Armed with the knowledge that the price of inputs contains incredible information, we can now consider a choice between two labor inputs. Suppose that an electronics firm has an opening for an entry level janitor. While the job does require the employee to have a good work attitude, it doesn't require formal skills. Two applicants show up for the position. One is a high school dropout. The other is a Ph.D. in electrical engineering. Each of the candidates has made it clear that he will take the job only if he is paid his market wage. The market wage for high school dropouts is about $15,000 a year. The market wage for Ph.D.'s in electrical engineering is about $70,000 a year. Which applicant should the firm hire? Once again, when we say "should" we aren't interested in what may or may not be good for the firm. We are interested in the overriding goal of maximizing society's happiness.

Of course, the firm should hire the high school dropout. You don't see a lot of Ph.D.'s in electrical engineering sweeping floors, and we personally think that is a good thing. Why? Because Ph.D.'s in electrical engineering are extremely valuable elsewhere in the economy. They can design new computer chips that allow home computers to play games that have more brilliant special effects. They can be used to build stereo systems that have more realistic sound quality. They can design circuit boards that allow better transmission and reception of telephone calls. In short, it seems like an absolute waste to put somebody with all this valuable training to use sweeping floors.

While we hate to say it like this, Ph.D.'s in electrical engineering are more valuable than high school dropouts. (If it's any consolation, we also have to acknowledge that they are more valuable than Ph.D.'s in economics.) The trick here is to know what we mean when we say "valuable." Ph.D.'s in electrical engineering--by virtue of their training--are in a position to produce more happiness for consumers than high school dropouts. They may not be nicer. You might not want to travel cross country on your Harley with one. But in terms of what they can do for the happiness of consumers, Ph.D's in electrical engineering are more valuable.

In our particular case, if the firm hires a high school dropout, that dropout won't be available to do other things. Consumers elsewhere in the economy will be missing out on some goods and services--such as washed cars, mowed lawns, and grocery bags packed--that they would have received if this high school dropout had not been removed from the labor market to produce clean floors for this firm. The fact that this worker expected to make around $15,000 a year doing something else means that the loss to consumers of not having him do those other things will be about $15,000. And that's too bad.

However, it's not nearly as bad as what would happen if the firm had hired the Ph.D. in electrical engineering. His market wage of $70,000 a year tells us that because there is one less electrical engineering Ph.D. out there in the world producing whatever he might have produced had he taken an electrical engineering job, consumers will be out about $70,000 in happiness. Let's save that Ph.D. for something more happiness-producing for consumers than a clean floor!

Up to this point, our analysis has considered what happens when a firm chooses to employ a new resource. However, the same tools can be applied when a firm chooses to let go of an old resource. Suppose our electronics firm already employs a Ph.D. in electrical engineering, but it doesn't use him to clean floors. It employs him in its product development department. Recently, a new software package became available that greatly simplifies the work that the Ph.D. was doing at this firm.¹ In fact, this software now makes the job so simple that, after a short training session, any high-school dropout could perform this work as well as this Ph.D. Question: Do we want the firm to replace its Ph.D. with a high school dropout?

The answer is a resounding YES. The Ph.D.'s market wage of $70,000 a year tells us that after he is laid off, he will contribute about $70,000 of happiness to society in another use.² In contrast, when the high school dropout is hired on, his market wage of $15,000 tells us that society is deprived of $15,000 of happiness someplace else. After one weighs out the respective gains and losses, the net effect is an increase in society's happiness of $55,000!

The fact that the price of an input tells us information about the happiness the input produces is really pretty reasonable once you start to think about it: Ph.D.'s in electrical engineering make more money than high school dropouts because consumers are willing to pay more for the things that Ph.D.'s produce--compared to the things that high school dropouts produce. To look at this issue from another angle, suppose an input had no gainful employments. That is, suppose nobody could figure how to produce anything useful with this input. In that case, we would expect the price of that input to be zero. Ultimately, it is the amount of happiness that an extra unit of an input is expected to produce that supports the price of that input.

Copper and steel, Ph.D.s and high school dropouts. They seem so different. Yet the common bond between them is that they are all inputs in the production of goods and services. In this very important respect they are alike. As a result, the information contained in the relative prices of copper and steel is the same information that is contained in the relative prices of Ph.D.s and high school dropouts. Their prices tell us the comparative value of those resources to society. They provide a crucial piece of information for helping society to allocate resources to their highest valued use.