How NOT to Do Economics

by Don Boudreaux on April 11, 2014

in Competition, Myths and Fallacies, Reality Is Not Optional, Seen and Unseen, Work

Mr. Aaron the Aaron

Dear Mr. the Aaron:

Thanks for sending me Robert Reich’s blog post detailing his case for raising the minimum wage.  You read Reich’s argument as ”settling the issue” in favor of raising the minimum wage; I read only a torrent of internal contradictions and economically uninformed nonsense.

I’ve no inclination to address each of his seven points.  I’ll content myself here to expose just one example of Reich’s penchant for poor reasoning - an example so stunning that it should discredit everything the man says about any matter touching on economics.

Reich writes that “A $15/hour minimum is unlikely to result in higher prices because most businesses directly affected by it are in intense competition for consumers, and will take the raise out of profits rather than raise their prices.”

Reich is correct that businesses are in intense competition for consumers.  What he misses, however, is the fact that, precisely because of this intense competition, businesses have none of the excess profits that Reich presumes will be tapped into to pay the higher mandated wages.

This error exposes Reich’s inability to grasp even the most elementary economic concepts.  Intense competition eliminates excess profits; with no excess profits firms cannot, contra Reich, simply pay workers higher wages.  Firms instead must respond to a higher minimum wage by some combination of hiring fewer low-skilled workers, working their remaining low-skilled workers harder and reducing these workers’ non-wage pay, and charging higher prices for their outputs.  The fact that Reich misses this reality - the fact that he does not understand that intense competition ensures that firms cannot possibly react to a higher minimum wage by tapping into their profits - tells any thinking person all that he or she needs to know about Reich’s analytical skills.

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

….

Several people – pro and con – sent to me this post by Reich.  I thank them.

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