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The Economic Way of Thinking

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A new commenter showed up today at the Cafe (on this post [2]) to level the familiar charge that those of us who oppose minimum-wage legislation are stuck in Econ 101 mode and are unfamiliar with – or refuse to acknowledge – the insights of more advance economic theory.

I confess that I believe Econ 101 thinking to be immensely powerful and too-little understood and too-little used – especially (here’s an irony!) by professional economists.  Indeed, I confess that I believe Econ 101 thinking generally to be far more powerful, revealing, and relevant to real-world policy discussions than are 90 percent or more of the theories and models that are presented as “advances” on Econ 101 thinking.  But expanding on this defense of Econ 101 thinking is not the point of this short post.  (In fact, go over to Coordination Problem [3] and read some of my colleague Pete Boettke’s defenses of Econ 101 thinking; Pete is far more eloquent and insightful than I can ever hope to be.)

Here I want only to point out that one common move of proponents of minimum-wage regulation (and, indeed, of government regulation of markets more generally) is to accuse those of us who use Econ 101 reasoning to expose the dangers of such regulation of relying naively on “theory” – of being blind to reality in all of its complexity.  But there’s another great irony here: the intellectual and academic case for minimum-wage legislation is also a theory.  (Actually, of course, any case for the minimum wage is based on a theory, even if those who use that theory are unaware that they are doing so.)  And the theoretical case for the minimum wage has in it far more assumptions that must hold true for that theory to apply in reality than does the Econ 101 case against the minimum wage.

If relying upon formal theory to understand reality is inappropriate, then all formal theory must be discarded, not just that formal theory that challenges your policy preferences.

The criterion, then, becomes which level of formal theory is most revealing and helpful.  My contention – which again, because my time is now pressed, I will not defend here – is that Econ 101 reasoning is not unduly simplistic just because it is Econ 101 rather than Econ 450 or Econ 890.  My contention, indeed, is that Econ 101 theory is in fact more revealing about reality, and more useful as a guide to reality, than are the more “advanced” theories and models that inhabit today’s refereed econ journals and upper- and graduate-level econ textbooks.