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What Theory of Prices Are These People Using?

Here’s a letter to a correspondent:

Mr. Carlo Key

Mr. Key:

Thanks for e-mailing me.  You write that you’re “swayed by research” that raising the minimum wage to $15 per hour “will have no or very little downside for workers….  [M]ost employers are rich enough to absorb the higher costs.”

I disagree profoundly.  Yet rather than list my many specific disagreements, I instead put to you a set of simple, related questions:

What do you think would happen if government forced down by 50 percent the prices of all outputs sold by firms that employ low-skilled workers?  Do you think that these firms can “absorb” these price cuts?  Do you think that firms can – or would – “absorb” these price cuts without reacting in ways that harm consumers, such as by reducing the amounts of these outputs that they make available for sale?  Do you think that such forced price cuts would not result in some firms going bankrupt?  Do you believe that real-world market prices and wages are determined so haphazardly or randomly that they can be arbitrarily changed so substantially by government without unleashing any negative effects except to lower firms’ profits?

Unless you honestly believe that there will be no or only very little downside for consumers and for firms if government forcibly lowers by 50 percent the prices that firms may charge for outputs, you should rethink your confidence that a forced 100-plus percent hike in the price of the input ‘low-skilled labor’ will have “no or only very little downside for workers.”  And if you do believe that such forced price changes will have no or little downside for consumers and for firms, then I am quite sure that you have no coherent theory of prices – which means, in turn, that you’re ill-equipped to make any predictions whatsoever about the consequences of minimum wages.

Donald J. Boudreaux
Professor of Economics
Martha and Nelson Getchell Chair for the Study of Free Market Capitalism at the Mercatus Center
George Mason University
Fairfax, VA  22030

Reading Mr. Key’s e-mail, and then pondering a reply, drove home to me a straightforward truth: most minimum-wage supporters simply do not understand price theory.  Not even remotely.  They have no coherent theory of prices.  (In the case of those minimum-wage supporters who boast degrees in economics, many of them are either equally bereft of any coherent theory of prices or they possess very poor judgment about how to use that theory to make better sense of reality.)