In my April 21st, 2006, column for the Pittsburgh Tribune-Review I took aim at the myth that economists believe that money is all that matters. You can read the column below the fold.
Money isn’t all that matters
Contrary to popular misconception, economists do not believe that money is all that matters.
I remember during the 1979 gasoline shortage that many Americans opposed getting rid of the government-imposed price ceiling on oil and gas prices because, these people thought, lifting this ceiling would raise the cost of gasoline. Economists explained again and again that while lifting the price ceiling would raise the price charged at the pump, the full price of gasoline would in fact fall.
By bringing forth greater supplies of oil and gasoline, lifting the price ceiling would eliminate the necessity of waiting in long lines at the pump — as well as eliminate motorists’ anxiety of not knowing if they’ll be able to fuel their automobiles.
In short, the full price of gasoline was much more than the dollar amount charged at the pump; it included also the time spent waiting in long lines and the anxiety caused by the uncertainty of gasoline availability.
To suppose that the only cost incurred by motorists was the money they paid at the pump is to overlook the value of their time and peace of mind.
Recognizing that costs and values go well beyond those things whose prices are expressed in money is a key to the economic way of thinking.
For example, suppose that Congress raises the federal minimum wage from $5.15 to, say, $6 per hour. Further suppose that employers don’t fire a single worker in response to this minimum-wage hike. Can we conclude that workers are made better off by this minimum-wage increase? No, at least not if we understand that workers value things in addition to the wages they are paid.
A worker’s job quality surely matters to him. How many breaks is he allowed to take while at work? How readily does his employer forgive him for innocent mistakes? How willing is his employer to allow him to take a day off to sit with his sick child? How comfortable and safe is the workplace? These and countless other “non-price” features of a job are vitally important even though they don’t show up in the wage figure.
If employers respond to this hike in the minimum wage not by hiring fewer low-skilled workers but instead by working their low-skilled workers harder, the quality of low-skilled jobs falls. Of course, these workers are now being paid a higher wage. But only those who focus exclusively on wages will conclude that this increase in the minimum wage definitely makes workers better off.
The economist, in contrast, knows better. The economist understands that workers care about more than just their wages and that employers can adjust to a minimum-wage hike by reducing the non-price qualities of employment. In short, the economic way of thinking reveals that even workers who remain employed after an increase in the minimum wage might be made worse off by that increase.
Economists’ sensitivity to non-price phenomena has an interesting application to criminal law. Suppose a study is released showing that the longer someone is imprisoned in a penitentiary, the less likely is that person to become a law-abiding and productive member of society upon his or her release. (Such a finding strikes me as plausible.)
This finding is distressing for those who want to punish crimes such as car-jacking and embezzlement with more than a slap on the wrist. On one hand, by imprisoning those convicted of such crimes for several years in a penitentiary along with unrepentant murderers and serial rapists, we condemn such people to a greater likelihood of becoming repeat criminals after their release. On the other hand, easing the punishment is not a good option because these offenses are serious.
The economist points out that prison terms can be reduced without decreasing the severity of punishment suffered by the likes of car-jackers and embezzlers. The secret is that the length of a prison term — the explicit ‘price’ paid by convicted criminals — is only one dimension of punishment.
Another dimension is the likelihood of being caught and convicted. If many of the resources spent building and staffing penitentiaries were instead spent to increase the chances of apprehending and convicting car-jackers and embezzlers, the expected costs to persons contemplating committing such crimes might not fall — or might even rise — despite the fact that, if they are convicted, they’ll spend fewer years behind bars than they would have spent before.
In brief, raising criminals’ chances of being captured and convicted increases the expected size of the penalty from committing a crime, thus allowing policymakers to reduce the length of prison terms without necessarily reducing persons’ expected costs of committing crimes.