… is from pages 258-259 of the late Wesleyan University economic historian Stanley Lebergott’s great 1984 book, The Americans: An Economic Record (footnotes deleted; asterisk note added; link added; first two brackets added by Boudreaux; third bracket original to Lebergott):

The deeper answer is implicit in the Reconstruction legislation that defined the criminal.  He was “not the black man who left his plantations, but the planter who sought a free market in labor.”  The “criminals” were in fact those white planters who offered higher wages to attract labor.  They included white landowners who offered [share]croppers a better share, to get croppers, and thereby profit from their land ownership.  They also included white lenders who loaned freedman money to buy land.  They even included corporations building railroads, who bid black labor away by offering higher wages.  Moreover, and importantly, they included planters in other states, who couldn’t care less about the need for “docile” labor in a given state.

As early as 1864*, planters in other states began seeking labor in Georgia.  As General [Davis] Tillson (then head of the Freedman’s Bureau in that state) observed, Georgia planters were offering farmhands only $2 a month.  But: “Men from Alabama, Mississippi, Arkansas say that [labor] is worth fifteen dollars, and stand reading to give it”….  Throughout Reconstruction the freedman moved to those areas where planters sought labor to work their lands.  The “feverish excitement” of the 1867 boom led Mississippi planters to pay wages 50 percent greater than South Carolina and 27 percent greater than Alabama….  In a later year “some four or five thousand colored laborers” left South Carolina for “Arkansas, Alabama, Mississippi, where wages were much higher.”  Between 1870 and 1880 alone about 20,000 freedmen moved into Mississippi.  Equal numbers migrated to Texas and to Arkansas.  Alabama lost over 35,000.

Owners of the old South, therefore, had to increase their wages and their share offers if they were to keep their entire labor supply from drifting away.

DBx: Lebergott’s historical account – which reinforces the important findings of Robert Higgs about the postbellum economic trajectory of blacks in America – reveals the equalizing powers of economic competition.  Contrary to popular myth, even racist southerners put their own economic well-being ahead of their irrational prejudices by competing with offers of higher wages for blacks’ labor and with offers of low prices for blacks’ business.  This competition, in turn, increased blacks’ geographic and economic mobility and raised their incomes.  The reason southerners – whether racists or rent-seekers (or both) – turned to government to get Jim Crow legislation is that market forces were undermining their racist preferences and competing away their uncompetitively high profits, rents, and wages.

Lebergott’s account also further reveals the utter implausibly of the claims of those who assert that today’s market in America for low-skilled workers is infected with monopsony power.  While this market isn’t textbook perfect (no real-world market is), and while this market would be improved by making it even freer (for example, by eliminating occupational-licensing statutes and zoning restrictions), the ability of low-skilled workers today throughout the U.S. to move from job to job is surely better than was the ability of low-skilled blacks 150 years ago throughout the American south to move from job to job.  And yet, as Lebergott documents,  low-skilled American blacks of 150 years ago in the American south did indeed enjoy such mobility that economic competition raised their wages.  Similarly, the ability today of entrepreneurs and business owners to discover and compete for under-priced labor is surely greater than was the ability of employers 150 years ago to do the same – and yet, again as Lebergott documents, such competitive initiative by employers was common 150 years ago and served to increase low-skilled workers’ mobility and wages.

If there was, as there was, vigorous economic competition for the labor services of black former slaves in the war-ravaged American south of the mid- to late-19th century, it is completely ludicrous for anyone to insist that minimum wages, whether national or local, are required to protect low-skilled workers in today’s America from the effects of monopsony power.  Such monopsony power is nothing more than the phantasm of minds that neither understand the nature of economic competition nor know much, if any, economic history.

…..

* “1864” is a typo in Lebergott.  He almost surely meant 1865, for 1865 is the year that Gen. Tillson was appointed to this post.

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Boston Globe columnist Jeff Jacoby wisely warns the press to avoid getting carried away with their criticisms of Trump.

George Will explores the creeping (and creepy) expansion of Uncle Sam’s power.

Arnold Kling has become more pessimistic about politics – but not about private enterprise and innovators.

James Hagerty remembers Allan Meltzer.  A slice:

He evolved into a libertarian. Capitalism, he wrote in one essay, “works well with people as they are, not as someone would like to make them.”

Does capitalism help or hurt women?

Richard McKenzie offers a new and interesting angle on the BAT proposal.

Richard Ebeling writes sensibly about trade deficits.

Nick Gillespie interviews P.J. O’Rourke.

And, finally, Dilbert.  (HT Roger Meiners)

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Quotation of the Day…

by Don Boudreaux on May 21, 2017

in Hubris and humility, Work

… is from page 247 of the 5th edition (2015) of Thomas Sowell’s Basic Economics:

Third-party observers face none of the inherent constraints and trade-offs that are inescapable for both employers and employees, and therefore these third parties have nothing to force them to even think in such terms.

DBx: Quite so.  And yet in the popular mind the no-skin-in-the-game crusaders for minimum wages, for mandated family leave, and for other state-dictated terms of employment contracts are held in great esteem while the employers who must arrange for the profitable employment of workers – including arrangements to pay workers – are regarded with suspicion or even outright hostility.  As for workers, the no-skin-in-the-game crusaders inflict damage on them even though most of these worker-victims never connect the dots.

The 19-year-old inner-city single mom who can’t find a job doesn’t realize that her unemployment is the result of minimum-wage legislation.  The 30-year-old junior account executive never learns that he would have gotten a larger raise were it not for the mandated leave that the state forced into the terms of his employment contract with his employer.  The 61-year-old welder, approaching retirement and looking back on his career in the shipyard, is oblivious to the fact that his lifetime earnings would have been higher had government let competitive markets determine optimal levels of workplace safety rather than impose, as it did, safety standards arbitrarily determined by politicians and bureaucrats none of whom had sufficient knowledge of either the worker’s preferences or of the costs of the diktats.

Far too many people operate according to a screwy and uncivilized code of ethics.  Butting in to strangers’ private affairs is applauded as altruistic if done through the agency of the state, while resisting and protesting against such officiousness is portrayed in the media and in the classrooms as evidence of greed or of cruelty or of ignorance (or of some combination of the three).

Making matters much worse are the all-too-typical modern economists.  They thrill to the not-very-challenging challenge of pointing out the many ways that real-world markets ‘deviate’ from textbook models – and in particular of all the many situations in which flesh-and-blood individuals acting in markets are less than fully informed.  These economists then leap, stuffed with stupid confidence but devoid of anything at stake, to the conclusion that they – and the state officials who they imagine are eager to act on their ‘scientific’ advice – somehow know, or can make known, all that the flesh-and-blood people are presumed not to know about the details of each of these individual’s specific situations.

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Bonus Quotation of the Day…

by Don Boudreaux on May 20, 2017

in History, Standard of Living

… is from page 316 of Mark Kishlansky’s 1996 volume, A Monarchy Transformed: Britain 1603-1714:

Anne Stuart was only thirty-seven when she ascended to the thrones of England, Scotland and Ireland in 1702, but she was already an old woman, carried to her coronation in a sedan chair.  She had been physically depleted by seventeen pregnancies and psychically debilitated by their futility – not a single child had survived.

DBx: A high-born English royal in the early modern era – a woman who was for twelve years Queen of what was by then one of the wealthiest nations on earth – died as a widow in 1714 at the age of 49 without a single surviving child despite giving birth ten times.  (Each of her other seven pregnancies ended in a miscarriage.)  Anne’s longest-surviving child was Prince William, Duke of Gloucester, who in 1700 died at the age of 11.

Anne’s sad fate was unusually bad even for her era, and especially for her class.  Still, she was of a generation a mere 18 or 19 previous to ours.  It’s not that long ago when the wealthiest and most powerful and privileged of human beings were at a higher risk than any of us are today to suffer such material privation and emotional agony that we, today, can barely imagine.  (By the way, Anne survived the case of smallpox that kept her, in 1677, from attending the wedding of her sister Mary – Mary, of the team of William & Mary, who herself died of smallpox in 1694.)

Who among us middle-class denizens of 2017 would wish to trade places with the likes of Her Majesty, Anne, Queen of Great Britain, France and Ireland, Defender of the Faith, etc., etc.?

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Some Links

by Don Boudreaux on May 20, 2017

in Economics, Health, Immigration, Truth-seeking & ideology

Here’s a line from near the beginning of this excellent essay in the New York Times by Martin Seligman and John Tierney:

What best distinguishes our species is an ability that scientists are just beginning to appreciate: We contemplate the future. Our singular foresight created civilization and sustains society.

Nicolás Maloberti is motivated to write about motivated reasoning.

David Bier writes about Sen. Ron Johnson’s (R-WI) bill to improve immigration policy.

George Will uses an idea from the late William Baumol to diagnose U.S. health-care policy.

FEE offers this excellent excerpt from Ludwig von Mises’s 1944 book, Bureaucracy.

My former GMU student Ninos Malek explains how to make economics interesting by revealing its full relevance.

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(Prefatory Note: This post and the earlier one on which it is an elaboration are wonkier than is typical for Cafe Hayek.  For that I apologize.  Each of these posts is also a bit more speculative than is typical for my blog posts.  While I believe that my reasoning here is correct, I’m still pondering the intricacies of the arguments.  I confess to a possibility of error that is even higher than usual.)

……………………….

The point I try to make in this earlier post on the Stolper-Samuelson Theorem warrants further elaboration.  Let’s begin by running through a quick example of Stolper-Samuelson.

Suppose that there are two goods (chemicals and shoes) and two inputs (high-skilled labor and low-skilled labor).  Both kinds of labor are used to produce both chemicals and shoes, but in different proportions.  Suppose that the production of each pair of shoes requires relatively more low-skilled labor compared to high-skilled labor than does the production of a liter of chemicals.  (“Requires” is a bit misleading because the optimal proportion of inputs used to produce any good or service depends upon the relative prices of inputs.  So, to be more precise, assume that at current wages the efficient production of shoes is low-skilled-labor intensive while the efficient production of chemicals is high-skilled-labor intensive.)

If the U.S. has a relative abundance of high-skilled labor compared to China, Americans will have a comparative advantage over the Chinese in the production of chemicals and the Chinese will have a comparative advantage over Americans in the production of shoes.  As trade opens up between these two countries, the demand for chemicals produced in America rises and the demand for shoes produced in America falls.  (In China the opposite happens.)  Because the production of chemicals uses relatively more high-skilled labor than does the production of shoes, the wages of high-skilled workers in America are bid up with freer trade.

In contrast, because the production of each liter of chemicals uses relatively less low-skilled labor than does the production of each pair of shoes, as shoe production falls in America a greater number of low-skilled workers are released from shoe production than are absorbed into chemical production – unless, that is, the wages of low-skilled workers fall sufficiently to encourage chemical producers to employ greater numbers of low-skilled workers.  In the U.S., in this very simple example, freer trade causes the wages of low-skilled workers to fall not only relative to the wages of high-skilled workers but also absolutely.  And because even before trade became freer the wages earned by high-skilled workers were higher than were the wages earned by low-skilled workers, freer trade further increases this income difference.  Freer trade increases income inequality in a country with a relative abundance of high-skilled workers.

The above is a standard account of Stolper-Samuelson’s identification of the process through which freer trade increases income inequality in a rich country (or, alternatively, of how judiciously imposed tariffs can not only raise the real incomes of the poorest workers in countries such as the U.S., but also make incomes more equal than they would be under free trade).

One problem with this standard account is its assumption of only two kinds of labor (“high” skilled and “low” skilled).  In reality each country has a wide range of many different qualities of labor, but with countries differing in their particular distributions of the different qualities of labor.

Suppose the U.S. is the only country in the world with hyper-super-duper talented managers.  Suppose also (as is reasonable) that the number of hyper-super-duper talented managers in the U.S. is nevertheless very small relative to the total U.S. workforce.  In this case, hyper-super-duper talented managers are nevertheless relatively abundant in the U.S. compared to in other countries.  Freer trade will further raise the labor income of such singularly skilled workers.

But in reality the bulk of U.S. workers have skill levels somewhere between those of the hyper-super-duper talented managers and those of low-skilled workers such as motel maids and handymen.  It is reasonable to suppose that if the bulk of American workers are employed in what we may call ‘middle-skill-level’ jobs, then America has a relative abundance of such middle-skill-level workers.

It is unquestionably true that, within America, there is an abundance of middle-skill-level labor relative to very high skilled and very low skilled labor.  But the question that is relevant for Stolper-Samuelson is this: In what kinds of labor does America have an abundance compared to other countries?  While it’s possible that, compared to other countries, the only kind of labor that America has in abundance is very high skilled labor, in reality this situation is implausible – or, at least it’s not obviously so.  Precisely because the great bulk of American workers are, in America, middle-skill-level workers, the relative abundance of such workers in America suggests that America has, compared to its trading partners, a relative abundance of many varieties of middle-skill-level workers.

America does have, for example, large numbers of skilled machinists, accountants, actuaries, medical technicians, web designers, educators, and engineers of all sorts.  Very few, if any, workers in these fields earn incomes that put them in top one-percent of income earners.  Many earn incomes that rank them at or near the middle of the income distribution for workers in America.  Therefore, if and to the extent that America has an abundance of such middle-skill-level workers relative to that of our trading partners, then Stolper-Samuelson predicts that freer trade will raise the wages of these middle-skill-level workers.

Whether or not freer trade raises the incomes of these middle-skill-level workers relative to any trade-induced increase in the incomes of America’s highest-skilled and highest-paid workers is a different question.  It might not do so – but it also might.

Bottom Line: In a world with a wide range of many different skill levels – from unskilled to hyper-super-duper skilled – it is a mistake to conclude from the Stolper-Samuelson Theorem that freer trade necessarily increases income inequality in rich countries.  It might do so.  But if the rich-country’s workforce is especially abundant in skills that, for that rich country, are considered middle level but which are relatively more scarce in the rich-country’s trading partners, then freer trade is likely to decrease income inequality in that rich country.  It will do so by swelling the incomes earned by the bulk of workers in that rich country – workers who, by the standards of that rich country, have middle-level skills.

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Here’s a letter to the Wall Street Journal:

Reviewing Roger Backhouse’s biography of the economist Paul Samuelson, Eric Maskin writes that “The Stolper-Samuelson Theorem implies that international trade causes inequality between high-skilled and less-skilled workers to grow in rich countries.  The theorem was derived in 1941 but clearly remains relevant in today’s America of rising inequality” (“An Einstein of the Dismal Science,” May 20).

Not so fast.

When applied to labor, the Stolper-Samuelson Theorem predicts that the workers whose wages fall as a result of freer trade are (in econ jargon) the relatively more scarce factor of production – which, in America, is less-skilled workers – and that the workers whose wages rise are the relatively more abundant factor of production.  In plain language, while the workers in America whose wages are reduced by freer trade are indeed the lowest paid, they also are a minority of workers.  Freer trade raises the wages of those workers whose skill-levels are relatively most abundant.  Because the workers in America whose skill-levels are most abundant likely are those whose incomes are in or near the middle of the income distribution for workers, Stolper-Samuelson predicts that the wages in America that will disproportionately rise when trade becomes freer are chiefly those earned by middle-income workers.

Yet it is difficult to see how a change in the wages distribution with a disproportionate amount of the gains going to middle-income workers increases income inequality.  Therefore, to the extent that the Stolper-Samuelson Theorem applies in reality, it tells us that whatever increase in income inequality has occurred over the past several decades is likely not due to the effect that freer trade has on the distribution of workers’ wages.

Sincerely,
Donald J. Boudreaux
Professor of Economics
and
Martha and Nelson Getchell Chair for the Study of Free Market Capitalism at the Mercatus Center
George Mason University
Fairfax, VA  22030

Note that in this letter I do not argue that income inequality has not increased in the United States.  Instead, I argue that whatever increase in income inequality there might have been in the U.S. is not as straightforwardly explained by – or even consistent with – the Stopler-Samuelson Theorem as many people today (such as Eric Maskin) presume.

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Quotation of the Day…

by Don Boudreaux on May 20, 2017

in Competition, Seen and Unseen, Work

… is from page 24 of Ludwig von Mises’s January 1962 essay “The Elite Under Capitalism,” as this essay is reprinted in the original, 1990 edition of the collection of some of Ludwig von Mises’s shorter essays, Economic Freedom and Interventionism (Bettina Bien Greaves, ed.):

If one de­plores the businessman’s unfeel­ing preoccupation with profit-seeking, one has to realize two things.  First, that this attitude is prescribed to the entrepreneur by the consumers who are not pre­pared to accept any excuse for poor service.  Secondly, that it is precisely this neglect of “the hu­man angle” that prevents arbi­trariness and partiality from af­fecting the employer-employee nexus.

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… is from page 418 of Thomas Babington Macaulay’s magisterial The History of England (1848-61), abridged edition, Hugh Trevor-Roper, editor (New York: Penguin Books, 1968):

We daily see men do for their party, for their sect, for their country, for their favourite schemes of political and social reform, what they would not do to enrich or to avenge themselves.  At a temptation directly addressed to our private cupidity or to our private animosity, whatever virtue we have takes the alarm.  But virtue itself may contribute to the fall of him who imagines that it is in his power, by violating some general rule of morality, to confer an important benefit on a church, on a commonwealth, on mankind.  He silences the remonstrances of conscience, and hardens his heart against the most touching spectacles of misery, by repeating to himself that his interventions are pure, that his objects are noble, that he is doing a little evil for the sake of a great good.  By degrees he comes altogether to forget the turpitude of the means in the excellence of the end, and at length perpetrates without one internal twinge acts which would shock a buccaneer.

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Mr. Rick Manning, President
Americans for Limited Government

Mr. Manning:

Again today – the third time this week! – your organization blasted out an e-mail beseeching Pres. Trump to punitively tax Americans who buy low-priced Mexican sugar.  You must really fear the damage that you suppose is done to an economy whenever its consumers gain increased access to goods and services.

So I’ve a question: why your bush-league focus on sugar from Mexico?  Why not go big league?!  Why not unfurl the logic of your economics to its full glory?  Why don’t you also urge Pres. Trump, for example, to

– raise capital-gains, corporate, and personal income tax rates to confiscatory levels;

– slap sky-high taxes on all carbon emissions;

– impose a great deal more crushing government regulations on U.S. businesses;

– mandate occupational licensing for all trades and jobs;

– outlaw all education in S.T.E.M. subjects; indeed, outlaw all education;

– transform his plan to improve America’s infrastructure into a plan to destroy America’s infrastructure;

– encourage the Fed to fuel hyperinflation by flooding the economy with newly created dollars?

If the economic reasoning used to justify artificial restrictions on Americans’ access to sugar is sound, then you’ll applaud the genius of the above proposals.  Each proposal, if adopted, will artificially restrict Americans’ access not only to sugar but also to all other goods and services.  These government-engineered supply restrictions will – again, if your economics is sound – only add to the great abundance of material prosperity that you obviously believe will spring from enforced dearth.

I’m eager to see if your future e-mail blasts reveal that you consistently follow the logic of that strange species of economics that leads you to believe that Americans are enriched by restrictions on their access to goods and services.

Sincerely,
Donald J. Boudreaux
Professor of Economics
and
Martha and Nelson Getchell Chair for the Study of Free Market Capitalism at the Mercatus Center
George Mason University
Fairfax, VA  22030

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