The University of Virginia School of Law’s great economist Charlie Goetz repeatedly said (at least when I was a student at UVA Law many years ago) that good economists are distinguished from poor economists (and from non-economists) by always asking “As compared to what?” It’s a simple question, yet a profoundly important one.
As I argued in this earlier post, to do good economics is chiefly to ask the right questions. The good economist is an incessant questioner; the good economist is neither blinded nor numbed by the popularity of familiar mantras or presumptions into accepting these mantras and presumptions as being valid. Even if there is no specific answer to a probing question asked by a good economist, the asking of the question itself often serves to demolish the weak base of implicit assumptions and poor logic upon which arguments and assertions about the operation of the economy, and about the likely consequences of government interventions, are too often constructed.
Here’s a good example of a popular claim about the operation of the economy that is exposed as highly dubious by the asking of some very simple and straightforward questions. The example comes from a recent New York Times editorial praising the Los Angeles city government’s action to raised the minimum-wage in that city eventually to $15 per hour:
Workers’ share of the economic pie has been shrinking for decades, as the gains from labor productivity have flowed increasingly to profits rather than pay.
Overlook the questionable (!) description of the economy as a “pie” (with its childishly mistaken implication that more ‘pie’ for some people necessarily means less ‘pie’ for others). Overlook also the fact that it’s not at all a settled matter that workers’ pay has failed to keep pace with improvements in labor productivity. Instead, ask: If it’s true that profits have been swelling for the past few decades because wages haven’t kept up with labor productivity, why are these profits not attracting even more firms in to the markets where these excess profits exist and persist?
– Is the U.S. so bereft of profit-hungry and able entrepreneurs and investors that only those entrepreneurs and investors who are already in business care enough, or know enough, to exploit profit opportunities that are so obvious that even newspaper editorialists can plainly see them and constantly announce their existence to the general public?
– Or, alternatively, are there barriers that have arisen over the past few decades that prevent profit-hungry entrepreneurs and investors from diving in to try to grab some of these excess profits?
– Even if the U.S. is so bereft of new able and profit-hungry entrepreneurs, or if effective barriers to their entry into markets do exist, what’s with existing and successful entrepreneurs, businesses, and investors? Why do they not compete amongst themselves to bid up workers’ wages, thus causing wages to reflect workers’ improved productivity? Are all existing entrepreneurs, businesses, and investors, while shameless at exploiting their current workers, unwilling to exploit workers even more fully by each trying to hire other firms’ underpaid workers?
– Or are all existing entrepreneurs, businesses, and investors in successful league with each other to agree not to compete amongst each other for workers, even though each business, by hiring away other businesses’ underpaid workers, could make even higher profits? If so, how do businesses manage successfully to overcome this massive free-rider problem? (The answer to this last question, should the presumption of fact that prompts it be descriptive of reality, would spark the greatest change and advance in economic theory since the marginal revolution of 1871. Huge amounts of what we economists think we know about reality would be tossed out of the window – along with, by the way, much of the standard justification for taxation and government interventions.)
– And if today’s firms are generally underpaying their workers – and, hence, earning excess profits off of most of their workers – why does not competition in output markets cause prices of goods and services to fall so that these excess profits are competed away? Are all or most of today’s existing business and investors also in successful league with each other to prevent competition in output markets as well as in the market for labor?
Note that different answers might – and in some cases must – be given to this series of questions. The answers, at this point, are less important than what the questions reveal: namely, that this statement is almost certainly factually false and, therefore, any proposed policy that this statement is used to sell should not be bought until these questions are answered. Also, the asking of such questions leads to sensible people not only to doubt some of the factual implications of the initial claim, but to consider alternative explanations for observed facts.
….
The above are just some of the more obvious questions that good economists are immediately motivated to ask upon reading the assertion that workers have been generally underpaid for decades. The New York Times editorial writer(s), though, obviously didn’t think to ask even one of these questions. The editorial simply states the claim as if its validity is obvious rather than highly questionable. Such an assertion as that quoted above from the NYT is, to the ears of a good economist, the equivalent of, say, the assertion that a perpetual-motion machine has been invented that, when powered by hamsters, can travel faster than the speed of light as it makes chocolate-flavored ice-cream with a scrumptious vanilla taste in an oven at a temperature of 10,000 degrees fahrenheit. So, so many questions are sparked!
