses. What if businesses collaborate to raise prices all at once? That would be price fixing which is illegal. So margins tend to become lower and lower over time. That leads to a very important problem - Tendency of the rate of profit to fall [0] [0] - https://en.wikipedia.org/wiki/Tendency_of_the_rate_of_profit_to_fall https://en.wikipedia.org/wiki/Tendency_of_the_rate_of_profit...

leetcrew 6y ago

in your SaaS example, that's only true if you're unlucky enough to be the only employer in your market whose devs are demanding a raise. if the devs at all your competitors are demanding raises at about the same time, it's more likely that all the prices go up, unless they are approaching the point where it's cheaper for your customers to just roll their own.

eru 6y ago
I'm not sure 'demanding a raise' even has any meaning without further context? People are always up for more money. The question is, I guess, what they would be doing different if they got that raise or not. (Ie stay on or quit, or join one vs another company etc.)
- artem247 6y ago
  Sorry for poor wording - my idea was just to propose a situation where you have to pay your employees more somehow, like for example your lead engineer quit and new hire as a substitute will cost you 20% more. The real question is how the business can mitigate rising salary (and lowering of margins) and whether there is relation between labour cost and price of goods.
imtringued 6y ago
In my opinion, he overengineered his entire post because what he is saying is your product and the labor making the product are two separate markets. You are not the only employer in town, if another employer pays more then your employees are not going to stick around to produce <insert_cheap_trinket_here>. Meanwhile customers are in a different market, only willing to pay the current price, so raising prices will just decrease demand.
artem247 6y ago
I think it's where it gets interesting. Imagine a situation on the market where margins somehow are lowering for everyone (all employees demand higher salaries, natural disaster, anything). All businesses in the market raise their prices, except one, which keeps operating at a lower margin. It is easy to see what would happen next - the company that didn't raise prices makes much more than before and all competitors suffer losses. What if businesses collaborate to raise prices all at once? That would be price fixing which is illegal. So margins tend to become lower and lower over time. That leads to a very important problem - Tendency of the rate of profit to fall [0] [0] - https://en.wikipedia.org/wiki/Tendency_of_the_rate_of_profit_to_fall https://en.wikipedia.org/wiki/Tendency_of_the_rate_of_profit...