In market economies, governments try not to intervene and allow market forces to allocate resources. Prices are supposed to bring supply and demand into equilibrium.
In centralized or command economies, the government tries to supplant these decentralized decisions with its own, typically to favor some specific group or agenda.
The foregoing represents an attempt to simplify a complicated concept which could require volumes to adequately analyze. However, two events, currently in the news, might provide investors with a practical understanding of some of the financial implications of the relative merit of each concept.
The Wall Street Journal recently published an assessment of California’s mandated, substantial increase in the fast-food minimum wage to $20.00 per hour, with built in periodic increases. Yes, workers received a higher hourly wage, at the cost of reduced hours and staffs, as customers pushed back over higher prices.
Too much, too soon?
At about the same time, CNBC reported that teen employment rates and wages were rising as companies boosted pay and other incentives. The report indicated that newly hired workers ages 15 through 19, averaged $15.68 per hour in June.
Is it possible that market forces work?
You can draw your own conclusions, but investors should be cautious when government tries to put its thumb on the scales.
All comments and suggestions are welcome.
Walter J. Kirchberger CFA