… is from pages 4-5 of the 1991 economics Nobel laureate Ronald Coase‘s superb 1988 essay “The Firm, the Market, and the Law,” which is the first chapter in the 1988 collection (with the same name: The Firm, the Market, and the Law) of some of Coase’s articles:
In the meantime, however, whatever makes men choose as they do, we must be content with the knowledge that for groups of human beings, in almost all circumstances, a higher (relative) price for anything will lead to a reduction in the amount demanded. This does not only refer to a money price but to price in its widest sense. Whether men are rational or not in deciding to walk across a dangerous thoroughfare to reach a certain restaurant, we can be sure that fewer will do so the more dangerous it becomes. And we need not doubt that the availability of a less dangerous alternative, say, a pedestrian bridge, will normally reduce the number of those crossing the thoroughfare, nor that, as what is gained by crossing becomes more attractive, the number of people crossing will increase. The generalization of such knowledge constitutes price theory. It does not seem to me to require us to assume that men are rational utility maximizers. On the other hand, it does not tell us why people choose as they do. Why a man will take a risk of being killed in order to obtain a sandwich is hidden from us even though we know that, if the risk is increased sufficiently, he will forego seeking that pleasure.
DBx: Coase here nicely summarizes the core logic of price theory (or, sound microeconomics). This logic is simultaneously pedestrian (no pun intended) and profound. At the core of this core (if you’ll excuse this inelegant expression) is the law of demand: ceteris paribus, the higher the cost that a person expects to bear by taking action A, the less likely is that person to take action A or the less frequently that person will take action A. Kindergartners grasp this truth, but far too few people of any age apply this truth to reality consistently. This truth applies not only to costs and benefits borne in the form of monetary payments either made or foregone; it applies to costs and benefits borne in any form.
One mark of the good economist – perhaps the mark of the good economic theorist – is consistency in following the logic of the law of demand. The good economist, for example, understands that the law of demand applies to low-skilled workers no less than it applies to high-carat diamonds. And this economist is therefore appropriately and deeply skeptical of empirical studies that purport to find that minimum-wage hikes consistently fail to reduce the employment options open to low-skilled workers. The fact that it might well be splendid if minimum-wage hikes did not in reality reduce the employment options open to low-skilled workers is irrelevant. It would also be splendid if eating slabs of bacon increased one’s health and reduced one’s weight. But it ain’t so. Reality is not optional.