… is from page 251 of William Easterly’s superb 2013 volume, The Tyranny of Experts:
The market, by contrast [to state and other nonmarket means of supplying goods and services], rewards the profit-seeking baker according to just how much the consumers feel the bread is worth at solving their nutritional gluten problem. So the market will self-correct. Suppose there is a high social payoff to making bread for consumers – as measured by what consumers are willing to pay – but nobody is producing any bread to take up consumers on what they are offering. Some suppliers in search of profit will start solving the missing bread problem, rewarded by the private payoffs of the revenue per loaf that is aligned with the social payoff to consumers.
Bill Easterly – an excellent economist – understands the logic of the market process. He understands that even the most well-functioning market economy is, at each moment in time, filled with as-yet-unexploited opportunities for profit. And he understands that when and where these opportunities exist, alert entrepreneurs will exploit them and, thus, in the process cause resources to be reallocated in ways that better serve consumers. Or, put differently, Bill understands that the only reliable test we have for whether or not such exploitable profit opportunities exist in any of countless specific places in the market is the actions of entrepreneurs. Where such opportunities exist, entrepreneurs are likely to exploit them. And when entrepreneurs en masse are observed not to act in ways to exploit some alleged profit opportunity, the only plausible conclusion is that the alleged profit opportunity isn’t real.
Non-economists, or poor economists, do not understand this reality. And their failure to understand exaggerates in their own minds the likelihood that their own personal speculations about reality are correct. Yet because these speculations are not market-tested – that is, because they are not tested in actual markets where people spend their own money (but instead, at best, tested only in academic offices with data processed by some econometric methods, and where the testers risk nothing of their own on the correctness of the conclusion) – these speculations are too likely to be incorrect.
People (including some economists) who assert that minimum wages are justified by existing market failures – failures that, in all cases involving the minimum wage, imply exploitable profit opportunities for entrepreneurial folk – yet who themselves risk nothing of their own on their speculations should be ignored for the cheap talkers that they are. These people – insufferably arrogant in their academic degrees, their facility with (too often economic-theory-free) econometrics, or their felt empathy with poor workers – are, astoundingly, insulted and angered when called upon to put their money where their mouths are. We are to overlook their personal non-actions, their personal idleness in markets, while we trust them to advise state officials to threaten with physical violence millions of other people who, spending their own money, stubbornly refuse to act as the idle speculators wish them to act.