There is no free lunch
Capital Thinking • Issue #718 • View online
Famed satirist Ambrose Bierce once described a cynic as a scoundrel whose faulty vision sees things as they are, not as they ought to be.
He could just as well have been describing good economics.
-WinterCow20
The Problem with Economics:
I was asked to give remarks at the annual Colloquium of the Alexander Hamilton Institute in Clinton, NY regarding the establishment of a sister organization here in Rochester. A draft of that talk follows.
Forgive me for taking the chance to talk a little bit about economics before I say a few words about our new project with the AHI.
I typically do not announce to folks that I am an economist in order to avoid the response of either a sympathetic, trite smile or more likely the ghastly gaze of fear, followed by, “I hated economics in college.”
Famed satirist Ambrose Bierce once described a cynic as a scoundrel whose faulty vision sees things as they are, not as they ought to be. He could just as well have been describing good economics. Let me apply some good economics to what economISTS have been doing.
Some economists have famously taken it upon themselves to use their PhD credentials to masquerade their normative views as positive economic policy propositions.
I do not limit my remarks to only describe a certain New York Times columnist. In fact, it was such an act by someone once near and dear to me (and to whom I owe much of my success) that roused me from my intellectual naiveté and set my course toward the establishment of AHI-West.
In 5 years of PhD study at Cornell, I was blissfully unaware of the ideas and contributions of Hayek, Friedman, von Mises, Knight, Coase, Buchanan, Alchian, Demsetz, etc.
I really did think of economics like a good utilitarian physical science, with each of us dedicating careers in the lab, analyzing data, in order to dispassionately contribute to some vague notion of the “common good.”
Until the Summer of 2006.
As you may recall, that is the summer when Congress debated and passed two minimum wage hikes, raising the minimum wage from $5.15 per hour to today’s $7.25 per hour.
Among economists, and I suspect almost everyone in this room, it is well known that mandating pay increases in the name of helping the poor turns out to be a really bad way to help the poor.
For starters, not many poor people make the minimum wage. But ignoring this inconvenient fact, raising the costs of hiring workers will end up sending some to the unemployment line, or making working conditions less pleasant, or reduce training opportunities, or raise prices, or reduce profits (which hurts the poor indirectly).
There is no free lunch.
You’d expect any good serious economist to understand this, especially if they are the author of the best-selling Labor Economics textbook which teaches these very ideas.
Well, you might imagine my surprise and dismay when I opened up the New York Times that summer to see a full-page ad taken out which printed a letter supporting the minimum wage hikes.
Why the surprise? Among the leading signatories was the author of this textbook, who also was my dissertation advisor and mentor.
Surely this was a mistake.
So I e-mailed him asking if what I had learned in school was wrong – that is it really true that minimum wages are effective poverty fighting tools. And his reply follows:
“I do not believe that the minimum wage is an effective way to fight poverty. My support and endorsement of the letter comes from the symbolic nature of the minimum wage.
It was the first piece of protective labor legislation passed at the national level in the United States.
Over time its value has eroded relative to average hourly earnings, … In a world in which … we are constantly giving tax breaks to the rich, we need to make a symbolic statement about our concern for the people who are less well off than us.”
There you have it – even ardent supporters of the minimum wage do it for symbolic reasons, even if it is useless economics.
What is the harm in that?
The harm is that government mandated prices are bad policy. Always have been, always will be.
Mandated wage laws lead to an increasingly paternalistic economy that stifles creativity and business creation.
Getting people comfortable with mandated wages will lead to them getting comfortable with other laws too.
Gas prices too high? Lower them by fiat! Salaries of managers too high? Cap them!
Profits too high? Tax ‘em! Health care is too expensive: decree it to be cheaper!
It all leads to a long and treacherous road to serfdom.
*Photo credit: Mike on Unsplash