Ars Gratia Libertatis

Sheldon Richman reviews Bryan Caplan's new book The Myth of the Rational Voter: Why Democracies Choose Bad Policies. The book presents a somewhat depressing, though brilliantly argued, analysis of exactly how poorly most voters understand economics, and why (quick summation: because they have no reason not to be irrational when it comes to voting), and what this means for limited government. Richman wonders what Caplan's thesis means for libertarian strategists:

Economic education for the public also would also seem in order. But just straightforward teaching won't be enough, for as Caplan elaborates, people hold fast to their errors through "emotional commitment." "A good teacher could change some minds, but the best teacher in the world would be lucky to convince half," he writes. Dogma dies hard.

At the very least, this implies that the case for liberty must be pressed across the entire cultural front, especially in movies and novels where emotions as well as reason can be appealed to. We must find emotional commitments in the population that are consistent with freedom. Libertarian strategic wisdom may well begin with Jonathan Swift's insight: "It is useless to attempt to reason a man out of a thing he was never reasoned into.

Previous blogging on Caplan's book, summarizing what both the New York Times and In These Times had to say about it.

Comments

otio | June 12, 2007, 6:51pm | #

Should be Ars Gratia Libertatis, Brian. You need the genitive there.

otio | June 12, 2007, 7:02pm | #

And to continue the insufferable pedantry, it should be Ars Libertatis Gratia, apparently. I never got past Wheelock so it's beyond me but in this case word order matters. Samuel Goldwyn just didn't like the way Ars Artis Gratia looked so he switched it around. I'll shut up now.

Ken | June 12, 2007, 7:05pm | #

"Economic education for the public also would also seem in order." But of course such education should be provided by private sources, eh?

Ken Shultz | June 12, 2007, 7:06pm | #

"At the very least, this implies that the case for liberty must be pressed across the entire cultural front, especially in movies and novels where emotions as well as reason can be appealed to. We must find emotional commitments in the population that are consistent with freedom."

I know! Let's ridicule their religious convictions!

...I can't tell you how many people I've brought to the libertarian cause by making fun of their religions.

Pious Candy-Assed Sidewinder | June 12, 2007, 7:10pm | #

...this implies that the case for liberty must be pressed across the entire cultural front, especially in movies and novels where emotions as well as reason can be appealed to.

That's fucking hilarious. Next time you post something like that, at least have the decency to warn me. I almost shot refried beans out my nose.
Well, I'm off to my Society of Screenwriters and Novelists for Reason, Logic and Economic Literacy meeting.
Bye-eye!

Nasikabatrachus | June 12, 2007, 7:23pm | #

Well, I'm off to my Society of Screenwriters and Novelists for Reason, Logic and Economic Literacy meeting.

And why not? It's not like the logical and economic arguments, despite their obvious strength, have actually been working for the past 100 years.

joe | June 12, 2007, 7:28pm | #

Perhaps one of the reasons voters don't act in the manner that political activists who fancy themselves economists would like them to is that political activists who fancy themselves economists don't do a very good job at understanding the economic consequences of political policies.

Every political activist who fancies himself an economist I can think of told me that the Clinton economic plan was going to result in recession, inflation, and massive unemployment. Oops. Every political activist who fancies himself and economist I can think of tells me that minimum wage increases cause greater unemployment. Oops.

Actual economists - like, say, Duncan Black - vote Democratic at much higher rates than political activists who fancy themselves economists.

GILMORE | June 12, 2007, 7:35pm | #

let me quote myself snarkily from previous thread (from = why do 65% of Americans suck?)

http://www.reason.com/blog/show/120448.html

GILMORE | May 30, 2007, 3:38pm | #
My explanation for why 65% of America is contradictory and apparently pretty fucking stupid =

We dont teach both Rhetoric or Economics in high school with any real rigor. Seriously. People a) dont know how to construct logical chains of argument, free from fallacies, and b) they have no idea how the world works in terms of currency, trade, regulation, etc.

(insert conspiracy thought here)

Is it surprising that Public high schools fail so miserably in these two things, which would likely help voters actually parse the BS that politicians spit out daily??

Edward | June 12, 2007, 7:36pm | #

Although orthodox libertarians may believe they know the TRUTH, economics is closer to theology than to science, which is why they think they do know the truth, I guess.

Nasikabatrachus | June 12, 2007, 7:38pm | #

Every political activist who fancies himself and economist I can think of tells me that minimum wage increases cause greater unemployment. Oops.

So forcibly raising wages above the market rate does not cause unemployment?

GILMORE | June 12, 2007, 7:38pm | #

joe

save your breath, read this.

http://www.mises.org/etexts/EconReasoning.pdf

isolated anecdotes arent particularly good ways of making generalizations.

jb | June 12, 2007, 7:41pm | #

I don't know about the cultural front...Serenity (the most libertarian of the movies of the last couple years) didn't do too well.

I guess people are OK with being meddled with, if they can meddle with other people too.

GILMORE | June 12, 2007, 7:47pm | #

What follows is an unpublished letter to the Economist, responding to their negative conclusion to the above question...:-)

Editor
The Economist

Sir:

In "News from the lab" (May 8, 1999 ) it is flattering to read that Kagel and Roth ( Handbook of Experimental Economics) is "the indispensable reference" on experimental economics. But it is distressing to read that because "...unlike physics, economics yields no natural laws or universal constants" it follows that "...with or without experiments, economics is not and never can be a proper science." By this definition, astronomy, geology, biology, perhaps parts of physics itself, and certainly psychology must not be proper sciences either.

Rather than quibbling about definitions, it may help to consider how laboratory experiments complement other kinds of investigation in economics, as they do in those other sciences. Let me give an example.

One strategy for looking at field data (as opposed to laboratory data) is to search out "natural experiments," namely comparable sets of observations that differ in only one critical factor. The benefit of using field data is that we are directly studying markets and behavior we are interested in, but the disadvantage is that in natural markets we can seldom find comparisons that permit sharp tests of economic theory.

In a 1990 paper (in the informatively named journal, Science) I studied such a natural experiment, involving the markets for new physicians in different regions of the U.K. in the 1970's. The markets in Edinburgh and Cardiff succeeded while those in Newcastle and Birmingham failed, in ways that can be explained by how these markets were organized. But as will be apparent to readers of the Economist, there are other differences than market organization between Edinburgh and Cardiff on the one hand and Newcastle and Birmingham on the other. So, how are we to know that the difference in market organization, and not those other differences, accounts for the success and failure of the markets?

One way to approach this question is with a laboratory experiment. In a paper in the Quarterly Journal of Economics, John Kagel and I report such an experiment, in which we study small, artificial markets that differ only in whether they are organized as in Edinburgh and Cardiff or as in Newcastle and Birmingham. Unlike in those naturally occurring markets, the market organization is the only difference between our laboratory markets. And our laboratory results reproduce, on a smaller scale and despite far smaller incentives, the results we see in the natural markets. So the experiments show that the differences in market organization by themselves can have the predicted consequences.

Does this "prove" to a mathematical certainty that the different market organizations are the cause of the differences observed in the natural markets? Of course not. Does it provide powerful additional evidence in favor of that hypothesis? Of course it does.

Alvin E. Roth

References cited:

· Roth, A.E. "New Physicians: A Natural Experiment in Market Organization," Science, 250, 1990, 1524-1528.

· Kagel, John H. and A.E. Roth, "The dynamics of reorganization in matching markets: A laboratory experiment motivated by a natural experiment," Quarterly Journal of Economics, February, 2000, 201-235.

· The Handbook of Experimental Economics, John H. Kagel and Alvin E. Roth, editors, Princeton University Press, 1995. Paperback edition, Fall 1997.

Charlie Plott, at Cal Tech, also wrote an (also unpublished) letter in response to the same piece: at his suggestion it is posted here....

Charlie Plott's letter to The Economist



The Economist
Letters:

The issues about laboratory experimental economics methods, addressed in your May 8 issue editorial, are not new. They have been examined extensively. The rapid growth in use of these methods is precisely because the implicit questions raised in your editorial have been answered in many ways. The issues are (1) whether or not there are principles of economics that can be observed operating under laboratory conditions and (2) what might be the value of using laboratory methods to study them, if such principles do exist. There is a third issue, which seems to grate against the editor's sense of what constitutes proper science, and that is how the profession as a whole deals with theories that are rejected by laboratory experiments.

Have experimentalists uncovered basic principles of economics? The law of supply and demand might be the best example. This principle, which predicts the price and volume of ultimate market equilibration, works with amazing accuracy under appropriate conditions. The price that is discovered in competitive markets is exactly the one predicted by an application of the competitive model. The nature of price stability and the information content of prices are both actively studied. The findings are robust, not depending on income, culture, education and perhaps not even age (since it seems to work with children). Furthermore, not only do multiple market systems follow the same principles, markets respond to institutional changes in predictable (but not always understood) ways. I think that no other branch of science can claim success in identifying principles that govern something as complex as a multiple market system with human participants. And, there is no need to stop with markets. Game theory and Nash equilibria are demonstrating similar powers of prediction. Circumstances have been identified where the models are stunningly inaccurate, yet even when the inaccuracies occur, experiments have been able to supply explanations from closely related disciplines, such as psychology.

Have the principles been put to valuable use? Experiments have played a central role in several major instances. These include the allocation of the rights to land at major U.S. airports, regulations governing pricing in natural gas pipelines, the Ethyl case in antitrust, the design of the auction mechanism used by the Federal Communications Commission, the architecture of the Regional Clean Air Markets in Southern California, the electric power markets in operation in Southern California, decisions regarding access to public railroad tracks, methods of allocating resources on Space Station Freedom, etc. Many other applications are underway. The editorial carried the implication that laboratory experimental work has no applications and that impression is seriously wrong.

Has the profession acted responsibly when the basic theories are rejected? The preference reversal phenomenon, used as an example in the editorial, was introduced to the economics literature by David Grether and me. The editorial reported accurately. We concluded that the phenomenon is inconsistent with all theories of economic decision making. Has the profession abandon the theories as a result? Of course not and it would be silly to do so. While the theories do have problems, paradoxes do exist, they nevertheless continue to help us understand phenomena of staggering complexity. They continue to help us design and implement very successful policies. Critics of the theories, scholars who relish in pointing out that the theories have been falsified, have produced absolutely nothing that will do a similar job. Much like the editorial, these scholars suppose that the sole purpose of economics is to study individual choice. They ignore the fact that much of economics is about markets.

The editorial did not provide many references for those who would want to pursue the issues. In addition to the excellent reference contained in the editorial, readers should be directed to sources such as Davis and Holt. There are also several other good books and collections of papers. (Douglas D. Davis and Charles A. Holt, Experimental Economics, Princeton University of Press, Princeton New Jersey (1993). Vernon L. Smith (editor), Experimental Economics, Edward Elgar, 1990. John D. Hey and Graham Loomes (editors), Recent Developments in Experimental Economics, Volumes 1 and 2, Edward Elgar, 1993. Daniel Friedman and Shyam Sunder, Experimental Methods: A Primer for Economists, Cambridge University Press, 1994. Elinor Ostrom, Roy Gardner and James Walker, Rules, Games and Common-Pool Resources,The University of Michigan Press, 1994. A new Journal Experimental Economics, Special Issues of Economic Theory.)

It is nice to know that the use of experimental methods in economics caught the eye of The Economist. However, whether or not economics or any other science, is a "proper science" according to the criteria used in the editorial, is probably not an answerable question. Of more interest to the readers are the existence of a laboratory experimental methodology in economics, its limitations, and the areas of potentially successful applications.

Professor Charles R. Plott
Edward S. Harkness Professor of Economics and Political Science
California Institute of Technology
Pasadena, California 91125

626 395-4209 (voice)
626 793-8580 (fax)

Mike Laursen | June 12, 2007, 7:50pm | #

very political activist who fancies himself and economist I can think of tells me that minimum wage increases cause greater unemployment.

I assume by "political activist who fancies himself an economist" you are at least in part alluding to Hit & Run commenters. A common take on minimum wage laws I have seen in the Hit & Run comments, perhaps even the prevalent view, is that small increases in minimum wage have hard-to-measure or negligible effects, while a large increase in minimum wage probably would cause a significant increase in unemployment.

(I say probably because it's largely theoretical. Other than limited experimentation with "living wage" laws, minimum wage hikes are usually small and lag behind market wages.)

Ken Shultz | June 12, 2007, 7:52pm | #

Take a subject like the humane treatment of detainees, for instance. Given the mission of persuading the masses and a choice of weapon, I'd take a photograph of the abuses at Abu Ghraib over an elegant and logical argument any day.

...when I see effective commercials on television, I don't see many logical arguments being used by advertisers. They're using big eyed children or hot chicks or puppies or whatever.

Although, like I said before, people do love it when you make fun of their religions. ...nothing's as persuasive, nothing brings other people to your point of view quite like making fun of their religious convictions.

joe | June 12, 2007, 7:53pm | #

Nabakabalabaradapolis,

The data is very mixed on the effects of the minimum wage on unemployment rates. Actual economists recognize this. Political activists who fancy themselves economists tell each other that it's a settled question.

Actual economists recognize that, in cases of extreme inequality in bargaining power, workers will end up taking wages lower than the "market rate." Political activists who fancy themselves economists use phrases like "market rate," "force," and "consensual" to convince themselves that these inequalities in bargaining power don't exist.

If things were as simple as your nice little formulation, the data would be clear. The data are not clear.

Edward | June 12, 2007, 7:55pm | #

Gilmore, thanks. It's amazing that you came up so fast with such an elegant rebuttal of my--it turns out, lame--point. Nevertheless, libertarians are a bit more evangelical about their economics than one would expect from those interested in objective science.

Leif | June 12, 2007, 7:56pm | #

"Every political activist who fancies himself an economist I can think of told me that the Clinton economic plan was going to result in recession, inflation, and massive unemployment. Oops."

what in the hell is this? oh right, i guess the economic growth of the 90s was due to the enlightened policies our philosopher king, not the creation of that whole 'internet/computer industry' thing. (well i guess al gore DID invent the internet - now we just need him to get back in the lab and solve this whole weather thing)

joe | June 12, 2007, 7:56pm | #

Good point, Ken.

Everyone, I'm sorry I made fun of your religion. :-)

Oh, here's another one: every political activist who fancies himself and economist I can think of said that Reagan's tax cuts would pay for themselves. Two years and a trillion dollars in deficits later, Reagan and the Democratic Congress had to implement the largest tax cut in American history to stave off fiscal armegeddon.

joe | June 12, 2007, 8:00pm | #

Leif,

I didn't say anything, one way or the other, about the cause of the economic growth in the 1990s. If you wish to respond to what I write, please respond to what I write, not to what you assume I must have meant.

But since you asked, I attribute only a tiny part of that economic growth to Clinton's policies - the budget discipline and debt reduction had some positive effects on financial markets. What is absolutely certain, proven beyond even a shadow of a doubt, and which was the actual point I made, is that the political activists who fancy themselves economists were completely wrong in their predictions. Their little models failed miserably to predict the effect of those policies.

Nasikabatrachus | June 12, 2007, 8:00pm | #

The data is very mixed on the effects of the minimum wage on unemployment rates. Actual economists recognize this. Political activists who fancy themselves economists tell each other that it's a settled question.

Let's take the simplest possible situation-increases of a few bucks an hour are too vague for the general point. Let's say the government mandates a 100$/hour minimum wage from a 5.15$/hour minimum wage. Do you think there would be an increase, or a decrease in employment?

Actual economists recognize that, in cases of extreme inequality in bargaining power, workers will end up taking wages lower than the "market rate." Political activists who fancy themselves economists use phrases like "market rate," "force," and "consensual" to convince themselves that these inequalities in bargaining power don't exist.

I'm not quite clear on how that was relevant, but do you think that there's such a thing as a market rate independent of what people actually choose to pay and work for?

Ken Shultz | June 12, 2007, 8:03pm | #

The principles of economics are fundamental to so much of what libertarians advocate. Whether or not you agree that libertarians generally interpret economics correctly, surely you'll concede, joe, that for most libertarians there's a special connection between economics and public policy. ...more so than in the other parties.

Edward | June 12, 2007, 8:05pm | #

In their economic determinism, libertarians are kissing cousins of marxists.

joe | June 12, 2007, 8:08pm | #

Nas,

I acknowledge that your reasoning is internally logical. However, it doesn't do a very good job predicting what happens in the real world.

If you'd like a similarly simple example from the world of physics, I'll point out than an airplane is heavier than air, and that objects heavier than air can be expected to sink. That's why universities offer more than one semester of physics, and why they offer more than one semester of economics.

"do you think that there's such a thing as a market rate independent of what people actually choose to pay and work for?"

Let's set the conclusion-defining terminology aside; I think that employers want to pay less than they are willing to pay, when conditions allow, and that extreme differences in bargaining power are an example of such circumstances.

Nasikabatrachus | June 12, 2007, 8:08pm | #

In their economic determinism, libertarians are kissing cousins of marxists.

Troll much?

joe | June 12, 2007, 8:10pm | #

Ken Shultz,

I acknowledge that. I'll leave you people alone now. I just found the arrogant assumptions in the review sufficiently irritating that I was motivated to comment on the emperor's fashion choices.

GILMORE | June 12, 2007, 8:11pm | #

libertarians are a bit more evangelical about their economics than one would expect from those interested in objective science.

sure. because we want something to cling to to justify what "good ideas" really are OTHER than rhetorical 'feel good'

I dont think anyone is particularly "religious" about it - in fact i'd say only about 1/3 of libertoids come with any real education in economics. but they reason that its better to have a science-'based' system rather than something that is constantly at the mercy of the vicissitudes of public feeling at the moment

I myself gall fellow reasonoids with my tolerance of some less-than-free-market issues, because I'm not a free market purist - there are fundies in our midst (is Dan T one of these?) who closely resemble religious zealots, and are impervious to reasonable argument

anyhoos

Ken Shultz | June 12, 2007, 8:12pm | #

"Everyone, I'm sorry I made fun of your religion. :-)"

I appreciate the humor there. ...really. ...but that kind of speaks to the same point too.

As someone who doesn't see a big barrier between faith and reason, I can say it like I really mean it. ...If only we pulled at people's heart strings like religions do.

If people vote out the incumbents with their hearts, then it would be irrational not to try to appeal to grab 'em by the heart.

Mike Laursen | June 12, 2007, 8:16pm | #

Political activists who fancy themselves economists tell each other that it's a settled question.

That statement could apply to all of the liberal political activists who consider it a settled question that there should be minimum wage hikes. You forgot to throw in your "that I can think of" qualifier.

GILMORE | June 12, 2007, 8:16pm | #

If people vote out the incumbents with their hearts, then it would be irrational not to try to appeal to grab 'em by the heart.

Good point ken

Cicero, i think, said something similar

But, at the same time, politics becomes overburdened when they go too far with these emotional appeals, and find themselves in a bind, having creating a fake boogeyman that they now have to slay

see: immigration reform, and how it's killing the GOP

GILMORE | June 12, 2007, 8:17pm | #

sorry, "having created"

When you type like 10,000 words a minute like me, these things happen :)

Edward | June 12, 2007, 8:22pm | #

Libertarianism has its greatest appeal on social issues. I should think that gay rights, legalization of drugs, and civil rights in general would draw in more young people than economic positions that are perceived, rightly or wrongly, to favor the clever and the rich.

Nasikabatrachus | June 12, 2007, 8:23pm | #

I acknowledge that your reasoning is internally logical. However, it doesn't do a very good job predicting what happens in the real world.

I don't think so: I just think that many situations are more subtle than many libertarians will admit, plus the impossiblity of predicting the future, which is why you see predictions of utter catastrophe that don't pan out.

If you'd like a similarly simple example from the world of physics, I'll point out than an airplane is heavier than air, and that objects heavier than air can be expected to sink. That's why universities offer more than one semester of physics, and why they offer more than one semester of economics.

Yet despite all of their attempts, governments are typically unable to overcome the drag of economic reality, despite the power of the engines they use. Cuba, FDR, Soviet Russia, etcetera. I'm sure you know the gauntlet by now.

Let's set the conclusion-defining terminology aside; I think that employers want to pay less than they are willing to pay, when conditions allow, and that extreme differences in bargaining power are an example of such circumstances.

So what you're saying is that employers would rather that their employees work for free: to that I agree. Forgive my confusion, but I don't understand how this is relevant.

Leif | June 12, 2007, 8:26pm | #

the point was that the general economic growth of the 90s (driven by the spontaneous creation of new industries not subsidised in any way by public policy) confounds any hypothesis about the effects of the administration's policies. if these new industries hadn't been created, who knows what the effect would have been? "free market" models were (sometimes) wrong about the general progression of the economy, sure. but so were the keynsian/duncan black ones that you apparently revere. and how the hell can you establish a real-life causal relationship between the federal budget of 90's and the activity of 'financial markets' in general? any prediction about the 'economy in general' is voodoo. no model exists, created by "political activists" or otherwise, that has been proven to accurately predict the effects of regulation on the general economy. THATS the reason why regulations tend to be stupid on the whole: they assume that markets behave linearly (in other words, predictably), and therefore can be manipulated by policy. but in terms of real life that's (observably) a stupid assumption; they are complex systems best modeled roughly by differetial equations that are effectively impossible to solve because they have so many variables.

joe | June 12, 2007, 8:30pm | #

Mike Laursen,

"That statement could apply to all of the liberal political activists who consider it a settled question that there should be minimum wage hikes."

I can't think of a single liberal activist who bases his support for minimum wage hikes on their macro-economic effect. I've never seen any of them make the argument that we should support minimum wage hikes in order to reduce enemployment or increase GDP growth. Instead, they make values-based arguments about how lowest-income workers deserve to be treated.

MikeP | June 12, 2007, 8:34pm | #

Libertarianism has its greatest appeal on social issues.

...says a liberal.

joe | June 12, 2007, 8:37pm | #

Nas,

"Yet despite all of their attempts, governments are typically unable to overcome the drag of economic reality, despite the power of the engines they use. Cuba, FDR, Soviet Russia, etcetera."

Yes, governments that have attempted to act in conflict with economic reality have run into serious problems. Even FDR, sometimes. This observation doesn't seem to be terribly relevant to our discussion of the minimum wage. Once again, going back to my point, you are assuming an understand of economic reality that you really don't have the objective data to back up.

"So what you're saying is that employers would rather that their employees work for free: to that I agree. Forgive my confusion, but I don't understand how this is relevant."

Actually, there's a second part to my point that you seem to have missed: that in cases of extreme disparity in bargaining power, a "seller of labor" is not going to be able to maximize his profit as predicted on a demand curve, because he is, for one reason or another, not going to be able to operate as a free actor in a perfect market, or anything approaching it. Hence, it is not rational to conclude that the wage he accepts represents the market value of his labor, just because he accepts it.

MikeP | June 12, 2007, 8:39pm | #

Instead, they make values-based arguments about how lowest-income workers deserve to be treated.

...where "lowest-income" is defined by fiat.

It is fair to say that perhaps there is a social good to be had by providing a floor to the income of a family breadwinner. But do realize that you are disemploying anyone whose labor is worth less. It may not matter so much because they may be only middle class teenagers passing the time. But, on the other hand, it may indeed matter to someone, somewhere.

GILMORE | June 12, 2007, 8:39pm | #

Leif | June 12, 2007, 8:26pm | #

... but in terms of real life that's (observably) a stupid assumption; they are complex systems best modeled roughly by differetial equations that are effectively impossible to solve because they have so many variables.

YOU SHOULD KNOW YOU SWEDISH ONE WORLD GOVERNMENT SHILL YOU AND ALL YOUR OLD PEOPLE ARE GOING TO BURY YOURSELFVES IN ENTITLEMENTS AND SALTED COD AND BE RELEGATED TO A SHAMEFUL FOOTNOTE OF VIKING HISTORY

GILMORE | June 12, 2007, 8:40pm | #

Oh shit! I've been outed

that was supposed to be MORE AMERICAN THAN YOU man

Sorry Leif. Only kidding.

(slinks back to hole)

joe | June 12, 2007, 8:41pm | #

Leif,

The fact that I don't find your economic theories to be terribly useful does not mean that I am beholden to any others, Keynsian, Atrioid, or otherwise.

But as for your statement that the American economy is too big and complicated for economists to make accurate predictions about, I agree. That's why I find political arguments based on some dude's economic predictions to be of such limited value.

joe | June 12, 2007, 8:43pm | #

"...BURY YOURSELFVES IN ENTITLEMENTS AND SALTED COD"

Big, heary, bearded LOL!!!

That was awesome!

GILMORE | June 12, 2007, 8:48pm | #

the variability of economic reasoning doesnt discount it - the point should be that all political decisions should consider the most obvious economic ramifications, not just the subtle ones, and adapt to them. too often the political rhetoric tries desperately to ignore these things, and sidesteps informing the public about the real consequences of decisions/policies for short term political gain...

a case in point was on the news hour tonight, on the topic of immigration, between a D rep from Arizona and a GOP state sentator from georgia. They totally talked across each other, one (the dem) making the case that the US *needs* cheap labor, and should encourage it, while the other made scare-tactic arguments about 'our culture', kind of.

Would post link to the exchange, but it only happened an hour ago, and the transcript is not online yet

Leif | June 12, 2007, 8:55pm | #

this assumption that there is a 'market value' of a commodity floating in the ether that is different from the actual price paid for that commodity is asinine. people don't usually have a 'fixed amount' that they are willing to pay for some commodity: they enter the market looking for a commodity, and go about finding for the cheapest price they can get. if 2 parties enter into a negotiation about a labor contract, the seller of the labor wants the highest price he can get, and the buyer wants the lowest price. now you'll probably say that mcdonalds can probably afford - and might be "willing to pay" - a burger flipper more than $5.75. fine. but in the negotiation process it sets a price of precisely $5.75, and refuses to go higher. so the minimum wage argument effectively says that mcd's should be obliged to pay the amount it would be 'willing to pay' (say, $8). this is obviously absurd. the 'value' of something can only be coherently defined by the price that was actually agreed upon via negotiation.

GILMORE | June 12, 2007, 9:00pm | #

Listen you swede this wasnt supposed to be a real discussion. It's a H&R thread. :) Say something insulting and vindictive!!

Also, if no one's ever seen Posh Nosh, a mock cooking show on public TV...

http://www.bbc.co.uk/comedy/poshnosh/

oh, my, god. Really funny. It was on in the background and i cried laughing over some of the routines.

Leif | June 12, 2007, 9:03pm | #

ok here's vindictive.

I'm norweigian you silly person!

Leif | June 12, 2007, 9:04pm | #

notice how i spelled norwegian wrong

joe | June 12, 2007, 9:08pm | #

Leif,

I'm neither an idiot nor an eigth grader. You completely whiffed on the idea that disparities in bargaining power can produce wages "agreements" at variance with the optimal wage level that would be produced by a perfect market. Inefficiencies can go in more than one direction, sport.

Derrick | June 12, 2007, 9:09pm | #

is that small increases in minimum wage have hard-to-measure or negligible effects, while a large increase in minimum wage probably would cause a significant increase in unemployment.

It has always seemed to me that minimum wage increases are likely to hurt the poorest people the most. That is, the problem is not how many people an increase hurts, but who it hurts: the marginally-employable, developmentally disabled, and/or homeless. The higher the increase, the farther up the employment ladder its effects are felt.

joe | June 12, 2007, 9:09pm | #

"Big, heary, bearded LOL!!!"

You know, whether this was a typo for "hearty" or "hairy," it doesn't matter. They both work.

Leif | June 12, 2007, 9:14pm | #

no, there was no whiffing. the whole concept of 'an optimal wage' in a 'perfect market' is incoherent, because it depends on a demand curve that itself depends on the concept of price being defined by what actor is 'willing to pay' for a commodity. and it is this last notion that I gave a refutation of. i don't think i can spell it out any clearer.

Nasikabatrachus | June 12, 2007, 9:16pm | #

Yes, governments that have attempted to act in conflict with economic reality have run into serious problems. Even FDR, sometimes.

Only sometimes? He, and Hoover to a lesser extent, cartelized the economy, strengthened union power, and bailed out failing businesses to an enormous degree. It should be no surprise that the Great Depression lasted as long as it did given those factors, as well as the fact that a similar stock market crash to the one in '29 occured in 1920, and the earlier one was resolved much sooner despite the government not doing anything.

Actually, there's a second part to my point that you seem to have missed: that in cases of extreme disparity in bargaining power, a "seller of labor" is not going to be able to maximize his profit as predicted on a demand curve, because he is, for one reason or another, not going to be able to operate as a free actor in a perfect market, or anything approaching it. Hence, it is not rational to conclude that the wage he accepts represents the market value of his labor, just because he accepts it.

How would you define bargaining power? If I have nothing to offer someone else, does that mean it is not a free market?

MORE AMERICAN THAN YOU | June 12, 2007, 9:16pm | #

NORWAY SWEDEN WHATEVER YOU NEUTRAL NORDIC FISH EATING ATHEIST STATIST WHY DONT YOU JUST BRING ON RAGNAROK AND LETS ALL SEE WHO MAKES IT ACROSS THE RAINBOW BRIDGE

joe | June 12, 2007, 9:18pm | #

GILMORE,

Don't get me wrong, I think economic analysis and even prediction can be very useful to public policy. I just don't think those making such predictions should get too big for their britches.

Here's what a useful contribution from an economist to a political leader would sound like: "OK, well, you can try A, B, or C. If you try A, you might get X, Y, or Z. So if you try A, keep an eye out for Measure M getting higher than 10% per month - that means Y is happening. If you can keep it below 5 or maybe 6%, that means Z is happening. But that's only going to last so long, and you should ease off if M starts growing."

A little humility is order, and there was almost none observable in that book review. If economists, or political activists who fancy themselves economists, want to opine about public policy, they should recognize that their profession operates with a level of precision closer to urban planning than to chemistry. If economists want to make broad statements about political philosophy, they need to be aware that there is more that goes into political philosophy than what they've been trained to measure.

GILMORE | June 12, 2007, 9:18pm | #

WARNING:

ACTUAL ECONOMICS DEBATES ARE HIGHLY TECHNICAL AND BORING. PROCEED AT OWN RISK

GILMORE | June 12, 2007, 9:20pm | #

joe,

you're going farther than the general point.

"Better economics education would produce a more rational electorate; a more rational electorate would probably err on the side of libertarian principles; a better understanding of economics would produce demand for more equitable policy"

i think thats the short of it

Gahan | June 12, 2007, 9:28pm | #

Joe,

How do you define "extreme disparity of bargaining power"? There are certainly conditions (such as a labor surplus) under which a laborer would have relatively little bargaining power, but I don't see this phenomenon as being somehow exempt from the laws of supply and demand. When workers have little bargaining power, the market rate for selling labor drops, but it's still the market rate.

joe | June 12, 2007, 9:32pm | #

No, Leif, "optimal wage" and "perfect markets" are widely recognized, useful concepts, that help us to discuss how economic phenomena operate in the world, even if they themselves are too simple to accurately describe the real world.

"price being defined by what actor is 'willing to pay' for a commodity" is not always coterminus with maximum efficiency or with the value that the employee's labor contributes to the economy, despite the fact that political activists who fancy themselves economists like to pretend that the two are the same. This is because negotiations over wages DON'T tend towards maximum efficiency when large disparities in bargaining power prevent the worker from selling his labor in something approaching a perfect market. Therefore, it is not the case that laws which require employers in this situation to pay more than they can get away must result in decreased economic efficiency.

joe | June 12, 2007, 9:34pm | #

Dude, that thing with the Rainbow Bridge isn't actually very American.

Ken | June 12, 2007, 9:34pm | #

Gahan
I won't speak for joe, but here is my example: you bargain with employer x for a job. Employer x has demands, and so do you, and you both decide to hold out until the other gets closer to your demands. He is worth 100 million dollars which he inherited from his dad, you are worth 1 dollar. I think he'll hold out a bit longer, won't he?

joe | June 12, 2007, 9:40pm | #

Nas, Gahan,

Take, for example, the case of a worker who cannot afford the cost of transportation to competing establishments. He really isn't able to put "I could go work for someone else" on the table.

Or just someone who is such severe economic straits that he can't even take the chance of spending another week looking for a better offer.

Yes, I'm sure you can come up with excuses about how each of these people is "perfectly free" to make some super-human effort to, I don't know, walk across country or eat table scraps for a couple of weeks. Please don't. If you're going to stretch that far, you're not actually discussing how the economy operates.

Gahan | June 12, 2007, 9:40pm | #

Ken,

Right, but the point I am making is that such situations are not exempt from economic theory or the rules of supply and demand. If I only have 1 dollar to my name, it's probably because the service I offer is A: not in demand or B: offered by lots of other folks who can do the same job as well as or better than I can for less money.

MikeP | June 12, 2007, 9:40pm | #

Employer x has demands, and so do you, and you both decide to hold out until the other gets closer to your demands. He is worth 100 million dollars which he inherited from his dad, you are worth 1 dollar. I think he'll hold out a bit longer, won't he?

And to make it an even more believable example, all this takes place on a deserted isle.

WAYMORE AMERICAN THAN THOR | June 12, 2007, 9:44pm | #

joe | June 12, 2007, 9:34pm | #
Dude, that thing with the Rainbow Bridge isn't actually very American.

HOW WOULD YOU KNOW YOU ATHIEST LIBERAL LABOR PROTECTIONIST SUBSIDY JUNKY REAL AMERICANS HAVE A OPEN PASS TO ANY HEAVENS THEY MIGHT PREFER SO WHEN THE FINAL SHIT KICKING STARTS BE IT LEFT BEHIND SCENARIO OR FIMBULWINTER ITS ALL THE SAME WE GET TO GET IN AND THE FOREIGNISTS ALL GET TO CHILL IN NÁSTRÖND CAUSE YOURE NOT INVITED

Nasikabatrachus | June 12, 2007, 9:55pm | #

Take, for example, the case of a worker who cannot afford the cost of transportation to competing establishments. He really isn't able to put "I could go work for someone else" on the table.

Only assuming that the employer does not know that our friend cannot go elsewhere, and only assuming that there isn't actually other employment nearby. My best guess is that this is not a free economy that you are describing.

Or just someone who is such severe economic straits that he can't even take the chance of spending another week looking for a better offer.

I find these snapshot arguments kind of ridiculous, quite frankly. How did this person get in this situation?
a) it's not a free economy
b) mismanagement of their life
c) they're good at managing their life, but they have some emergency bill due

For (a), well that's precisely what I'm arguing against, for (b) it's their own damn fault and for (c) they would seem to have plenty of bargaining power.

Yes, I'm sure you can come up with excuses about how each of these people is "perfectly free" to make some super-human effort to, I don't know, walk across country or eat table scraps for a couple of weeks.

What a weird bunch of options. Why not go to a local charity?

If you're going to stretch that far, you're not actually discussing how the economy operates.

What economy are you talking about? It sounds like a mercantilist economy, given your scenarios.

Nasikabatrachus | June 12, 2007, 9:58pm | #

for (c) they would seem to have plenty of bargaining power.

i.e. they are bound to be decent employees who have good references (and probably savings, too).

Leif | June 12, 2007, 10:00pm | #

"No, Leif, "optimal wage" and "perfect markets" are widely recognized, useful concepts, that help us to discuss how economic phenomena operate in the world, even if they themselves are too simple to accurately describe the real world."

so in other words they can't describe what actually goes but lets use them anyway.

joe | June 12, 2007, 10:01pm | #

Wait a sec, wouldn't the Americans be the foreigners?

AMERICAN TO THE NUCLEUS | June 12, 2007, 10:05pm | #

joe | June 12, 2007, 10:01pm | #
Wait a sec, wouldn't the Americans be the foreigners?

FOOL AMERICANS ARE THE PURE FORM OF ALL THE DISPARATE NATIONALITIES INTERMIXED INTO THE IDEAL OF ALL OF HUMAN CREATION ALL RELIGIOUS PREDICTED OUR COMING AND ALL RELIGIONS WHEN THEY DESCRIBE THE CHOSEN MEAN RED BLOODED ASS KICKING AMERICANS IF ITS NOT OBVIOUS YET I SUGGEST YOU GET YOUR HEAD EXAMINED BY AN AMERICAN HEAD SCIENTIST BUT THEN YOU MIGHT FIND OUT YOUR HALF FRENCH AND THEN WONT YOU BE SORRY

joe | June 12, 2007, 10:06pm | #

Nas,

I'm talking about the real world. Neither breezy assertions that such things don't happen in libertopia, nor opining that severe economic hardship is unfamiliar to you, really count as holding up your end of this argument.

Leif,

Sometimes, people use the term "meter" to refer to distances that are fractionally greater or smaller. Welcome to the real world. If your beautiful mind is too fragile for such imperfection, then you shouldn't lecture those of us who can operate here on how to discuss it.

Nasikabatrachus | June 12, 2007, 10:11pm | #

I'm talking about the real world. Neither breezy assertions that such things don't happen in libertopia, nor opining that severe economic hardship is unfamiliar to you, really count as holding up your end of this argument.

Well, I assume that you're offering these arguments to disprove the economic arguments of libertarians, so I don't think that positing a society that's popped into existence on a mercantilist desert island is really the way to go. Unless you'd like to respond to my arguments directly, I'll take my leave, as I don't enjoy the style of debate that you have now decided to employ.

joe | June 12, 2007, 10:14pm | #

Nas,

"So forcibly raising wages above the market rate does not cause unemployment?"

The market rate? What is this market rate you speak of? If you can't precisely quantify it, does that make it a worthless concept to use in conversation?

Hey, Leif, remember writing "they are complex systems best modeled roughly by differetial equations that are effectively impossible to solve because they have so many variables?" And now you're going to get all fussy on me about my use of concepts because their ability to describe the real world with absolute precision is limited?

Y'all just blew a bunch of chaff and beat a hasty retreat, is what I think.

joe | June 12, 2007, 10:17pm | #

The fact that you think transporation limitations, finding yourself in harsh economic straits, or other conditions that limit very poor people's ability to exploit economic opportunities that come with a transaction cost exist only on theoretical desert islands indicates that you don't have a very solid grasp of the experience of poor people, Nas.

Nasikabatrachus | June 12, 2007, 10:24pm | #

The market rate? What is this market rate you speak of? If you can't precisely quantify it, does that make it a worthless concept to use in conversation?

If you're trying to enjoy this debate, I apologize for mischaracterizing you, but I'm not going to stick around for what I perceive to be a growing amount of passive-aggression.

As for the market rate, I believe it's defined as what people are willing to pay. If you say they have to pay more, it's going to reduce demand. That's how price is decided in the first place.

Nasikabatrachus | June 12, 2007, 10:27pm | #

The fact that you think transporation limitations, finding yourself in harsh economic straits, or other conditions that limit very poor people's ability to exploit economic opportunities that come with a transaction cost exist only on theoretical desert islands indicates that you don't have a very solid grasp of the experience of poor people, Nas.

My perception is that you're using these examples to argue against libertarian economic arguments: I agree that it's possible for this to happen even in this country, but then again I don't find this country's economic system to be free enough, so in relation to libertarianism the point seems nil to me.

joe | June 12, 2007, 10:30pm | #

Oops, my bad, Nas. Gahan and Leif were throwing out "your terminology isn't precise" arguments, and I responded to you in my confusion.

Just ignore that last comment; it doesn't apply to you at all.

Leif | June 12, 2007, 10:34pm | #

im going to say this one more time and then im done. the concept of market effeciency that you're employing depends on a concept of price that doesn't describe how people really behave when they enter negotiations over what to pay for a commodity. its not that its 'a rough estimate' of what goes on: its that its wrong, period. people look to get the highest possible price if they are selling or lowest possible if they are buying. thus the only meaningful 'meter' of the value of a commodity is what is actually paid for that commodity. yes, you're right, sometimes one party has much more 'bargaining power' than another in a given negotiation. in fact most transactions in the modern world are like that, e.g. i don't have much "bargaining power" when i go buy a can beans at safeway. there is nothing inherently immoral about one party having more bargaining power in a given transaction. and given that the complaints of "market inefficiency" wtr to labor prices are based on a bogus assumption about bargaining behavior, i don't see what the problem is.

i don't care if 100 out of a 100 academic economists (regardless of their voting tendencies) use a model that assumes people have a fixed price set in their head when they go to the market to buy tomatoes. that assumption is wrong, wrong wrong, and any model built on it is going to be wrong, wrong, wrong (not just a 'kind of rough' approximation of what goes on).

joe | June 12, 2007, 10:34pm | #

Here, Nas, these arguments are directed at you:

1. Asserting that there won't be poor people who inability to afford transaction costs related to selling their labor in even a libertopian economy is wishful thinking.

2. Economists, as well as political activists who fancy themselves economists, don't seem to have any problem talking about predictable, Economics-based (in the sense of the Social Science) economic phenomena and consquences in our less-than-libertopian economy. You certainly seem to have no problem doing so, and your effort to hold me to a higher standards seems a bit dodgy.

CharlesWT | June 12, 2007, 10:35pm | #

"...movies and novels where emotions as well as reason can be appealed to."

Here's a page turner with a libertarian bent. And the price is hard to beat too.

joe | June 12, 2007, 10:42pm | #

Leif,

"there is nothing inherently immoral about one party having more bargaining power in a given transaction."

We haven't been talking about morality; we've been talking about market efficiency, and whether a minimum wage that makes up for disparities in bargaining power at the lowest end of the labor market is going to have the negative economic effects its critics postulate.

You say there is no other wage level that is legitimate beyond what an employer gets an employee to accept; yes, there is - there is the wage level that brings about the most good, whether this is measured in overall economic efficiency, or in social utility. It is simply a statement of faith to insist that in all cases, those three measures will always be the same.

Nasikabatrachus | June 12, 2007, 11:05pm | #

1. Asserting that there won't be poor people who inability to afford transaction costs related to selling their labor in even a libertopian economy is wishful thinking.

If one is making universal claims, then yes it is wishful thinking: however the trend seems to me to be largely against it, especially in the realm of the kind of disparities you're talking about. After all, these things do not occur in a vacuum, but within the context of a policy. I mean, it's the whole point of having a free economy to ensure that these kinds of disparities are minimised.

2. Economists, as well as political activists who fancy themselves economists, don't seem to have any problem talking about predictable, Economics-based (in the sense of the Social Science) economic phenomena and consquences in our less-than-libertopian economy. You certainly seem to have no problem doing so, and your effort to hold me to a higher standards seems a bit dodgy.

Don't get me wrong: I'm aware that planes can fly, despite their weight. There might even be an argument that raising the minimum wage a little bit motivates workers more: after all, the increased motivation means the market rate is changed, meaning in turn that the increase has not raised it above the market rate. Nor am I confident in those who make flat predictions based on one variable. In what way do you think that I'm holding you to a higher standard?

Anthony Gregory | June 12, 2007, 11:36pm | #

Joe, which "models" are you speaking of? Chicago school models? You know those free-market lite economists are basically Keynesians and neoclassicals in many of their assumptions. Not very a priori.

You assumption that libertarian free-market types don't understand issues like unequal bargaining power is unfounded:

http://www.mises.org/story/804
http://libertariannation.org/a/f41l2.html

Gahan | June 13, 2007, 12:17am | #

One can appreciate the plight of poor people who face hardships like lack of transportation or whatever hypotheticals you want to throw out, but still not agree that a minimum wage is the best method of helping these people. Why not address the specific problems, i.e. the lack of transportation, instead of implementing sweeping market distortions that may or may not help the people they're aimed at helping?

Gahan | June 13, 2007, 12:22am | #

Those who think that being against the minimum wage means being against alleviating poverty ought to read some of Milton Friedman's (an actual economist, not an activist who fancies himself as one) work on the subject.

Robert | June 13, 2007, 1:33am | #

"Antiforeign bias means underappreciation of the benefits of trading with people in other countries. This apparently results, primarily, from some natural but unreasonable fear of foreigners, as well as a lack of understanding about the division of labor and law of comparative advantage, or costs."

It's a special case of what might be called the mercantile bias -- the idea that money is better than the goods & services it buys. People frequently regret spending money, but they hardly ever regret making it. As long as you have money, you have all this potential, but once reduced to a particular purchase, it seems like less. Therefore selling is better than buying.

Mike Laursen | June 13, 2007, 1:57am | #

Instead, they make values-based arguments about how lowest-income workers deserve to be treated.

True. Pro-minimum wagers side tend to quote economic studies only in defense against economic assertions made by the anti-minimum wagers.

grylliade | June 13, 2007, 3:07am | #

The fact that you think transporation limitations, finding yourself in harsh economic straits, or other conditions that limit very poor people's ability to exploit economic opportunities that come with a transaction cost exist only on theoretical desert islands indicates that you don't have a very solid grasp of the experience of poor people, Nas.

The fact that you don't like Wal-Mart shows that you don't have a very solid grasp of the experience of poor people, joe.

Take, for example, the case of a worker who cannot afford the cost of transportation to competing establishments. He really isn't able to put "I could go work for someone else" on the table.

Or just someone who is such severe economic straits that he can't even take the chance of spending another week looking for a better offer.

Both of those cases assume that the employer has perfect knowledge about the circumstances of the potential employee, and that they'll use those circumstances during an actual negotiation for wage. At the bottom of the barrel, it doesn't work like that. Labor is a fungible commodity there; the employer doesn't care whether you work there or someone else does. The effort required to find out the personal circumstances of a potential employee is simply not justified. Basically, they're not negotiating with individuals, because at such low wage rates it's not worth the time or effort to debate wages. They're negotiating with the labor pool, and competing with other businesses, all of which seem similar from the standpoint of the unskilled laborer. In other words, it's the kind of market in which you'd most expect the free market to apply. If you want to help poor people out, try a negative income tax or some similar low-overhead way of helping them. A minimum wage is about the least helpful thing you can do.

As to the rest of it: the basic libertarian position is that meddling in the economy is mostly bad. The problem is one of knowledge: you don't know ahead of time (or even, given imperfect knowledge, in hindsight) which interventions work and which don't. In general, over time, the free market produces the best outcomes. You might gain some small advantages in one case or another (like, if the data are true, the minimum wage not affecting employment), but the risks from intervention outweigh the benefits in almost every case.

What's worse, the cost of administering all the programs you start to "adjust" the efficiency of the free market starts to outweigh those very efficiency gains. You have to go around to every employer and make sure that they're paying the proper wage and, if necessary, drag them through the legal system, which costs time and money. Again, in this one case, it might be worth it (though I doubt it very much). But you set a precedent for intervening again, and again, and again . . . until you've swamped the engine of the free market with regulations, all of which mean well, but almost none of which have any actual benefit.

And the worst part of this is that all the damage done is in foregone wealth growth. It's easy to point out the hard-luck cases that result from free market capitalism; it's a lot harder to point out how much better their lives would be had the economy not been shackled by unnecessary regulation for decades. I contend (and I suspect that, if they thought about it, most libertarians would) that the actual wages of those minimum wage workers would be much higher than any "living wage" proposed by progressives had libertarian economic ideas prevailed in the Great Depression and after. That is why I support the free market, because the outcomes are much better in very nearly every case than under any form of regulation, and those few cases under which it would be worse are better managed by private charity or a simple negative income tax than by complex regulation of the whole economy.

jh | June 13, 2007, 5:26am | #

"Libertarianism has its greatest appeal on social issues."

Not for me. The love of free markets is what drew me into libertarianism, and only when I started reading the literature and commentaries like this did I realize that the social issues were simply a subcategory of free markets, and that the two were inextricably intertwined, that violations of one usually lead to violations of the other. For example, unjustified wars lead to economic restrictions as well as civil liberty violations.

jh | June 13, 2007, 5:34am | #

joe says: "But as for your statement that the American economy is too big and complicated for economists to make accurate predictions about, I agree. That's why I find political arguments based on some dude's economic predictions to be of such limited value."

But as for your statement that the American economy is too big and complicated for STATIST POLITICAL HACKS IGNORANT OF BASIC ECONOMICS to make accurate predictions about, I agree. That's why I find ECONOMIC arguments based on some dude's POLITICAL PRECONCEPTIONS to be of such limited value.

Fixed those typos for you, Joe.

MJ | June 13, 2007, 7:36am | #

"But as for your statement that the American economy is too big and complicated for economists to make accurate predictions about, I agree."

"You say there is no other wage level that is legitimate beyond what an employer gets an employee to accept; yes, there is - there is the wage level that brings about the most good, whether this is measured in overall economic efficiency, or in social utility." -joe

joe, given that you simultaneously believe that the economy is too big for even experts to fully understand and that the market left to its own devices does not produce an optimal "good" wage. Who or what in your perfect world is capable of figuring out what that optimal "good" wage is and on what basis?

I am not saying that the market is infallible, I am asking how is any other institution better qualified to make those decisions?

ChrisO | June 13, 2007, 8:05am | #

Here's a thought:

Libertarianism is primarily a moral, rather than economic, force. To the degree that it results in higher economic efficiency, that's great. But even if it results in lower efficiency, it is still a more just ideology than authoritarianism, which is the only real alternative.

Ken | June 13, 2007, 8:21am | #

"And to make it an even more believable example, all this takes place on a deserted isle."
Or maybe, nearly every employer has way more resources to hold out than nearly every worker. You know, the way things actually are.
"If I only have 1 dollar to my name, it's probably because the service I offer is A: not in demand or B: offered by lots of other folks who can do the same job as well as or better than I can for less money." Or, since the beginning you've had less and had to take the worst part of a bargain from those who can hold out (after all, you have to eat).
"How did this person get in this situation?" Maybe he chose his parents poorly and he is poor, eh?
""there is nothing inherently immoral about one party having more bargaining power in a given transaction.""
Unless you believe in freedom of choice, which in unequal bargaining exist at least to a lesser degree (why do libertarians think fraud is wrong for example?).

knock knock | June 13, 2007, 8:30am | #

The 'people' have an innate right to be stupid and make stupid decisions and the responsibility to live with those choices.

We certainly exercise our right to freedom of stupid speech on here all the time, don't we?

Stupid isn't the right word, 'ignorant' is,
for we surely try to learn and not make the same mistakes over and over.

From the person we marry to the car we drive to our taste in clothes, we make decisions that we have to live with for a time.

D.A. Ridgely | June 13, 2007, 8:44am | #

My (long winded) review of Caplan's book here.

Actually, not only are any number of joe's comments fairly good evidence of Caplan's thesis, so are the opinions of many libertarians. (So, probably, are some of mine. Being irrational, I wouldn't be able to know.) The important thing about his book is his challenge to the Public Choice "rational ignorance" thesis. As for what economists believe as opposed to non-economists, he devotes a section to data in support of his thesis.

As for joe's thesis, sure, individual prospective employees may lack sufficient bargaining power to optimize their incomes. So, for that matter, may employers from time to time, though probably less often in most firms. The issue is aggregate efficiency, not individual efficiency, and in the real world in the aggregate the market approaches perfect efficiency better than non-market approaches do.

Yes, minimum wage laws increase unemployment except in the case where the minimum wage for a job is below its market price. Maybe not much and maybe society is willing to accept that cost. But if you artificially raise the price of anything beyond its market price the market will consume less of it, and that includes labor.

Almost universally, the (real) economists who support minimum wage laws are making the normative decision it is worth that cost. That's hardly surprising in terms of Caplan's thesis -- economists are not immune from what he calls "rational irrationality," either.

joe | June 13, 2007, 9:33am | #

Nas,

1. There will always be transaction costs to changing jobs or even holding out for a better offer, and there will always be a stratum at the bottom who will be unable to afford them.

2. Your counter-argument, that my observations about labor mobility transaction costs is only true because we don't have a perfect free market system and should therefore not be considered when formulating policy, is holding me to a higher standard, since you seem to have no problem advocating for policies that you think would be improvements, even given that we're in a less-than-totall-free-market system.

joe | June 13, 2007, 9:34am | #

Anthony Gregory,

I'm an equal opportunity economics skeptic. I think any school's models are going to be insufficiently able to describe the complexity of the world to justify leaning too heavily on them in the formulation of policy.

joe | June 13, 2007, 9:37am | #

Gahan,

"Why not address the specific problems, i.e. the lack of transportation, instead of implementing sweeping market distortions that may or may not help the people they're aimed at helping?"

Like libertarians wouldn't be arguing against those!

Don't get me wrong, I do support more targetted efforts like that, too - I'm not holding out the minimum wage as a cure-all. But the fundamental problem - a lack of economic power that prevents one from operating at a sufficiently high level of choice and autonomy - is one that is going to have far more manifestations than there can possibly be programs.

joe | June 13, 2007, 9:39am | #

Gahan,

Freidman's negative income tax idea is certainly a profound one, and I for one was glad when Clinton boosted the EITC.

Anyway, my argument has not been that fans of classical economic theory lack compassion.

joe | June 13, 2007, 9:43am | #

grylliade,

It does not take detailed information about every applicant for someone seeking to secure minimum wage labor to realize that his applicants are people who lack bargaining power in the economy. The fact that their labor can be so commodified, that he can throw out the offer of $5/hour and expect to have people accept, and not budge on that wage, is pretty gosh darn irrefutable evidence that he knows that his applicants lack bargaining power.

D.A. Ridgely | June 13, 2007, 9:44am | #

BTW, and before joe gets around to telling me why I'm wrong, too, another "social justice" problem with minimum wage laws is that they constitute an unfair tax on employers whose business uses low skill labor. If society wants to ensure everyone makes $10 an hour, then all of society should subsidize whatever the market rate for labor happens to be, not foist the subsidy on people who hire gardeners instead of accountants. Yes, there are problems with that approach, too, but for those who seek some abstract sense of distributive justice and who also want both plenty of gardeners and accountants, it is unjust to have the latter escape the cost of that "justice."

joe | June 13, 2007, 9:46am | #

MJ,

"Who or what in your perfect world is capable of figuring out what that optimal "good" wage is and on what basis?"

No one, with any great degree of accuracy. That's why I support state efforts to set wages only in a tiny fraction of employment situations, when the failure of the real-world market to operate like a perfect market is so obvious and extreme.

joe | June 13, 2007, 9:47am | #

Hush, jh, the grown-ups are tyring to have a conversation.

joe | June 13, 2007, 9:51am | #

DAR,

"The issue is aggregate efficiency, not individual efficiency, and in the real world in the aggregate the market approaches perfect efficiency better than non-market approaches do."

In the case of wages, there are levels in between the entire universe of employment contracts and an individuals employment contract. I would agree, if you look at that whole universe, a market approach is going to yield greater efficiency; however, in the subset of the bottom reaches of the labor market, I have laid out cogent, economics-based reasons for why market failure can be expected.

Which you have only waived away with a statement of faith, while failing utterly to offer even the beginning of a rational counter-argument.

joe | June 13, 2007, 9:56am | #

It is just to impose the cost of a minimum-wage law on those who hire at the very bottom of the labor market for exactly the reason I have already laid out - they are already enjoying the benefit of a market failure, which has allowed them to enjoy labor costs below those that they would experience in a perfectly functioning market, while those who hire higher-cost labor are negotiating wages with people who are able to operate like the provider of a service in a perfect market, or at least something close to it.

The extra cost imposed on those who hire dirt-cheap labor isn't putting them at a disadvantage compared to other employers; it's leveling the playing field.

steveintheknow | June 13, 2007, 10:00am | #

I have laid out cogent, economics-based reasons for why market failure can be expected.

joe

Is the lack of bargaining power the market failure you are talking about?

Sorry, I just started reading this thread (..30 minutes ago, but its still not enough time), so you may have made it clear already.

steveintheknow | June 13, 2007, 10:04am | #

Ok, I got you, the market failure has lead to the lack of bargaining power. is that a correct reading?

joe | June 13, 2007, 10:08am | #

Yes, that's right - the inability of lowest-wage workers to operate in a manner that approaches that of a labor-provider in a perfect market leaves them with reduced bargaining power, which leaves them accepting irrationally low wages.

To those who would say, "Well, if they took the job, that meant the wage was high enough," I'll reply with the old chestnut, "A drowning man will grasp even the sharp end of a sword."

D.A. Ridgely | June 13, 2007, 10:11am | #

Um, no. "Waiving away" would be ignoring the abundant evidence of price theory to fit one's prejudices here. There is nothing about labor that exempts it from supply and demand pressures.

Beyond your noting occasional labor surpluses (which, sure, drive down the price of labor but that hardly counts as market failure) and transaction costs, neither of which I denied as leading to sub-optimal results in individual cases, if there are "cogent, economics-based reasons why market failure can be expected," I must have missed them.

steveintheknow | June 13, 2007, 10:17am | #

Well I agree with you that there is a huge lack of bargaining power, but I am not sure I agree it is because of market failure exactly. Although none are "perfect", it still seems like the labor market sets the rate. That is not an argument that the rate is justified, just that I don't think it is failure in the most academic sense.

But you are also right that just because someones accepts a job doesn't mean they are happy with it.

Reinmoose | June 13, 2007, 10:24am | #

*I must preface my post by saying that I have read every comment posted before mine. I regret that I was not involved in the entirety of the above conversation.*

Jo