Cafe Hayek — where orders emerge

Some Questions (Especially for Students of Formal Economics)

by Don Boudreaux on July 29, 2014

Suppose that consumers throughout history have grown their own apples. Apples were never produced for sale in markets by specialized apple growers; nor did any household that grew apples in its yard sell those apples to anyone. All apples that were consumed were grown by the individuals or households that consumed them.

Suppose also that each household’s minimum cost today of growing apples, when reckoned accurately in dollars, is $15 per pound.

Now, there arrives on the scene today an apple entrepreneur (call him Johnny) who, using his own special skills that he honed, enters the business of growing and selling apples. Johnny’s cost of growing and supplying apples is $1 per pound – and his apples are identical in quality to those grown throughout history, and still grown today, by households. And the scale of Johnny’s operation allows him to profitably satisfy large numbers of customers.

Johnny charges (let us say) $5.00 per pound for his apples. Other people are free – in the sense of not being prevented by coercion – to enter the apple-selling business in competition with Johnny. But at least for the time being, no one else has the skills to produce apples at any per-pound cost lower than $15 per pound. So at least for the time being, Johnny is the society’s only specialized apple producer and seller. And he is, as a result, making handsome profits!

Economists call Johnny a “monopolist” because Johnny has the power to raise the price of his apples a bit without driving away all of his customers. If Johnny, for example, hikes the price of his apples from $5.00 per pound to $5.50 per pound, he will almost surely still be able to sell some quantity of apples.

Questions:

(1) Is Johnny really a monopolist in the negative-connotation-laden sense of that term?

(2) Would consumers today be better off had Johnny never been born (or had Johnny never discovered or honed his special talent for growing apples)?

(3) Would a maximum-apple-price regulation that prohibits the sale of apples at any price higher than (say) $2.00 per pound benefit consumers?

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Some Links

by Don Boudreaux on July 29, 2014

in Books, Crony Capitalism, Hayek, Hubris and humility, Other People's Money, Seen and Unseen, Subsidies, War, Work

Adam Ozimek draws from the recent study showing that large retailers pay their workers more, on average, than do smaller retailers a relevant lesson about minimum-wage legislation. (HT Tyler Cowen) A slice:

If monopsony power is an important feature of the labor market, and monopsony power should be prevalent when firms are bigger and therefore have a larger share of the local industry, then why do big firms pay more than small firms? The small mom and pops should be closest to operating in a competitive labor market and have little bargaining power, but they pay less. Maybe the productivity effects of big retailer outweigh the monopsony effect, but that just is another way of saying it’s not as an important feature of the market. In addition, ask yourself whether you predicted this result of big firms paying more before you read about this study. Be honest, if someone asked you to predict the results, would you have told a story about big firms bargaining workers down to lower wages? If so, it is time to re-evaluate your views.

Here’s the cover of my forthcoming book, The Essential Hayek. (I thank Jason Clemens and his marvelous colleagues at the Fraser Institute for making this book possible.)

Bill Shughart offers yet another reason to shut down, completely, that great geyser of cronyism, the U.S. Export-Import Bank.

Here’s a new article, this one in the Independent Review, by Ben Powell on sweatshops.

Ira Stoll explains that, contra Paul Krugman’s claims, Kansas’s fiscal house is not in bad shape. Here’s Stoll’s conclusion:

One final thought: the measure of the success or failure of these tax cuts shouldn’t just be the effect they have on the bottom line of the Kansas state budget. The measure should be the effect they have on the budgets of the individuals, families, and businesses that are residents of Kansas. In the end it’s money that belongs to them.

Doug Bandow wisely counsels Uncle Sam not to rush back into Iraq.

Here is Steve Davies’s remembrance of John Blundell.

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Quotation of the Day…

by Don Boudreaux on July 29, 2014

in Seen and Unseen, Trade

… is from page 187 of Matt Ridley’s 2010 volume, The Rational Optimist (link added):

Trade, says Johan Norberg, is like a machine that turns potatoes into computers, or anything into anything: who would not want to have such a machine at their disposal?

If you doubt or otherwise do not see the truth of this claim, just look around and ask yourself: “How much of what I see around me – my computer, my cell phone, my shirt, my jeans, the walls of my home or office, the chair in which I sit, the coffee in the cup (and the cup itself), the automobile parked outside in the driveway (and the driveway itself), the glass in the window out of which I gaze upon the car in the driveway – did I make myself? How much of what I see around me could I possibly make myself, even if I had the physical strength and stamina of Superman, the smarts of Albert Einstein, and a century to complete the tasks?”

Your answer to each question is (if you are not intellectually blind) ”None of it.” You (or your parents, if you are still a full-time student) performed one or two highly specialized tasks – such as bookkeeping for XYZ Co., carpentry for Acme Building Contractor, Inc., or teaching economics or another specialized discipline at State U. You then exchanged the particular fruits of your highly specialized labor for each and every one of the countless goods and services that you consume daily. You specialize in producing one thing and you trade with hundreds of millions of other specialists who, in total, produce hundreds of millions of other, different goods and services. And you, personally, then get to choose which particular, personalized selection of these hundreds of millions of different goods and services you transform your own output in to.

Trade turns everything into everything, largely according to each specialist’s wishes (as long as government doesn’t interfere, by using the likes of tariffs and subsidies, with the process that makes these countless and diverse wishes come true).

It’s a truly amazing process! It’s a process that’s on-going, every moment, in market-oriented societies. And it works, if not perfectly, so well and so smoothly and so quietly that we take it for granted, not realizing that the prosperity that each and every one of us enjoys from this process is what gives us the luxury to worry about the likes of climate change and about how much money some of us have in our bank accounts relative to how much money others of us have.

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These Numbers Lend No Good Support to the Case for the Minimum Wage

by Don Boudreaux on July 28, 2014

in Data, Seen and Unseen, Work

GMU Econ PhD student Liya Palagashvili and I have studied some numbers that Barack Obama and plenty of pundits have seized upon as evidence that raising the minimum wage is good economic policy. Here – in U.S. News & World Report – is our first attempt to expose the flimsiness of those numbers and the wrongheadedness of using them to argue in favor of raising the minimum wage. (In this U.S. News essay we had only 600 words, but the pro-minimum-wage case that is built on these numbers is infected by several other errors that we had no space here to point out.) A slice:

Second, these statistics are disturbingly sensitive to small changes in their starting and ending dates. It’s true that employment in the 13 states that raised their minimum wages in January was, on average, 0.85 percent higher in June 2014 than it was in December 2013. It’s also true that, over this same time span, employment in the 37 states that did not raise their minimum wages rose by only 0.61 percent. (These are the very figures that minimum wage proponents are now trumpeting.) But if we shorten this time span by just one month — looking now at January 2014 to June 2014 — we get a very different picture.

In June, the number of jobs in the 13 minimum-wage states was, on average, only 0.59 percent higher than it was in January, while, for the same time period, the number of jobs for the 37 states that did not raise their minimum wages was higher, on average, by 0.69 percent. Job growth since January (the month that these 13 states actually hiked their minimum wages) was slower in states that raised the minimum wage than in states that did not.

We don’t report these particular statistics as evidence that raising the minimum wage slows job growth. Our point instead is that finding simple trends, especially those that are highly sensitive to the time period analyzed, and then drawing policy conclusions is scientifically illegitimate. Using such a method makes it far too easy to cherry-pick from the data those numbers that support your preferred policy. So just as our comparison of January 2014 to June 2014 employment data is no evidence that raising the minimum wage reduces job growth, Obama’s comparison of December 2013 employment data to June 2014 data is no evidence that raising the minimum wage enhances job growth.

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Mary Poppins Should Stick to Nannying Only People Who Pay Her to Nanny (and Celebrities Should Stick to Celebritying)

by Don Boudreaux on July 28, 2014

in Reality Is Not Optional, Seen and Unseen, Video, Work

From the great folks at Reason we get Remy’s response to Kristen Bell’s economically uninformed attempt to justify an increase in the minimum wage. (HT Methinks)

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Bloody Corporate Welfare

by Don Boudreaux on July 28, 2014

in Crony Capitalism, Other People's Money, Reality Is Not Optional, Seen and Unseen, Subsidies, Trade

Here’s a letter to a long-time friend, a gentleman who largely supports free markets.

Mr. Gordon J___________

Dear Gordon:

Thanks for your note in defense of the Export-Import Bank.

I’ll not respond to each of your arguments (especially because Vero has addressed these claims in her many well-researched and reasoned writings on this matter). I’ll simply, and with respect, say that you forget Bastiat’s greatest lesson: look beyond the seen to the unseen.

No government can make some firms within its jurisdiction artificially more competitive in foreign markets without simultaneously making other firms within its jurisdiction artificially less competitive. The reason is that resources transferred by government to favored firms must come from somewhere; they are not free. The resources enjoyed by favored firms either come directly from other, unfavored firms whose taxes are raised to support the favored firms, or these resources come indirectly from other, unfavored firms who lose consumer patronage because now higher-taxed consumers have less money to spend in support of these other firms.

A foreign government that subsidies some of its firms is like a physician who routinely forces thousands of unseen and powerless people to transfuse excessive amounts of their blood to a handful of prominent and powerful patients. The blood received by the powerful patients is taken from others. (This fact remains true even if these powerful patients unfailingly pay in full the physician’s fee.) And just as it would be mistaken to conclude that any resulting increased vigor of the powerful patients means that society at large is made healthier by coerced blood transfusions, it is mistaken to conclude that any resulting increased vigor of subsidized firms means that the economy at large is made stronger by coerced resource transfusions. In both cases, quite opposite is true: the forced transfers weaken, rather than strengthen, the larger group.

If other governments weaken their economies by forcing their citizens to make such resource transfusions, that’s no good reason for Uncle Sam to weaken the American economy by forcing American citizens to make such resource transfusions.

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 July 28, 2014

in Politics, Reality Is Not Optional, Regulation

… is from page 341 of my great emeritus colleague Gordon Tullock’s 1987 essay “Concluding Thoughts on the Politics of Regulation,” which is the final chapter of the insight-rich 1987 collection Public Choice & Regulation: A View from Inside the Federal Trade Commission (Robert J. Mackay, James C. Miller III, and Bruce Yandle, eds.):

The attitude of those who turn to regulatory boards because there is a defect in the market and expect them to work perfectly is more likely to lead to boards that behave imperfectly than if they were set up by more cynical people.

Healthy skepticism – or realism – about the nature of politics is foreign to many advocates of government intervention. These advocates believe in miracles - and, in addition, they too often reason inconsistently about the play of incentives and the incompleteness of information across different institutional settings.

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Some Additional Questions for Supporters (Especially Among Economists) of the Minimum Wage

by Don Boudreaux on July 27, 2014

in Seen and Unseen, Work

1. Suppose that all low-skilled workers telecommute to their jobs in the U.S. from foreign countries, and that Congress imposes a tariff on the importation of such services. Do you predict that employers of these workers will continue to hire the same hours of labor from such workers – under the exact same terms of employment – as these employers hire without the tariff? If not, why do you believe that obliging employers to pay to low-skilled workers a per-hour tax called “minimum wage” will not reduce the number of hours that employers hire of such labor?

2. Suppose the government, expressing pity for producers of low-priced metals, passes and enforces a minimum-price-of-metal statute that prevents metals from selling at prices as low as some metals have been selling for recently. Suppose also that researchers from Ivy League schools report, from their empirical investigations, that this government action results in no empirically detectable reduction in the amounts of metal used in the construction of skyscrapers, automobiles, lawn mowers, snowblowers, outdoor grills, and other products made with lots of metal. Would you conclude that government can raise the incomes of all metal producers simply by passing such legislation? Would you wonder why metal is apparently an exception to the foundational law of demand? How many such studies would be required before you conclude that, yes indeed, the market for metal (especially low-quality metal) is so different from that of other goods and services that the law of demand is inoperative in that market (at least for relatively modest, government-imposed hikes in the price of metal)?

And even if you become convinced that these empirical studies are flawless and that their findings are indisputable, would you worry that the minimum-price-of-metal legislation causes a substitution away from the use of lower-quality metals in production toward the use of more higher-quality metals? (That is, would you worry, even if the absolute amount of metal used in production is unchanged by the minimum-price-of-metal legislation, that lower-quality metals – the ones whose makers the government meant to help – are being used less while higher-quality metal are now being used more?)

Just asking.

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Quotation of the Day…

by Don Boudreaux on July 27, 2014

in Economics, Work

… is from page 3 of the 2nd (1985) edition of Deirdre McCloskey’s superb intermediate microeconomics textbook, The Applied Theory of Price:

Notice that the economist’s affirmative answers [to a series of questions about economic matters] are bipartisan, stepping on everyone’s toes. Republican or Democrat, you can find an economist to insult your most cherished belief. Furthermore, the answers are not mere matters of faith. The economist could persuade the open-minded noneconomist that these economic propositions are true by the same method that an astronomer would use to persuade them that astronomical propositions are true: refined common sense, consistent reasoning, and ascertainable fact.

The economist faces the special obstacle that the people being persuaded are themselves economic bodies that have elaborate opinions of their own. The Earth’s own opinion about the movement of heavenly bodies would probably be that they all move around the Earth itself in circles. Untutored economic experience is a bad teacher of economics, just as the unaided eye is a bad teacher of astronomy.

Note that Deirdre refers to consistent reasoning. The importance of consistency in reasoning is a chief and good reason why many economists (including me) have not jumped on the pro-minimum-wage bandwagon ridden today by some other economists. There is simply no good reason to suppose that the market for low-skilled workers is such that higher prices for such workers consistently have effects that are inconsistent with the foundational tenets of economics.

Put differently, the economist who argues that raising the minimum wage does not reduce the employment options of low-skilled workers – but who also doesn’t hesitate to argue that higher taxes on imported steel will reduce the quantities demanded of such steel, that higher taxes on carbon emissions will reduce carbon emissions, and that stiffer penalties on tax evaders will reduce the amount of tax evasion – is not reasoning consistently.

Barring a very persuasive reason – backed by overwhelming empirical evidence – to believe that the market for low-skilled workers is consistently fundamentally different, in economically relevant ways, from the market for nearly everything else, the economist who argues that a rise in the minimum wage will not reduce the employment options open to low-skilled workers is being inconsistent and, hence, unscientific.*

This conclusion is not changed just because the economist can draw a pretty picture or tell a logically consistent tale showing the possibility that a higher minimum wage will not reduce the employment options of low-skilled workers. (Of course the economist can perform such feats. I learned to perform them when I was 19 years old. It’s child’s play.) Ditto if this economist presents some data that he or she offers in support of the proposition. Such data prove nothing absent (1) a compelling theory for why in reality they show the startling outcome that they seem to show, and (2) overwhelming numbers of other empirical studies that consistently show the same thing.

To date, nothing close to (1) or (2) has been offered in support of the proposition that raising the minimum wage, even modestly, does not reduce the employment options of at least some of the workers that the minimum wage is supposedly meant to help.

…..

* Note that the economist can still – without being inconsistent – argue in favor of the minimum wage on the grounds that the gains outweigh the losses, but this argument is different from the free-lunch-to-workers argument that asserts that raising the minimum wage doesn’t harm the very workers that it is ostensibly designed to help.

UPDATE: The prediction that the higher the minimum wage, ceteris paribus, the fewer are the employment options for low-skilled workers does not mean that only the number of jobs for such workers will decline. It likely, in practice, does mean fewer jobs, but it also means fewer hours of paid work even for workers who find jobs or keep their jobs, lower fringe benefits, and worsened work conditions. It is, indeed, possible (although I think unlikely) for a higher minimum wage to result only, say, in worsened work conditions without causing any reduction in the number of jobs for low-skilled workers. The minimum wage, in this event, would still harm those workers.

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The New York Times Inadvertently Offers Evidence that Genuine Economic Inequality is Not Rising…

by Don Boudreaux on July 26, 2014

in Inequality, Myths and Fallacies, Seen and Unseen, Standard of Living

… or, at least, is not a problem that threatens to tear modern, market-oriented societies apart at the seams. This evidence is reported in Eduardo Porter’s New York Times essay from a few days ago. Here’s a key slice:

In every one of the 26 nations, most of them in the developed world, for which they collected data, people believe that the income gap is smaller than it really is.

Porter’s essay grapples with what Porter apparently believes is a mystery: if monetary income (or wealth) inequality is rising, why don’t the masses see it? Why aren’t the masses up in arms about this inequality? After all, professors and other intellectuals – those whom Deirdre McCloskey rightly ridicules as “the clerisy” – are up in arms about it. Yet the masses are not. Strange, that (if you’re a “Progressive”).

The gaudy and excessive consumption of the one percent should cause the deprived, crumb-eating 99 percent to grab their pitchforks, storm Wall Street and the City of London, and demand their ‘fair share’ from the plutocrats who (somehow) steal it from them. But it’s not happening. The 99 percent aren’t behaving as their “progressive” wannabe-caretakers think they should behave.

…..

One reason, I’m sure, is that rising inequality in monetary incomes or wealth is NOT the same thing as rising inequality in economic welfare (extra emphasis intentional). It’s not even close – although rare is the “Progressive” who acknowledges the reality that changes in income (or wealth) are not identical to changes in consumption-ability (that is, to changes in real economic well-being). Inequality of monetarily reckoned income or wealth can rise while inequality of consumption opportunities can fall. See, for example, here and here and here and, especially, here.

If ordinary people – spared lectures and long tomes by intellectuals – are blind in their daily lives to the vast inequalities in economic fortunes that intellectuals are constantly warning will trigger revolutionary anger in ordinary people, then the most plausible explanation for this blindness is that there is, in reality, nothing to see. Ordinary people aren’t blind; instead, “Progressives” are hallucinating. If ordinary people’s reactions (as reported by Porter) are evidence of economic reality, then everyday life in market-oriented societies is not marked by growing economic inequality of the sort that ultimately matters: inequality in people’s ability to consume. If professors must write 700-page books, and “Progressive” columnists must harp continually about growing economic inequality, in order for ordinary people even to begin to become aware of this inequality, then it’s quite implausible to maintain that modern capitalist societies are generating ‘terrifying’ degrees of economic inequalities.

In short, if you must study charts in economics books in order to learn that you are intolerably destitute compared to some other people, then, in fact, you are not even remotely close to being destitute in any economically meaningful sense of the term.

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