The Society of Real Economists

by Russ Roberts on October 12, 2006

in Prices

Some have suggested to me that it would be a good idea to have a counter-petition to the one advocating an increase in the minimum wage. I’m not so keen on it for a variety of reasons. We could get more signatures. We could get more Nobel Laureates. But so what? We’d just encourage the world to think that economists don’t agree on anything, even the minimum wage, which used to be the dividing line between economists and everyone else.

Here’s a different idea. Let’s start a new society of economists—not the American Economic Association but the Society of Real Economists (SORE). When people ask you what you do for a living, instead of saying "economist," you’d say you’re a "real economist."

It’s a big tent kind of group. Here’s my first cut at a list of principles that makes you a real economist:

1. Demand slopes downward–people do less of something when it gets more expensive
2. Prices respond to market forces
3. Motives and intentions do not matter. Results and actions do.

Maybe that’s it. The beauty of these principles is that there’s room for people on the left and the right. You can be an interventionist or a free-marketer. You can be a member of SORE and be in favor of the minimum wage because you think the benefits of helping some people get a higher wage outweighs the costs of some people losing their job or having a hard time finding a job because there are fewer opportunities.

But if you support the minimum wage because it’s important as a symbol of our desire to help people or because the minimum wage doesn’t effect employment, you can’t be a member of SORE.

I’m in. It’s somewhat exclusive, though. Here are a list of 650 people who are out.

If you agree with the three principles I’ve listed, just send me an email with your affiliation and you’re in.

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{ 48 comments }

drtaxsacto October 13, 2006 at 12:01 am

Russell,
I am an association president of the California Independent College Association.

My favorite joke is "How many University of Chicago economists does it take to screw in a light bulb?"
The answer "Zero, they expect the market to do it."
Sign me up.
Jonathan Brown

ben October 13, 2006 at 12:56 am

"You can be a member of SORE and be in favor of the minimum wage because you think the benefits of helping some people get a higher wage outweighs the costs of some people losing their job or having a hard time finding a job because there are fewer opportunities."

This particular issue has always troubled me on minimum wage. I can't think of a way in principle to decide which effect outweighs the other. My only reasoning would be to start at an extreme – a minimum wage of $1000/hour, which would obviously be deterimental, then work backwards to conclude a $7.25 minimum also has negative effects.

What principle allows me to say with confidence that x% losing their job is not worth the y% increase in wages enjoyed by the rest? I don't know that welfare effects can be demonstrated empirically because it is hard to control for changes in job quality.

Stephen October 13, 2006 at 2:33 am

Ben,

Presumably the elasticity of demand for low skilled workers plays a part. At $1,000/hr, demand would presumably have a high elasticity. This may or may not be the case at $7.25/hr. If demand for low skilled workers is highly inelastic at these low price levels, then it can be argued that the benefits for these low skilled workers outweighs the costs of those that lose their job.

Are there any studies attemting to determine the elasticity of demand for low skilled labor? At least it would add some facts to the debate.

Randy October 13, 2006 at 7:26 am

Ben,

Re; "What principle allows me to say with confidence that x% losing their job is not worth the y% increase in wages enjoyed by the rest?"

Try this.

Two assumptions; first, that a minimum wage has the effect of denying people who are worth less than the minimum the right to work; second, that at low price levels wages probably are relatively inelastic.

The cost to society of the minimum wage is that the productivity of those whose labor is worth less than the minimum, not falling within the range of elasticity, but still willing to work, is lost.

We can debate the idea that anyone who works should be entitled to a certain standard of living, but even if we agree that they are, the minimum wage is not the most efficient method of achieving that objective.

Randy October 13, 2006 at 7:32 am

Russell,

I do agree with your principles, but I'm not an economist. Maybe you can sign me up as an associate or something of the sort.

ben October 13, 2006 at 7:49 am

Stephen, Randy, thanks.

Reading your comments and thinking about it a little more has helped.

I have never supported any minimum wage and have thought carefully about why that is. The answer I came up with is that the market for unskilled labour is highly competitive and, as you point out Randy, putting in a floor destroys surplus. What workers keeping their jobs gain from minimum wage is taken from employers (zero sum) and there is a DWL to deduct as well. There is no reason in economics to prefer surplus accruing to the firm over surplus accruing to workers. That is a value judgment, and one on which the case for minimum wage rests.

Mace October 13, 2006 at 7:57 am

A continuation of a very dangerous trend in academia over the las few decades – the supremacy of feelings over logic. The Left must be delighted by the 650 signatures. Next up: incentives don't matter THAT much.

Slocum October 13, 2006 at 8:00 am

"What principle allows me to say with confidence that x% losing their job is not worth the y% increase in wages enjoyed by the rest?"

I would say the logic is something like this, "It is beneath anyone's dignity to work for less than $X/hr. Yes, those whose skills are not worth that much may be unemployed (and unemployable), but then it is the responsibility of society to support them."

This 'a good job or the dole' model is essentially the current european model, and I assume that many of those who favor high minimum wages also like the european system.

I would say, on the other hand, that it is beneath anyone's dignity (and highly damaging) to spend a life on the dole, that every able-bodied person ought to work for the wages they are able to earn (and social support payments should supplement the income of poor families). And I'd further say that those who work for low wages are more likely to build the skills needed to earn better wages than are are those on the dole sitting at home watching TV.

Anyway, I think this is the fundamental disagreement between those favoring minimum wage increases and those who favor the EITC.

Randy October 13, 2006 at 9:06 am

Ben,

Re; "What workers keeping their jobs gain from minimum wage is taken from employers…"

I happen to think that is the myth which supports the minimum wage in the minds of many. It satisfies their egalitarian instincts. But again, I think it is a myth that the employer pays the higher cost of wages. In the short term perhaps, but over time, the higher cost of labor will be distributed to society in general, and the burden of it will be felt most by those with the least. In time, the minimum wage becomes a regressive tax. Which explains why the Society of Unreal Economists supports indexing it to inflation. I would suggest to them that raising a burdensome regressive tax will only make it more of a burden.

JohnDewey October 13, 2006 at 10:19 am

stephen: "If demand for low skilled workers is highly inelastic at these low price levels, then it can be argued that the benefits for these low skilled workers outweighs the costs of those that lose their job."

In the long run, though, demand is certainly not highly inelastic. Jobs can be moved to lower cost nations. Jobs can be automated.

Another problem is that the beneficiaries are often not the workers who were receiving lower wages. A higher minimum wage will attract more workers. The formerly unemployed – college students, for example – will enter the workforce as parttimers. The formerly underemployed will work more hours. The low-skilled workers who are not worth the new wage floor will be displaced by workers who are.

mobile October 13, 2006 at 10:33 am

To second Randy's comment, do you have to be an economist to be a real economist? Also, if you hold principles that disqualify from joining does that make you a SORE loser?

David October 13, 2006 at 10:33 am

The Economic Policy Institute is an arm of Big Organized Labor. My question is: Why are the well known names on the first page of the petition going to bat for the Labor Unions? Question 2: If 22 states and DC already have a minimum wage above the federal minimum, doesn't that suggest this should not be a federal policy?

Howard Baetjer October 13, 2006 at 11:06 am

Sign me up, Russ. I'm as sore about the statement of the 650 as you are, and I'm requiring all 117 of my micro principles students to read the whole exchange.

Howard Baetjer
Lecturer
Department of Economics
Towson University

triticale October 13, 2006 at 11:47 am

My blog post claiming the identity of Real Economist based upon my agreement as an observant layman went up before reading the comments suggesting I should identify as a SORE associate. So be it.

My position is that minimum wage legislation should read that it shall be illegal to provide employment to any individual whose value as a worker is such that one cannot justify paying said person at least the stated wage. By the way, given the current related demands for a "living wage", I maintain that any jobs for which such is mandated must be set aside so that only persons who in fact depend on that wage may be hired.

Caliban Darklock October 13, 2006 at 12:13 pm

Something in your principles jumps out at me. In order to argue against these three principles, you have to be completely ignorant of empirical reality.

So perhaps your group really ought to be called the "Society Of Halfway Intelligent People". We would be SOHIP. And since people who understand economic theory almost universally enjoy puns, we could make up all kinds of nifty slogans, amusing recognition signs, and maybe even a secret handshake like the freemasons. Perhaps we could use the famous Monty Python sketch for inspiration on that one.

And while I'm not an economist, I am sometimes mistaken for one by lawyers. Economists have also mistaken me for a lawyer, which has led me to consider perhaps returning to college for a degree in economics and then going to law school.

Jeff October 13, 2006 at 12:28 pm

There was an ad in the newspapers similar to this when Bush was proposing his tax cuts. It was very similar to this situation in that the ad made no real economic argument against the tax cuts, it just said that a bunch of economists were against them.

Economists are still regular people and have their moments when personal political views can sway their judgement. All this says is that there's simply a bunch of economists who happen to hold this certain political view. Tons of people agreee with them and tons don't. I really don't care that these people happen to be economists. I am bothered that they try to act as though their PhD somehow makes their political views correct without presenting an argument.

Tim October 13, 2006 at 4:51 pm

One of the sources of confusion for these people you refer to (who deny the law of demand) comes from confusion of employment rate with employment. If I own a firm and pay an employee for 50 hours a week, and the min wage goes up, it becomes cheaper for me to hire another worker. The effects of overtime pay mean I now have two employees, each working 20 hours a week.

The law of demand still holds – increased prices lowered hours of labor demanded, but the unemployment rate went down. It seems many people commit that mistake as they present studies trying to convince you the demand for labor is perfectly inelastic.

anon October 13, 2006 at 5:34 pm

LOL great idea. as a graduate of The University of Chicago I am frequently puzzled when supposed economists from virtually any other school (eg NYU, Harvard, any other Ivy) make assertions or "studies" that blatantly contradict the basics of Econ 101! what do they teach at those places? i had to read my fair share of Das Kapital in school but not in the econ dept.

maybe we need the equivalent of Board certification that surgeons go through to seperate legitimate econ schools from the places that produce Krugman & co.

i don't think you've chosen the correct criteria, though. #1 should be understanding TANSTAAFL. actually, the best criteria might be to first ignore anyone not associated with U. Chicago, and then check for basic knowledge

Tim October 13, 2006 at 6:28 pm

Anon –

I suppose the first requirement to become a government-certified economist would be holding the belief that certification is a bad idea. How delightfully ironic.

MesaEconoGuy October 13, 2006 at 7:06 pm

Sign me up, Professor Roberts.

But, on the other hand…….

James Wells October 13, 2006 at 7:15 pm

Russell,
You might want to do an entry about the AEA concentrating on its foundations, ie, it was founded by socialists and its early years were spent advocating prohibition (evidence that they can be very wrong – they thought that prohibition would actually work etc). I'm not certain that the AEA has progressed a great deal other than the obligatory math in working papers that can be used to support just about anything.

Perhaps one of the strongest 'arguments' against these increases in the minimum wage tends to increase the drop out rate among those in high school. They mention this in principles textbooks – presumably the signatories have not taught principles, slept through it, or have chosen not to receive pay for reviewing such books.

I was not much surprised by the 'notables' that signed up for the 1-2.50/hr increased and neither were you. One of the most frustrating aspects of the profession are that a laureate is taken to be almost always 'right' and definately right if there are six of them. I did not notice Friedman signing the petition…but then again people tend to not understand that America dominates the awards and that there are 'specialities' in economics. Unfortunately it seems that some of these 'specialists' (labor econ, etc) don't have a grasp of principles micro/macro.

James Wells
WFU

Randy,
There is a bit of research I have read regarding the effects of a minimum wage increase. I can't quote an elasticity for you and it wouldn't much matter anyway (low skilled workers need to be divided into many groups for there to be any rational 'debate') but the conclusions are inevitably the same: some workers who receive the minimum wage are not kept on. The total effects of a 'small' increase (which is more like 1 dollar not 2.50/hr) is a 'small' increase in unemployment. Note that 'unemployment' must be defined. Those that are advocating this move will say it is marginal and they would be correct in the sense that they are saying marginal ACROSS THE ENTIRE LABOR MARKET. They ignore the actual market that such a wage law targets and go for the entire labor market to mask the degrees to which increases 'hurt' low skilled workers.

James Wells October 13, 2006 at 7:29 pm

"To second Randy's comment, do you have to be an economist to be a real economist? Also, if you hold principles that disqualify from joining does that make you a SORE loser?"

I found your comment to be amusing but quite important to the discussion. If these 650 are not economists (and I posit that they are not)
then the reason, as stated by Russell, is that they do not grasp/recognize/etc Principles of Economics (ie econ 101,102). Of course some of them are quite aware of principles and presumably by taking money for reviewing principles textbooks for the publisher (which more than one of the signatories has) they read the relevant sections that counter their arguments. Minimum wage legislation and its effects (very general are in most principles books today.

Therefore, if a 'non-economist' can pass a multiple choice exam covering Principles then they are more economists than these 650 who would presumably fail such a test.

Krugman is an outrageous example and I find myself increasingly frustrated that the 'public' is taking his articles/positions as the 'word of [the profession]/God'. He really does have a cult following among 'liberal' blogs…and that is THE PROBLEM WITH A LAUREATE. They are seen as all knowing.

It would be nice if people recognized just how these awards are given: the group is in political balance (5 people) who represent the makeup of Sweden's political culture. Yes, Sweden (although the nobel for econ was phased in later than the others). They are independent of the govt but appointed by the govt (according to their site) which is quite a contradiction; across all the prizes most are politicians. They tend to emphasize Swedish social values (which is also acknowledged). It was one reason people were so wrong about Pope John Paul II's chances of getting a peace prize; the won't award it to someone who does not recognize certain rights that are recognized within their own country.

Time for SORE PRIZES TOO!

Swimmy October 13, 2006 at 8:59 pm

James Wells: Krugman isn't a laureate. He's seen as all-knowing because he postures as all-knowing. Have you noticed how often his columns posit his view as that of "well-informed economist"s or so on? It's almost argument by bullying, and I respect him as an economist, but his articles for the general public are an eyesore.

Chris Meisenzahl October 13, 2006 at 9:11 pm

In addition to the obvious economic reasons to dislike a min. wage, I'm also against it because it violates freedom of contract between two parties.

anon October 13, 2006 at 9:33 pm

"I suppose the first requirement to become a government-certified economist would be holding the belief that certification is a bad idea. How delightfully ironic."

lol

the real problem is the stupid audience of the NYT etc don't know real economics from junk, and will accept that someone like krugman is an economist just because the NYT says so. instead of the SORE society i'd rather see mandatory high school econ 101, including reading Wealth of Nations, in our public schools. economics should be studied by everyone and by no one!

blink October 13, 2006 at 10:31 pm

I wonder whether the 650 signatories really believe the statement on the minimum wage. What are the incentives? The cost, it appears, is to look foolish to a small number of intellectuals who know better. The benefit is to be lionized by supporters of the minimum wage (and perhaps some political connections as well). A test: would these economists make a wager about “little or no effect”? A betting market could elicit the real opinions of economists.

anon October 13, 2006 at 11:21 pm

^sadly, economists have agendas too. they probably collect nice "consulting fees" from the DNC for spreading their insane propaganda. im sure krugman, sachs, etc, wouldn't get so much NYT/MSM coverage if they told the truth. and let's not forget book deals (which prey on the same ignorant people who don't understand economics). i'd guess half of the fake economists don't know (there are lots of stupid people out there!) and half don't care.

Adam October 14, 2006 at 2:12 am

The few studies I read several years ago on minimum wage all came to the conclusion that the effect of minimum wage increases in terms of total earnings by those effected by the increase was essentially zero. The position being taken by these 650 wannabe economists is that greater income inequality among low-skill workers is a good thing. But supporters of minimum wage legislation are typically individuals who support greater income equality. The simple-minded nature of these economists leads them to neglect the fact that the monetary wage is only a component of an employment compensation package. Employers who do not cut jobs as a result of higher wages will:

- earn less, whether it be entrepeneurs or, in the case of corporations, anybody who owns a stock mutual fund
OR
- raise prices on goods purchased by rich and poor alike
OR
- cut non-pecuniary benefits such as heating, air conditioning, and employee discounts

or some combination thereof. The point is these individuals are not economists, they ate moral philosophers who know a lot of math.

James Wells October 14, 2006 at 2:13 am

Swimmy,
My mistake. I had meant to say he won the John Clarke medal (best/most promising economist under 40). He would have had a decent chance for the Nobel had he not abandoned is professional duties…like actually teaching.

I lumped Krugman into the Laureate category mainly because I was thinking of Arrow, Solow, etc. I am mildly discouraged that people who win a Nobel or a John Clarke award can actually sign on to such policies.

Incidentally I do view the John Clarke medal as having greater merit than the Nobel. That doesn't mean a tremendous amount but still.

Sorry for the error. Next time I start typing paragraph upon paragraph I will be sure to actually examine what I write before I post.

James Wells October 14, 2006 at 2:21 am

^^
Have you read 'The Coming Generational Storm'? That book's authors run a scenario that the US is going to hell in a handbasket but only present the results of one set of vars for their model (ie a discount rate that is probably great for their conclusions as well as productivity growth rate, etc). It is a doomsday work and if you check out amazon.com it gets wonderful reviews.

The book has serious flaws but the one that most bothers me is that you are referred to their website…which sells their financial planning software. The basic strategy is to dump 401ks invest in houses and gold in the anticipation that tax rates will jump 70 percent. There are a number of 'assertions' that certainly have room for changes and the fifty year forecast is prone to error….which is why alt results were left out presumably. Anyway the book is decent but painful and the authors definately are making money after scaring the hell out of people (tax planning software plus the book).

Yes, I have a problem with such people offering financial advice (specific advice) when they are essentially fortune tellers or even less transparent than S.S. 'trustees' in that the latter actually presents alternative outcomes while the authors do not.

The profession is corrupted. I find myself quite discouraged by it and as a result I am prone to write rambling responses in threads such as these where I make glaring errors…such as lumping Krugman in with the Laureates when the John Clarke medal was what I meant to insert (and I do think it is of some value, at the time Krugman was doing decent work).

AskMom October 14, 2006 at 12:44 pm

I've got an economics degree but more to the point I believe your principles are the ones that work. My evidence: beautiful women have always been in demand. As there are more free markets in the world, there are more beautiful women. When all the world has free open markets, the world will be full of beautiful women.

Sign me up.

Michael F. Cannon October 14, 2006 at 3:41 pm

Maybe we could require economists to be licensed by the state.

Nathan October 14, 2006 at 5:29 pm

I would love to be signed up by this. But I am not an economist. I've personally developed my argument against minimum wage by reading hazlitt. Plus, I also believe that we should simply look at the results of minimum wage than simply the motive of it. Ask yourself this:

1.Has minimum wage made workers better off?
2.Has it had any effects on the economy..positive or negative?
3. Has it benefitted EVERYONE?

And by everyone, I mean business owners as well.

Ryan Fuller October 14, 2006 at 7:58 pm

I think it would be impossible to distinguish the effects of a minimum wage from the sea of other constantly-changing variables.

Minimum wage is best disproven by drawing a supply and demand curve with a horizontal line at some point above equilibrium. Move the line up or down to show the relationship between price floors and surpluses. Looking for empirical results when there are so many variables at work is pointless.

triticale October 14, 2006 at 8:29 pm

One thing overlooked in all this discussion of the minimum wage is that raising it puts upward pressure on all wages. My understanding is that some labor contracts are directly tied to it by a multiplier or adder, but the rest are also, less formally, by market pressure.

Russell Nelson October 15, 2006 at 2:32 am

I am an autodidact economist. Or, to put it another way, I haven't let my schooling get in the way of my education, or my education get in the way of my learning. Or to put it another way, a degree in economics is just a piece of paper if you don't actually understand and practice real economics. As this guy wrote in this book "Ye shall know them by their fruits." I don't see how Randy can make a perfectly fine economic argument and then claim not to be an economist. Those who can, do; those who can't, get a PhD. (Sorry Dr. Russ, but you're an economist because you're a Real Economist(tm), not because of your sheepskin.)

alex October 15, 2006 at 5:53 pm

Several problems with the basis for SORE. The first principle is a downward demand curve, where people buy less of something when it gets more expensive. This doesn't always work in the real world. Look at very inelastic goods like gasoline and drugs needed to keep you alive, and tell me that people simply refuse to fill up at the pump, or get that drug perscription that prevents them from getting an heart attack.
Second principle, on prices adjusting to market forces, is questionable. For instance, the US dollar has lost a lotof value over the past several years, equivalent to about a 5% increase in prices of certain imported goods. The cost to consumers? Under .1%, because sellers ate the loss. If this was purely a matter of market forces, than consumers would have been forced to pay 5% more. You are also forgetting about productivity levels, which are not directly connected to market forces, but which have a lot of influence on prices, because they allow producers to swallow losses due to inflation for certain periods of time in exchange for higher sales over the long term. On motives and intentions not mattering, but results do, this also has flaws. If you are a classical economist, they are really similar in economics. How? Well, if I am a company, and my intention is to make profits, and its my motivation as well, I will follow results that make me money. My motives and intentions actually go along with my results. There isn't much of a difference, as its allow about optimizing profits.

JohnDewey October 15, 2006 at 7:37 pm

alex: "downward demand curve …doesn't always work in the real world … tell me that people simply refuse to fill up at the pump"

SOME consumers will continue to use just as much gasoline even if the price doubles. But that doesn't mean the total demand for gasoline in inelastic. Sharp price increases last year did immediately reduce gasoline demand below long term seasonal trends.

Consumers have short-term and long-term responses to changes in gasoline prices, and these responses are not the same. For that reason, the short term and long term demand curves for motor fuels differ.

Employers have both short and long term responses for low-skilled labor prices as well. IMO, in the long term, labor demand in many industries is extremely inelastic. Firms will move facilities offshore, they'll automate, and they'll reduce the non-wage portion of compensation (increase health care copayments, for example.)

pgl October 16, 2006 at 3:47 pm

As I said over at Max Sawicky's place, you have confused a low elasticity with a flipped sign. I doubt a single one of these 650 economist are arguing that demand curves slope up, but many might argue that this demand curve has a low elasticity.

Russ Roberts October 16, 2006 at 4:56 pm

pgl,

Read the letter they signed.

"Little or no effect on employment."

No effect means a vertical demand curve for labor. Not a low elasticity but a ZERO elasticity.

pgl October 16, 2006 at 5:00 pm

Russ – so they did NOT say employment would increase. Little = low. Zero elasticity – yep, VERY low.

Russ Roberts October 16, 2006 at 8:43 pm

pgl,

Correct. A zero elasticity of demand means that demand doesn't slope downward. It's vertical. Vertical. No slope. Straight up and down. Zero elasticity. Zero economics.

Malcolm Kirkpatrick October 18, 2006 at 10:35 pm

I'm in, if I get to assert that prices adjust to changes in supply. Now let's discuss immigration (again).

Smitty October 19, 2006 at 4:06 pm

So is there another list of the same 650 "economists" advocating we restrict immigration for the same reasons?

Walt October 19, 2006 at 4:06 pm

This is the funniest thread in the history of the internet. I'm thinking about cutting back on my weblog usage, so I think this is an excellent way to go out.

I mean, Ken Arrow, what does _he_ know about economics. Robert Solow, what did he ever do? How can either of them complete with the gigantic contribution of to the world of ideas made by Russell Roberts?

Angelo October 26, 2006 at 12:29 pm

I think we can respond in kind by proposing an increase in the minimum wage to $100 an hour. Or, propose that we stop cutting into the wages of employees by raising the prices of all goods in industries that employ minimum wage workers. Let's see what people have to say about that!

hayesy316 October 26, 2006 at 9:29 pm

Alex;

"Look at very inelastic goods like gasoline and drugs needed to keep you alive, and tell me that people simply refuse to fill up at the pump, or get that drug perscription that prevents them from getting an heart attack."

For a relatively small price rise in inelastic goods such as petroleum/medication to produce the effects you're describing, the good would be exhibiting the behavior of an almost perfectly elastic good, which is self-contradictory. I prefer to leave such arguments to the co-signers of this petition.

Consumers of inelastically priced goods will curtail their MARGINAL use and/or transfer their spending from the consumption of less valued marginal goods or to newly preferred marginal substitutes, the degree to which the latter occurs relative to the former being inversely proportional to the elasticity. What Dewey said; marginal, marginal, marginal.

FINALLY, an economic think-tank I can actually respect. I haven't quite finished my degree yet, but my neo-Keynesian macroeconomics professor hates me for arguing with him all the time. Do I qualify?

Bill Drissel October 28, 2006 at 10:25 pm

I'm an engineer who subscribes to your three principles. I'd like to join SORE. I'd like your permission to make myself a membership certificate.

Regards,
Bill Drissel
Grand Prairie, TX

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