≡ Menu

Supply and Demand Analysis Captures Social Forces and Political Power

There are many candidates for ‘worst Paul Krugman column ever.’  Yesterday’s column is among them.  David Henderson wrote wisely on that column over at EconLog.  Here’s a comment that I left there:

David is absolutely correct: that column by Krugman is awful. It’s anti-economics. It’s written as though its author is unfamiliar with the introductory chapters of a principles-of-microeconomics textbook. And I’m not talking here about the conflict between the theoretical prediction that higher minimum wages cause job losses for some low-skilled workers and some empirical findings to the contrary. I’m talking instead of statements by Krugman such as this one: “and how much workers are paid depends as much on social forces and political power as it does on simple supply and demand.”

What the heck does Krugman mean by “simple supply and demand”? No economist of any merit has ever taught that supply and demand are context-less, free-floating presences that are independent of the likes of “social forces and political power.” For 33 years I’ve taught my principles students that, for example, occupational-licensing regulations (the product of political power) reduce the supply of workers in licensed occupations. Similarly, I explain that the strengthening of the social norm against smoking cigarettes (an instance of social forces) has reduced the demand for cigarettes.

But neither social forces nor political power – in the form of minimum-wage legislation – are likely to make N-number of workers each more productive. And neither social forces nor political power can long ensure that employers who pay workers more than the value of their marginal products will remain in business.

Social forces and political power are real, and they affect supply and demand – but they do not affect supply and demand always, or even usually, in the ways that interventionists would like.

In short, to say that social forces and political power affect supply and demand and, hence, equilibrium wages is true. But it does not follow that any particular social force or any specific unsheathing of political power will bring about those happy equilibrium results that are intended by those people who fuel the social force or who wield the political power.

In the end, prices and wages are determined by supply and demand – a brilliant tool quite capable showing the influence on prices and wages of social forces and political power. Krugman, though, seems to suggest that social forces and political power play a role independently of supply and demand in setting prices and wages. That’s anti-economics. That’s the kind of talk one can excuse in a taxi driver or podiatrist who’s never taken a course in economics or read a book in the subject. But it’s a shame to hear it come from a professional economist.