The Case of a Cleaning Lady

My mother [in 2008] had an interesting experience interviewing a cleaning lady for her house. The lady said that she charged $12/hour in the evenings and $15/hour in the afternoons, because she had to pay her babysitter. My mother was shocked, and that for two reasons.

First, in any firm its revenues are independent of its expenses. One doesn't set his prices by summing up his accounts payable and then adding some arbitrary number to it which will be his profit. Prices are determined by supply and demand, and one should always charge for his product as much as the market will bear. The job of an entrepreneur is to choose that production process in which the revenues indeed are greater than the costs of doing business. But the costs do not determine the revenues! In the economy as a whole the sequence is rather the reverse: the prices of the factors of production are set or imputed by the prices of the final products. In order to underscore the absurdity of the cleaning lady's economic reasoning, it is enough to have her say that she charges $12/hour in the evenings and $115/hour in the afternoons, because she has numerous expenses at that time of day. My mother was not asking her for her life's story or for information on how she elected to spend her income: she wanted a price which would be acceptable to her. She wanted to say: "Am I supposed to pay for your house, as well, honey?"

Second, she told the cleaning lady that she had $X to spend on her, and she would not pay by the hour. Whether she finishes her cleaning in 3 hours or 5 hours, she will receive the same payment. And that's exactly how employment should work: ideally, one pays for results rather than the "labor" expended. "Reality does not reward toil and trouble," Mises writes. "If toil and trouble is expended according to well-conceived plans, its outcome increases the means available for want-satisfaction." (HA, 396)

So there. Ignorance of economic theory is not just a cause of social failure; sometimes it leads even an individual into disaster.

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