Cafe Hayek — where orders emerge

Some Links

by Don Boudreaux on April 14, 2014

Alberto Mingardi reflects on Thomas Piketty’s Capital in the Twenty-First Century. A slice:

[I]s it really true [as Piketty claims] that the distribution of wealth is the central problem we confront, as we enter the public debate? I mean, couldn’t it just be that some of us do not care about inequalities? I know somebody may reply that indeed, there are people that do not care about inequalities: the rich. But why should the drive towards a more equal distribution of wealth be the central question for all those interested in politics? Surely inequalities are often visible to “the naked eye”: but so are, for example, asymmetries in the distribution of not wealth, but power. We live in societies that are centered around stable power asymmetries: and yet we tend to make fun of those that would like to equalize the power of men over men, as most people think that anarchists rightly belong to the periphery of the learned debate.

Arnold Kling reflects on Paul Krugman’s reflections on Thomas Piketty’s Capital in the Twenty-First Century.

And a commenter (Paul Power) at Arnold’s blog points us to this April 2013 BBC report on wealth ‘distribution’ in Great Britain. A slice:

“Wealth that is self-made is becoming more and more evident,” Mr Beresford told BBC News.

“When I first started 25 years ago about two-thirds of the rich list were people who had inherited their wealth.

“Today, approaching 80% are self-made and that’s really a legacy of the Thatcher years.”

(Incidentally, I’m now reading Piketty’s new book very carefully for a review of it that I’ll write for Barron’s. I’ll likely, from time to time, reflect here at the Cafe on my reading as I progress through the volume. It’s more than 600 pages long. Right now I’m only 1/10th into it. So far at least, it’s well-written (and well-translated from French into English). And already Piketty has said some things with which I quite agree, yet also much that I find to be in error – not mistakes as much as questionable presumptions about the likes of aggregates, economic categories, the unplanned consequences of market processes.)

Let’s assume, for the sake of argument, that Thomas Piketty and Paul Krugman (and Joseph Stiglitz, and Robert Reich, and name-your-favorite-”Progressive”) are correct to allege that wealth or income (or both) are now ‘too concentrated’ among ‘the rich.’ And let’s also grant, for the sake of argument, the truth of the psychologically (if not logically) related claim – made by many of the same “Progressives” – that the economic well-being of ordinary, middle-class Americans hasn’t improved much, if at all, over the past 30 or 40 years. What would such income and wealth concentration, and middle-class stagnation, prove? Of what would these putative facts be relevant evidence? Surely not of problems with laissez-faire capitalism or even with increasingly freer markets.

Wendy McElroy calls for regulators to back off of wealth creators.

Diane Coyle reviews Zachary Karabell’s The Leading Indicators.

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Quotation of the Day…

by Don Boudreaux on April 14, 2014

in Economics, Reality Is Not Optional

… is from page 119 of George Stigler‘s 1968 volume, The Organization of Industry; specifically, it’s from Stigler’s important June 1967 Journal of Political Economy article, “Imperfections in the Capital Market“:

There is no “imperfection” in a market possessing incomplete knowledge if it would not be remunerative to acquire (produce) complete knowledge: information costs are the costs of transportation from ignorance to omniscience, and seldom can a trader afford to take the entire trip.

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Violence It Indeed Is

by Don Boudreaux on April 14, 2014

in Reality Is Not Optional, Seen and Unseen, Work

In the comments on this recent EconLog post by David Henderson (who writes on Robert Reich’s economically uninformed case for the minimum wage), commenter Chris Wegener disagrees with commenter Vikingvista’s observation that government policy to prohibit workers from working at wages below the legislated minimum is violence. Mr. Wegener writes that

Making sure that work pays a living wage is not violence.

Mr. Wegener here confuses motives with means. Even if we all agree that the intent of government officials who raise the minimum wage is to do good, and even if we agree that the result of such regulation will be net good, these facts do not render the means other than what they are: violence.

Minimum-wage legislation would not succeed in prohibiting anyone from working at wages below the minimum if government merely suggested to employees that they not offer to work at hourly wages below that ~~legislated~~ suggested minimum. Some employees would disregard the suggestion, and would have no trouble finding employers to employ them at hourly wages below the minimum. Therefore, government must threaten to inflict force upon any employers who would accept any workers’ offers to work at hourly wages below the minimum.

Violence is not a nice word, and violence unleashed on people engaged in mutually agreeable actions is not a nice thing. But the fact that violence is disagreeable doesn’t give Mr. Wegener any basis for saying that his preferred means for achieving his (allegedly) noble end does not involve the threat of violence. It does.

Let’s view this reality more clearly. Suppose that, to achieve the goal of all workers (actual and currently unemployed) being paid a “living wage,” government issues a regulation that requires each American with an annual income of at least $75,000 to hire at least one currently unemployed worker at an annual salary of at least $20,000. Each hired worker is to be employed as a “personal servant” to the American who is obliged to hire him or her.

I make more than $75,000 annually, so I would be obliged to hire at least one currently unemployed person and to pay that worker (my “personal servant”) at least $20,000 annually.

Let’s assume that this policy – no doubt contrary to fact – assures that all low-skilled workers in America are indeed paid a “living wage.” I assume that Mr. Wegener would regard this outcome as desirable. But surely he could not with a straight face proclaim that the achievement of this outcome does not involve the threat of violence leveled against Americans whose annual incomes are at least $75,000.

….

Whenever you hear someone say that a government policy does not involve violence, ask that person if he or she would therefore be content for government to credibly announce that the policy in question is only a suggestion. If that someone’s response is akin to “No, the policy must be binding,” then that someone in fact understands that the policy in question is grounded in violence. (Note that this observation says nothing by itself about the merits or demerits of any policy. It simply points out the reality of government intervention.)

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Happy Anniversary Us!

by Don Boudreaux on April 13, 2014

in Weblogs

Today is the 10th anniversary of the opening of Cafe Hayek. Russ opened our e-doors with this post on Cuban cars. My first post didn’t appear until six days later, on April 19th. This 10th-anniversary post, by the way, is the 8,597th post published here at the Cafe.

Remarkably (as I recall Cafe Hayek’s launch), I wasn’t enthusiastic about blogging, although my enthusiasm grew very large very fast. I thank Russ for pressing me to blog. No one else, I think, could have persuaded me to do it. So Cafe Hayek is really Russ’s brainchild, and he from the start has handled all of the ‘back room’ management. He does so to this day. And one of the most satisfying aspects of Cafe Hayek for me is that it allows me to continue to work with Russ and to boast that “I co-blog with Russ Roberts.”

We thank, sincerely, all of the readers over the years and the commenters. We are honored that you visit the Cafe, and we will strive to continue to make your visits mutually advantageous.

(Oh, and I rather like the fact that Cafe Hayek shares a birthday with Thomas Jefferson.)

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Quotation of the Day…

by Don Boudreaux on April 13, 2014

in Civil Society, Environment, Hubris and humility

… is from page xxxiv of Julian Simon’s 1996 magnum opus, The Ultimate Resource 2:

The real issue is not whether one cares about nature, but whether one cares about people. Environmental sympathies are not in dispute; because one puts the interests of one’s children before the interests of the people down the street does not imply that one hates the neighbors, or even is uninterested in them. The central matters in dispute here are truth and liberty, versus the desire to impose one’s aesthetic and moral tastes on others.

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The Minimum Wage and Bargaining Power

by Don Boudreaux on April 12, 2014

in Myths and Fallacies, Seen and Unseen, Wal-Mart, Work

Ms. Josie Carrela

Dear Ms. Carrela:

Thank you for sending me the link to Prof. Charles M.A. Clark’s defense of the minimum wage. You are impressed especially by his argument that “Minimum wage laws … will also support the bargaining power of workers.”

I’m less impressed than you are with this argument. In fact, I believe it to be evidence of Prof. Clark’s weak grasp of economics.

A worker’s bargaining power is increased only if that worker is made more attractive to employers, which means only if that worker’s skills are made less abundantly available to employers. This outcome can be achieved in several different ways, some socially productive and some not. For example, worker Jones can master skills that are in shorter supply relative to the demand for those skills; consumer demands for outputs can change in ways that raise employers’ demands for workers with skill sets similar to those of Jones; or artificial restrictions, such as occupational licensing, can be used to reduce the number of workers who compete with Jones for jobs.

What does not increase the bargaining power of workers is for government to strip from them a bargaining chip - and such stripping is exactly what minimum-wage legislation accomplishes for workers with the fewest and least-valuable skills. Just as these workers’ bargaining power would fall if government prevented them from, say, working after sundown or from working on Wednesdays, minimum-wage legislation reduces these workers’ bargaining power by preventing them from competing for jobs (or for better non-wage terms of employment) by offering to work at hourly wages below the minimum. The minimum wage does nothing at all to make the skills of the lowest-skilled workers less abundantly available to employers while it simultaneously makes these workers less attractive to employers.

Some workers’ bargaining power, however, is indeed enhanced by the minimum wage, namely, workers who are somewhat more skilled than the lowest-skilled workers who lose their jobs. By artificially removing the lowest-skilled workers from the ranks of the employable, minimum-wage legislation artificially increases employers’ demand for many higher-skilled (or otherwise more ‘desirable’) workers. For example, employers’ demand for the skills of my private-school educated, upper-middle-class 17-year-old white son is raised by minimum-wage legislation. The reason is that such legislation prevents many teenagers from poorer families – who are denied the bargaining chip of being able to offer to work for wages lower than the minimum - from competing with my son for a job. Is that fair? Is that just? I think not.

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

…..

I didn’t get into this matter with Ms. Carrela, but Prof. Clark is correct in one matter. Here’s the full quotation containing the bargaining-power claim:

Minimum wage laws—along with other forms of social protection like a strong social safety net, universal education, and a commitment to full employment—will also support the bargaining power of workers.

Again, the claim that minimum-wage legislation increases the bargaining power of the lowest-skilled and least valued workers is sheer nonsense. But Prof. Clarks is correct in his “strong social safety net” claim. The reason is that a strong social safety net – at least in the short and medium run, and if we ignore the effects of such a policy on both human and non-human capital formation – decreases the supply of labor, which increases the marginal value of labor. Note, though, that this correct claim is the opposite of the common claim, made most recently by Robert Reich, that a strong social safety net effectively reduces workers’ wages. That argument is wrong. I addressed it here at the Cafe nearly ten years ago, and my colleague Bryan Caplan did so much more recently and much better.

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Quotation of the Day…

by Don Boudreaux on April 12, 2014

in Competition, Complexity & Emergence, Economics, Hubris and humility, Prices, Seen and Unseen

… is from page 716 of volume 2 of The Collected Works of Armen A. Alchian (2006); specifically, it’s from Alchian’s and William Allen’s 1968 Michigan Quarterly Review article, “What Price Zero Tuition?“:

Since the fiasco in the Garden of Eden, mankind has suffered from scarcity: there cannot be enough goods and services to satisfy completely all the wants of all the people all the time. Consequently, man has had to learn the hard way that in order to obtain more of this good he must forego some of that: most goods carry a price, and obtaining them involves the bearing of a cost.

Armen Alchian was born 100 years ago today. I have believed and have said now for decades that Alchian is history’s greatest natural microeconomist – or, more specifically, what we economists call a “price theorist.” I generally avoid the term “price theorist” because one mark of any competent price theorist is the recognition that monetary prices are only one of the many manifestations of human cooperation and competition. Competent price theorists understand that monetary exchanges are ultimately exchanges of real goods, services, opportunities, or resources; they understand that people can and often do accept payment in ways not mediated by money prices; they understand that people can and often do compete for scarce goods, services, resources, and opportunities in ways that do not involve monetary payments. (Of course, competent price theorists also understand well how monetary prices are determined, what roles monetary prices play, and the consequences of artificial interference with the formation and fluctuation of monetary prices.)

To me, one of the most distressing realities of the current state of the economics profession is the high portion of professional economists who give no evidence of being competent in, much less good at, price theory. Either these economists have not read, or they have not read carefully, Armen Alchian’s voluminous works, or they (for whatever reason) are unable to grasp his analyses. Either way, this state of affairs is a shame. No one matched Alchian’s ability to detect and explain clearly the many different ways that people compete for scarce resources and opportunities – ways deeply influenced by the details of prevailing property rights.

Alchian was that rare scholar who gave us a useful and user-friendly tool – “the economic way of thinking” – to better understand society without our having to pretend that society is simpler than it really is. It is a thinking tool that, when used as Alchian used it, instills in its users appropriate awe of the market process and humility toward that process.

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Some Links

by Don Boudreaux on April 11, 2014

in Myths and Fallacies, Seen and Unseen, Self-deception, Trade, Work

Steve Horwitz weighs in on the pay gap between men and women. A slice, which challenges those who make a case for government intervention to be more specific in that part of their formula when they (unwittingly) proclaim “Then a miracle occurs“:

Finally, as libertarians we might want to challenge some of our feminist friends with the following consideration: if patriarchy is real and men have disproportionate power over all of society’s major institutions, why should a feminist trust the government to be the solution to problems like the gender wage gap? Even without assuming patriarchy, given the track record of government in the 20^th century and before, why should we believe it will not only care about women’s interests but be able to effectively pursue them? To simultaneously complain about how Congress is controlled by men and still think that the federal government is the solution to men’s oppression of women seems… problematic. And if our feminist friends agree that the state is not the solution, then it would seem we’re all on the same side.

Bryan Riley shows how first-person plural pronouns can lead to serious confusion in trade policy.

David Henderson adds his clear critical voice to the criticism of Robert Reich’s case for raising the minimum wage.

When Steve Landsburg disagrees with me, I worry. But on this issue I’m sticking to my guns – hopefully not foolishly, but also not without some anxiety that my reasoning is awry. (I respond to Steve in the comments to his post.)

Yale professor of law and psychology, Dan Kahan, is unimpressed by Paul Krugman’s reasoning. (HT Rae Hederman) (Jonah Goldberg is also unimpressed.)

Ben Gitis’s evidence informs him that minimum-wage legislation does indeed increase unemployment of low-skilled workers.

But let’s remember that the destruction of some low-wage jobs is only one of the many possible negative consequences of minimum-wage legislation. U.C.-Irvine economist Richard McKenzie highlights – and documents – some other of the negative consequences. (HT Tyler Cowen) A slice:

Employers are certainly capable of responding to wage hikes by making direct changes to the employment status of their workers. They can shift their workforce to noncovered workers (such as unpaid interns) or to automated machines. Or, businesses can import their products from overseas, where workers earn far less per hour than American minimum-wage workers. That the employment effects of wage floors have been so small, therefore, is explained by the reduction in workers’ nonmonetary compensation. Granted, a decade ago researchers found minimum-wage hikes had little to no effect on workers’ fringe benefits, but they considered only the expensive benefits that high-income workers receive (for example, health insurance), and they took no account of the easily obscured work-demand effects of mandated wage hikes (or any of the other nonmoney forms of compensation, for example, job security).

Sarah Skwire ponders The Merchant of Venice.

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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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Quotation of the Day…

by Don Boudreaux on April 11, 2014

in Seen and Unseen, Work

… is from page 572-573 of Karl Brunner’s superb 1970 Kyklos article, “Knowledge, Values and the Choice of Economic Organization“:

But what about persistent unemployment of Negroes and increasing unemployment among teenagers? The observations are not disputed, but the interpretation advanced by the critiques [of the free market] is rejected. This interpretation emerges again through an impressionistic short-cut. The contention ‘inherent market failures’ is not subsumed under a testable theory of market processes. It occurs in a cognitive limbo as a valuational judgment attached to the observations cited. On the other hand, we do possess a highly confirmed hypothesis explaining the response of distinct labor types to increases in minimum wages. This successfully explains the patterns of persistent unemployment pockets. The hypothesis in question implies nothing with respect to our values. It says nothing about whether we should help the poor or the rich. It only says that if we help the poor by raising minimum wages, then the frequency of unemployment among the poor will rise.

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