Cafe Hayek — where orders emerge

Where Nudging Leads

by Don Boudreaux on January 24, 2015

in Hubris and humility, Man of System, Nanny State, Reality Is Not Optional, Seen and Unseen

My Mercatus Center colleague Carrie Conko just alerted me to Julian Le Grand’s and Bill New’s new book, Government Paternalism: Nanny State or Helpful Friend?. I have not yet read this book, so I can’t offer an opinion on it. But its publication does provide an opportunity for me to mention a relevant passage in Albert Venn Dicey’s monumental 1905 study, Lectures on the Relation Between Law & Public Opinion in England During the Nineteenth Century. This passage (from pages 264-265) serves as a warning that nudging – or “libertarian paternalism” as it was originally called – poses a greater threat to freedom of contract than its proponents believe.

Law-making of this sort [i.e., legislation meant to protect people from contractual outcomes deemed by the legislature to be generally undesirable] generally passes through two stages. In the earlier stage the law places upon some kind of contract an interpretation supposed to be specially favourable to one of the parties, but allows them to negative such construction by the express terms of the agreement between them. In the later stage the law forbids the parties to vary, by the terms of their contract, the construction placed upon it by law. The difference between these two stages is well illustrated by the case of a lease made by a landlord to a tenant farmer. As the law originally stood the tenant had no right to compensation for improvements made by him during his tenancy, unless he was entitled thereto by an express term in his lease. This was felt to be a hardship. Parliament, therefore, enacted that it should be an implied term of every lease, unless the contrary were expressly stated therein, that the tenant should receive compensation for improvements. So far there was no interference with the contractual freedom either of the landlord or the tenant, for it was open to the parties by an express term of the lease to exclude the tenant’s right to compensation. It was found, however, that, upon this change in the law, the tenant’s right was habitually excluded by the terms of the lease, and that he did not therefore receive the benefit which the legislature hoped to confer upon him. The next step was for Parliament absolutely to prohibit the bargaining away of his right by the tenant. Here the inroad upon contractual freedom is patent.

People eager to use the power of the state to ‘nudge’ others to behave in ways that the nudgers have divined are appropriate seldom need much nudging to become proponents of forcing people, if necessary, to behave in ways that these once-nudgers-now-forcers have divined are appropriate.

….

While we’re on the subject…. If you click on the link to the Le Grand & New book and read the blurbs for it, you’ll notice that Alan Hamlin praises the book as one that “steers a sophisticated course between the extremes of antipaternalism and paternalism.” Since when is antipaternalism “extreme”? By calling antipaternalism “extreme,” Hamlin’s language itself subtly nudges readers to accept as morally legitimate the state’s habit of butting into people’s private affairs.

….

Some of the best work on nudging is done by Mario Rizzo.

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Well, If THAT’S Its Only Ill Effect….

by Don Boudreaux on January 24, 2015

in Seen and Unseen, Work

Here’s a letter to the Wall Street Journal:

In his superb article “’Secular Stagnation’ and the Cheap Burger” (Jan. 24), Holman Jenkins quotes New Yorker columnist John Cassidy’s curious defense of minimum-wage legislation - namely, Cassidy’s observation that the negative impact of such legislation is “usually confined to teenagers and unskilled workers.”

Well duh. Is Cassidy unaware that the core of the case against the minimum wage is precisely that it prices out of jobs many teenagers and other unskilled workers? Of course the minimum wage negatively affects only workers so unskilled that they cannot produce enough value to justify their being employed at wages as high as the government-mandated minimum. No opponent of the minimum wage has ever argued otherwise.

Mr. Cassidy’s defense of the minimum wage on this ground makes no more sense and has no more moral merit than would have a defense, one hundred years ago, of Jim Crow legislation on the ground that the negative impact of Jim Crow is usually confined to ex-slaves and other blacks.

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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Quotation of the Day…

by Don Boudreaux on January 24, 2015

in Hubris and humility

… is from page 301 of the splendid 2007 collection of some of Joseph Epstein’s essays, In a Cardboard Belt!; specifically, it’s from Epstein’s 2000 essay, in Commentary, entitled “Intellectuals, Public and Otherwise”:

Like the kibitzer, the intellectual stands at the rim of the game, risking nothing but his assertions. An American intellectual once announced to Edward Shils that, when it came to the politics of the state of Israel, he was of the war party. ”Yes,” Shils said in reporting this conversation to me, “Israel will go to war, and he’ll go to the party.”

What fun it is to fiddle with the lives of strangers without ever having to risk anything substantive of your own!

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Bonus Quotation of the Day…

by Don Boudreaux on January 23, 2015

in Law

… is from page 128 of the same book that supplied today’s Quotation of the Day, namely, the 2009 edition of H.L. Mencken’s insightful and thoroughly entertaining 1926 Notes on Democracy:

A judge who jails a well-disposed and inoffensive citizen for violating an unjust and dishonest law may be defended plausibly, perhaps, by legal casuistry, but it is very hard to make out a case for him as a self-respecting man. Like the ordinary politician, he puts his job above his professional dignity and his common decency.

The most important take-away here is that no truly wise and good judge ever regards any legislature as the font of law. Every truly wise and good judge understands that law is always something above any legislature – always something distinct from, and higher than, any legislature’s diktats, pronouncements, and scribblings.

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Quotation of the Day…

by Don Boudreaux on January 23, 2015

in Politics

… is from page 132 of the 2009 edition of H.L. Mencken’s brilliant 1926 Notes on Democracy:

Why should democracy rise against bribery? It is itself a form of wholesale bribery. In place of government with a fixed purpose and a visible goal, it sets up a government that is a mere function of the mob’s vagaries, and that maintains itself by constantly bargaining with those vagaries.

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If Groceries Were Supplied Like K-12 Education…

by Don Boudreaux on January 23, 2015

in Education

… news reports would regularly include stories of “grocery experts” offering new and “pioneering” proposals to improve grocery distribution, and of the citizens of “grocery districts” meeting with their local “grocery boards” to discuss and debate these different proposals. Each affiliate of a major national network (like each of the national networks), as well as each newspaper and other significant news outlet, would have its own “grocery reporter” (or “grocery correspondent”) to keep tabs on the latest efforts to improve the way government delivers groceries to citizens.

When new big-city mayors are sworn into office they would typically replace the incumbent “Grocery Superintendents” (or “Grocery Chancellors”) with their own preferred “Grocery Superintendents” (or “Chancellors”). The local policy punditry would discuss in great detail the differences in the grocery-supply philosophies of the new Grocery Superintendents compared to those of the outgoing Superintendents. ”Grocery-beat reporters” would often solicit from people on the street these people’s opinions of the different methods proposed to improve grocery distribution. Questions such as “Do you think new Grocery Chancellor Smith’s proposal to allow a handful of people to buy their groceries from charter grocery stores is a good idea? Or do you side with former Chancellor Jones in staunchly opposing charter grocery stores?” would be asked and seriously answered.

Ordinary men and women – physicians, electricians, cab drivers, auto mechanics, professors of economics, web designers, kennel owners, carpenters – almost none of whom have the slightest bit of expertise or experience to qualify them to assess the different methods proposed to deliver groceries, would nevertheless be expected to have such an opinion, and they would be applauded if and when they attend the next meeting of the “Grocery Board” to express their opinions on how best to supply groceries.

When some new method of supplying groceries is chosen, many people will await with great hope and joy the coming improvement in grocery supply – and such people will always suffer disappointment when (as would nearly always be the case) the expected improvement in grocery supply doesn’t materialize. ”Professors of Groceries” in all the top “Schools of Groceries” across the land would debate with each other and with the public the whys and why-nots of the failure of the latest scheme to make America again #1 in international measures of grocery distribution. Newspapers of record would regularly feature headline reports on the “grocery crisis.”

Anyone proposing to get government out of the grocery-supply business would, of course, be ridiculed as being totally unrealistic or being an out-of-touch ideologue, or accused of harboring a secret desire to see the the vast majority of people starve while only the top one percent of the population continues to enjoy excellent access to superb groceries. Likewise, proposals to cut (or to not increase) grocery-district funding would be widely condemned as being pro-starvation proposals. And efforts to measure the performance of grocery-store workers would be mocked as impossible as well as unfair to such workers. Efforts to restrain the pay of grocery-store workers would be portrayed as efforts to deny ordinary citizens access to the best possible supply of groceries.

Ordinary citizens would, in short, be expected to ponder appropriate grocery budgeting as well as alternative grocery theories, and to have informed opinions on all grocery-supply matters – for, in the finest democratic tradition, these citizens, as voters, would be responsible for superintending the supply of groceries.

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Inefficiency Is Not a Benefit

by Don Boudreaux on January 22, 2015

in Competition, Hubris and humility, Myths and Fallacies, Work

In writing my response yesterday to Chris Oliver, I got distracted from making the point that I originally meant to make. I’ll try here not to get distracted again.

Mr. Oliver objects to a particular part of my explanation that minimum-wage legislation reduces the employment opportunities of low-skilled workers. The part he objects to – a part that he describes as being “flat-out untrue” – is my claim that “[e]mployers, therefore, can afford to raise their workers’ pay only if their workers become more productive.” The basis for Mr. Oliver’s objection is his belief that my claim

assumes that each and every business is running either right at absolute peak efficiency, or at the brink of inviability. Employers don’t pay employees what they can afford to pay, they pay what they can get away with paying.

In other words, Mr. Oliver seems to argue – especially with his “right at absolute peak efficiency” remark – that because most businesses are not as efficient as they could be, raising the minimum wage isn’t likely to cause some low-skilled workers to lose their jobs. (Or, raising the minimum wage is less likely than I suppose to cause some low-skilled workers to lose their jobs.)

This argument is, as I described it yesterday, very odd. It says that the more inefficient are businesses, the better able they are to absorb arbitrary hikes in their costs – hikes in their costs that are unaccompanied by any improvement in their productivity. Why would being inefficient increase a firm’s efficiency at absorbing an arbitrarily imposed cost increase, such as a hike in the minimum wage? Cost increases unaccompanied by (or, more generally, in excess of) revenue increases are more likely to force inefficiently run firms to dramatically scale back their operations, or to go bankrupt, than they are to make efficiently run firms scale back or shut down.

So, read literally, Mr. Oliver’s contention makes no economic sense. Inefficiency for a firm is a burden, not a blessing. Efficiency, in happy contrast to inefficiency, supplies a buffer against the worst consequences of cost increases.

What Mr. Oliver likely has in mind, therefore, isn’t that most firms are generally inefficient but, rather, that most firms enjoy some monopoly power or monopsony power (or both). But this contention of monopoly or monopsony power is empirically untenable in modern-day America. Given that in the U.S. there are no, or only low, legal barriers to entry into most businesses that employ lots of low-skilled workers – businesses such as grocery, clothing, and other retailing, the restaurant and food-preparation business, the lawn-care business, the maid-service business, and the residential and commercial moving business – I repeat again that anyone who asserts that monopoly or monopsony power in these industries is sufficiently widespread across space and time to justify minimum-wage legislation ought to be ignored unless and until they themselves try in some way to take advantage of the corresponding profit opportunities to enter these industries.

Unless and until they take such actions – directly, or indirectly by trying to persuade other people who are more practical and business-savvy than they are to enter these industries – any diagnoses that they offer, either explicitly or implicitly, that existing firms are generally far away from “inviability” because of the alleged existence of monopoly or monopsony power deserve zero respect. The consistent and personal refusal of the people who make such claims to act in any stake-holding way in conformity with their claims is itself powerful empirical evidence against the validity of those very claims. And the excuses that such people unfailingly offer for why they don’t personally act in any stake-holding ways on their claims are only additional empirical evidence that these people, when making such claims, ought to be treated as if they are utterly ignorant of the relevant details of economic reality about which they pretend to know so much.

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Quotation of the Day…

by Don Boudreaux on January 22, 2015

in Crony Capitalism, Immigration, Seen and Unseen, Work

… is from a long-time and perceptive friend – an historian – who e-mailed this observation to me yesterday (ellipses original):

NPR this morning was noting that “even some conservative states raised their minimum wage!” I can’t help but wonder, What kind of conservative? I suspect, being the cynic that I am, they are not our sort of “conservative,” but rather these states knew full well who would be hurt…poor immigrant laborers.

Indeed so. That’s the history of minimum-wage legislation: price competitors out of jobs. How humane. How “Progressive.”

How, in fact, appalling.

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Yes, Worker Pay Does Reflect Worker Productivity

by Don Boudreaux on January 21, 2015

in Myths and Fallacies, Seen and Unseen, Work

One of the oddest arguments used in attempts to shoot down the standard economic case against minimum-wage legislation reared its head in a comment by Chris Oliver over at my friend Janet Neilson’s Facebook page. (I do not know Mr. Oliver.) Here’s Mr. Oliver reacting to Janet quoting my statement (from here) that “Employers, therefore, can afford to raise their workers’ pay only if their workers become more productive”:

This statement is flat-out untrue. It assumes that each and every business is running either right at absolute peak efficiency, or at the brink of inviability. Employers don’t pay employees what they can afford to pay, they pay what they can get away with paying.

The last sentence of this quotation from Mr. Oliver is true. No serious economist has ever denied it. But Mr. Oliver is mistaken to believe that the truth of his last sentence implies that my statement (quoted above) is wrong. Employers raise workers’ pay in order to keep and to attract the best possible workers for the positions employers wish to fill. The New England Patriots football team pays its starting quarterback, Tom Brady, millions of dollars a year not because the owners of the team are generous people but, rather, because they wish to keep Brady’s talents on their team and not see him flee to another employer. What employers “can get away with paying” rises to reflect the value of the what employees produce. (To my economist colleagues: please forgive me for here using rather lose language in not speaking about “marginal product” or “the marginal worker.” My audience here isn’t economists.)

Read the full post →

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Another Open Letter to Pres. Obama

by Don Boudreaux on January 21, 2015

in Myths and Fallacies, Seen and Unseen, Work

Pres. Barack Obama

Dear Mr. Obama:

In last-night’s State of the Union address you said “And to everyone in this Congress who still refuses to raise the minimum wage, I say this: If you truly believe you could work full-time and support a family on less than $15,000 a year, go try it. If not, vote to give millions of the hardest-working people in America a raise.”

The premise of your plea is mistaken: raises aren’t given by votes, by you, or by Congress: they’re given only by employers. And employers must fund these higher payments out of the revenues they earn by competing successfully in markets. Employers, therefore, can afford to raise their workers’ pay only if their workers become more productive - an outcome that is not achieved by a legislature waving its wand over workers’ paychecks.

You are, however, correct in one sense. Because the policy you propose would price many workers out of jobs, that policy would indeed change these workers’ incomes: it would drop them to $0. So I say this: If you truly believe you could be unemployed full-time and support a family on $0 a year, go try it. If not, vote to give millions of the hardest-working people in America opportunities to work that they are now denied. Abolish the minimum wage.

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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