First Day of Class

by Don Boudreaux on August 31, 2015

in Complexity & Emergence, Economics, Seen and Unseen, Video

As Bryan Caplan notes over at EconLog, today is the first day of the 2015-2016 academic year at George Mason University.  As always, the keystone course in my teaching schedule is ECON 103 – Principles of Microeconomics.  It meets this Fall semester in the same time and place that it typically meets: Enterprise Hall room #80 from 7:20-10:00pm every Tuesday.  Last year at this time I reflected on this class.  Here’s a slice from that post:

My goal – by teaching basic, foundational, principles of microeconomics – is to inoculate students against the bulk of the common economic myths that they’ll encounter throughout their lives – myths such as that the great abundance of goods and services available to us denizens of modernity is the result of a process that can be easily mimicked or understood in detail by smart people or planners – that the market value of goods or services can be raised by price floors (such as a legislated minimum wage) or lowered by price ceilings (such as rent control) – that benefits can be created without costs – that government is an institution capable of rising above the realities that ensure that private institutions never perform ‘perfectly’ – that intentions are results – that destruction of property is a source of prosperity – that exchange across political boundaries differs in economically meaningful ways from exchange that takes place within political boundaries – that the only consequences that occur or that matter are those that are easily anticipated and seen.

I add here only a summary of my teaching goal: It is to make my students aware that society in general, and the economy in particular, is far more complex than most professors, pundits, proselytizers, politicians, preachers, and popes typically assert it to be, and that this complexity is handled with surprising, if not nirvana-producing, success by the decentralized forces of the competitive market.  I aim both to inspire in my students awe that Manhattan gets fed daily and that pencils exist in abundance, and to help them understand just how and why their world is filled with such marvels – and, I add further, also to put my students on guard against the many errors typically committed by those who, ignoring the market economy’s incomprehensible complexity, insist too cavalierly that government intervention promises improvement.

Here, in short, is the point:

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Quotation of the Day…

by Don Boudreaux on August 31, 2015

in Hubris and humility

… is from pages 144-145 of the late Shirley Robin Letwin’s 1976 Hillsdale College address, “The Morality of the Free Man,” as it appears in Champions of Freedom (Vol. 3, 1976); here, Letwin means by “gentleman” anyone who is guided in his or her personal conduct and outlook by what Deirdre McCloskey describes as the bourgeois virtues:

His diffidence prevents the gentleman from supposing that everything is or ought to be subject to his manipulation….  The gentleman is skeptical of benevolence because he is so concerned about giving others – as individuals – their due.  His awareness of the uniqueness and ultimate mystery of each person makes him cautious about the dangers of misunderstanding others.  Of course it is unthinkable for him to help people in order to improve the species, or to serve humanity, or exercise his own virtue – to his way of thinking, all such efforts most flagrantly deny the humanity of his fellows.  He also feels obliged to remember that treating another man as if he were incapable of running his own life may be the greatest of humiliations.  Talk of human rights as a guide to benevolence strikes him as the rhetoric of tyranny that sacrifices real human beings to abstract illusions.  He recognizes how easily acting for others may do harm by mistaking or ignoring their peculiar characters or circumstances.  In all these ways, the gentleman’s diffidence inhibits him from imposing on others by a reckless indulgence in the pleasures of charity.  He thinks that true benevolence must be highly discriminating.

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Quotation of the Day…

by Don Boudreaux on August 30, 2015

in Man of System

… is from page 144 of William Marina’s 1972 essay “Egalitarianism and Empire,” which is reprinted as Essay Four in the 1979 Liberty Fund collection The Politicization of Society (Kenneth S. Templeton, Jr., ed.):

Intellectuals and politicians enjoy the idea of power and control.  Like the mandarin, whose long fingernails demonstrated his distaste for, and ability to evade, physical labor, many politicians and intellectuals have an inherent dislike of the market economy with its emphasis on work, entrepreneurial risk, and money.

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Ultra-Cheap Talk

by Don Boudreaux on August 29, 2015

in Hubris and humility, Other People's Money, Work

Pardon me for here largely repeating what has been said elsewhere about asking those people to put their own money where their mouths are if they allege that today in the United States employers of low-skilled workers have significant monopsony power.  My point is epistemological.  It is here a way of probing the truth-content of the assertion of monopsony power.  It is a means of exploring just how much stock people in general should put in academics’ asserted findings of monopsony power.

As I’ve said in earlier posts, I don’t really expect professors and think-tank researchers to quit their jobs in order to start businesses.  Most academics – including myself – are far too lazy, too impractical, too greedy of our own time, and far too chickensh*t to do anything genuinely productive such as start or run (or both) actual business firms.  Yet when some of my fellow academics make a claim that, if it is valid, implies the existence of profit opportunities that are easily exploitable by the many people who do have a genuine taste and talent for real-world business, it is incumbent upon the professors, pundits, and think-tank researchers who make this claim to explain why these alleged exploitable opportunities for private profit remain unexploited by real-world business people.

Why do real-world entrepreneurs and business people not exploit these profit opportunities?  I know of no credible explanation along these lines.  (Remember, the industries in which disproportionately large numbers of low-skilled workers are employed are industries into which entry and exit are relatively easy.)

Pointing out that workers with jobs are reluctant to quit their current jobs because they are so poor fails as an explanation.  Such an explanation, of course, is patently absurd insofar as it applies to immigrants who had courage and gumption enough to leave their homes in order to emigrate to the U.S.  (“While I had courage and gumption enough to leave my home and family in Guatemala in order to risk moving across the continent to the U.S. – a country in which I did not know beforehand if I’d get a job and in which I do not speak the native language well – I’m too scared to leave my current job at McDonald’s in order to find a better job across town.”  That’s just too implausible.)  More fundamentally, even if all low-skilled workers are indeed as risk-averse as monopsony-power believers assert, profit-seeking entrepreneurs would move to them in order to offer these workers better employment opportunities if the labor market is such that raising the minimum wage would not reduce the employment prospects of any low-skilled workers.

Because real-world business people consistently do not act to exploit the profit opportunities that monopsony-power believers publicly assert to exist, we have, thereby, excellent evidence that the findings and assertions of the monopsony-power believes are mistaken.  Yet the monopsony-power believers, entranced by their econometric findings and their textbook diagrams, continue to insist that monopsony power is real – so real that these believers feel justified to ask government to force low-skilled workers to bear the risk of an ultimate test of whether or not monopsony power is real: the imposition of a minimum wage.

If the monopsony-power believers’ hypothesis is true, low-skilled workers will indeed benefit (assuming that the minimum wage isn’t set too high).  But if the monopsony-power believers hypothesis is false, the cost of having acted in the real world on this hypothesis falls upon those low-skilled workers whose employment opportunities shrink; the monopsony-power believers suffer no personal consequences for having subjected innocent people to their mistaken speculations.

So why is it unreasonable to ask monopsony-power believers to put their own money where their mouths are given the devastating consequences that would be suffered by innocent low-skilled workers if the minimum wage is raised because of the mistaken speculative entreaties of the monopsony-power believers?  If real-world business people refuse to believe the claims of the monopsony-power believers, why should we demand that politicians – who also risk nothing of their own when they raise the minimum wage – treat the claims of the monopsony-power believers as possessing more truth content than is possessed by the actual, revealed behaviors of real-world business people and by the monopsony-power believers themselves?

What each such monopsony-power believer is telling us is the following: ‘While I’m too unknowledgeable and inexperienced to be trusted to risk my own personal well-being on my hypothesis, I’m sufficiently knowledgeable and experienced to be trusted to risk the personal well-being of other people – who happen in this case to be the poorest workers in the country – on my hypothesis.  Trust me!’

What arrogance.   What nonsense.

If the monopsony-power believers won’t put up in this case, they should shut up.  And if they refuse to shut up, the rest of us ought to treat their claim as being the ultra-cheap and recklessly irresponsible talk that it is.

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Hurricane Katrina: 10 Years Ago

by Don Boudreaux on August 29, 2015

in Civil Society, Seen and Unseen, Video

Ten years ago today, residents of my hometown, New Orleans, and its suburbs suffered death and devastation caused by government failure.  Of course, a hurricane that was category 3 when it made landfall on August 29, 2005, sparked this death and devastation, but negligent maintenance allowed the calamitous breaches of the government-owned and operated levee system for containing the waters of the Mississippi river and of Lake Pontchartrain.

The house in which I lived from the age of 4 to 22 (which is in New Orleans’s close-in suburb of Marrero) was flooded with more than three feet of water.  My Aunt Carol’s and Uncle Eddie’s home (which sits just behind my boyhood home) was similarly flooded.  Fortunately, no one in my family suffered bodily harm, in part because my parents had, two years earlier, moved to a home in Mandeville, LA, which is on Lake Pontchartrain’s north shore.

Pete Boettke and some of my other Mercatus Center colleagues have just released the video below – and this study – on Katrina and the recovery effort that followed.

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… is from page 154 of Deirdre McCloskey’s brilliant 1990 book, If You’re So Smart: The Narrative of Economic Expertise:

Clergymen and upper middle class intellectuals delight in the transformation of mea culpa into nostra culpa, prejudging in a word the weighty question of whether or not charity should be individual or social.

Yes.  And (as I know Deirdre would agree) not only charity but also market-improving actions, such as entrepreneurial efforts to hire away from their current employers low-skilled workers who at the moment are underpaid.  Such market-improving entrepreneurial actions – which occur daily in markets – are largely invisible to those preachers, popes, professors, pundits, and politicians who unthinkingly (or, in the case especially of politicians, greedily) insist that the chief means of ‘solving’ today’s problems is government force unleashed by conscious collective decisions and directed consciously by government officials.

Yet while not all real problems are practically able to be successfully addressed through private actions,* many problems are.  Contrary to the illogical presumption of a commenter (Richard Bearse) on a recent post here at Cafe Hayek, pointing out that problem X can be solved with private actions does not imply that problem Y is also solvable with private actions.  (If, for example, global climate change is a problem caused by carbon emissions, there is no obvious private means of profitably exploiting this problem in a way that reduces the magnitude of the problem.)  But if problem X is indeed one whose existence implies the real-world availability of privately exploitable profit opportunities, then one is justifiably skeptical of those who publicly assert that X is real while privately acting as though X is unreal.  And an unambiguous real-world example of asserted problem X is the assertion of monopsony power in modern American markets for low-skilled workers.  This assertion is akin to an assertion by Jones who refuses to trouble himself to walk over to the bushes just over there despite his repeated insistence that in those bushes just over there are bags full of gold.  If Jones does not act on his assertion – and if none of the many other people who hear Jones’s assertion privately act on it – then such inaction is powerful evidence that Jones’s assertion is mistaken.


* Note that, contrary to an all-too-common assumption, the inability of problem Y to be practically successfully addressed through private actions does not imply the ability of problem Y to be practically successfully addressed through government force.

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No Takers

by Don Boudreaux on August 28, 2015

in Other People's Money, Work

Speaking of the minimum wage, four full weeks have passed since I first shared the generous offer of the successful and skilled businessman Mike Long to help inexperienced academics who believe that monopsony power is real to start their own businesses in order to take advantage of this presumed profit opportunity.  Amazingly, not a single person has taken Mike up on his kind offer.

The offer remains open, yet I must say that the empirical record by now is growing full and powerful that those academics who proclaim the reality of monopsony power in the market for low-skilled workers seem to be quite unsure of their hypothesis.  I propose that henceforth these people – none of whom is willing to risk his or her own financial resources on the hypothesis of the real-world prevalence of monopsony power – be ignored and their calls for higher minimum wages be dismissed as talk that is as cheap for them as it is dangerous for low-skilled workers.

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Here’s a point that’s worth repeating: only if monopsony power is enjoyed by employers of low-skilled workers is there even the possibility (although still not the guarantee) that a government-mandated minimum wage will not reduce the employment options of at least some low-skilled workers.  That is, any economically coherent case that the minimum wage does not harm at least some low-skilled workers must be based upon the discovered (or, far more commonly, the simply presumed) existence in real-world labor markets of monopsony power.*

Yet if such monopsony power did indeed exist in reality in sufficient degree to economically justify minimum-wage legislation (or to justify hikes in an existing minimum wage), then there is no reason why any real increase in the minimum wage must be phased in.  Implementing or raising the minimum wage all at once will immediately yield all of the benefits that believers in the existence of monopsony power claim that the minimum wage will yield without doing any of harm that we skeptics of the minimum wage warn against.

And yet many minimum-wage hikes are phased in.  As Mark Perry points out, such phase-ins are evidence against the proposition that minimum-wage policies are justified by economic science.


* I suppose that one can stretch the meaning of “economically coherent case” for a minimum-wage policy to include also the hypothesis that a higher minimum wage will so raise the productivity of all low-skilled workers that employers will actually benefit from paying the higher wage.  For reasons spelled out here at the Cafe and in many other places featuring economic good sense, this case for the minimum wage is quite an absurd stretch.  It is quite an absurd stretch given that each employer already possesses – absent minimum-wage legislation (indeed, as Paul Krugman correctly pointed out years ago, especially absent minimum-wage legislation!) – strong incentives to raise workers’ pay if such pay raises improve employers’ bottom lines.  But even if we accept this bizarre case for the minimum wage as economically valid, it, too, is inconsistent with the reality that many minimum-wage hikes are phased in: why, after all, if better-paid employees will turn out to be profitable for employers would anyone want the source of this bounty to be phased in?  Why not reap these profits immediately and all-at-once?!

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Duke University economics professor Ed Tower sent to me this morning the following e-mail, which I share below in full (with Ed’s kind permission):

When I got a job teaching economics at the University of Auckland in New Zealand, my wife, pregnant with our first to be born, and fresh with a MA in Classics from Harvard wanted to teach Latin at the university. She knew there wasn’t a big demand for Latin instructors, especially those who are going to have to take some time off in the middle of the semester, delivering offspring.  She wrote the Classics department chair, saying I want to teach for you and  you don’t have to pay me.  She was hired at her reservation wage of zero. The  classics department invited us to great  parties. The next year the Classics department paid her. Her experience teaching  at the university level enhanced her appeal for her subsequent career teaching at the Carolina Friends School and the Chapel Hill NC public schools, where she taught the young woman who delivered the Latin oration at her graduation from Harvard.    I suspect the university teaching helped  my wife get  a Fulbright to study one summer in Rome.  She maintained a warm friendship with the department  chair for the rest of his life. Had the University of Auckland been encumbered by minimum wages and fears of law suits for treating women unfairly, our two years in New Zealand would have been considerably less satisfying.  Ed Tower

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Quotation of the Day…

by Don Boudreaux on August 28, 2015

in Economics, State of Macro

… is from pages 116-117 of Gerry O’Driscoll’s insightful 1977 essay, reprinted in Louis M. Spadaro, ed., New Directions in Austrian Economics (1978), and entitled “Spontaneous Order and the Coordination of Economic Activities“ (original emphasis; footnote deleted; links added):

The principle of spontaneous order – or of “undesigned order,” as it might more properly be called – can be viewed as the first principle of economics.  Indeed, James Buchanan has recently gone so far as to suggest that it is the only principle of economics.  The principle is, in any case, a cornerstone of modern economics, whether we trace modern (i.e., post-mercantilist) economics back to Adam Smith and the other Scottish moral philosophers, or to the Physiocrats.  With this principle, scholars for the first time could see economic phenomena as interdependent events.  Indeed, this principle made it possible to reason systematically and coherently about economic phenomena.  Much of nineteenth century economics can be seen as consisting of developments of this principle (along with minority criticisms of the principle and the systems of thought deduced therefrom).

On the other hand, most of twentieth century economics has consisted of reactions against systems in which this principle plays a central role.  In this, Keynesian economics is but one among a family of theories that deny the existence of a spontaneous or undesigned market order in which plans are coordinated.  The reaction has been so complete that what was taken by earlier economists to be an empirical law – the existence of a spontaneous market order – is now frequently viewed as the product of ideological bias or prejudice.  If anything, modern economic discussions presuppose the absence of the very order whose existence was the cornerstone of much of nineteenth century economics.  In this sense, modern economics is fundamentally inconsistent.

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