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Supporting Phil Magness’s Defense of Jim Buchanan

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Here’s a note that I just sent to the indispensable Phil Magness:

Phil Magness
American Institute for Economic Research
Great Barrington, MA

Phil:

Congratulations for masterfully defending Jim Buchanan [2] against the ill-informed criticisms recently leveled at him by Noah Smith. You’re correct that Jim’s “camp-following whores” comment was not explicitly aimed at David Card and Alan Krueger.

Even more important is your documentation that Jim had – in his 1954 economics textbook [3] (co-written with Clark Allen and Marshall Colberg) – expressly discussed the theoretical possibility of monopsony power creating an exception to economists’ standard prediction that minimum wages reduce the employment of low-skilled workers. In doing so, Jim and his co-authors even used the word “monopsony.” And so Smith reveals only his own ignorance of economic thought when he writes that in 1994 “Card and Krueger’s finding seemed revolutionary and heretical.”

But to strengthen your point, I note here two other instances of prominent economists explicitly recognizing the monopsony point long before Card and Krueger came along. One of these economists is George Stigler, who, on pages 360-361 of his June 1946 American Economic Review paper, “The Economics of Minimum Wage Legislation [4],” wrote the following:

If an employer has a significant degree of control over the wage rate he pays for a given quality of labor, a skillfully-set minimum wage may increase his employment and wage rate and, because the wage is brought closer to the value of the marginal product, at the same time increase aggregate output.

Stigler then explained the practically insuperable difficulties of designing a real-world minimum wage that will not, even when employers have monopsony power, reduce employment.

The second such economist is the late Columbia University scholar Donald Dewey. On pages 197-204 of his 1975 intermediate price-theory text, Microeconomics: The Analysis of Prices and Markets [5], Dewey explicitly discussed this point about monopsony. In addition – and as Buchanan himself also did in 1996 [6]* – Dewey recognized a reality that is overlooked by all who try to justify minimum wages by shouting “monopsony!” Dewey explained that for artificially raised wage rates not to reduce employment, “the monopsonist must also have the monopoly power in the market for his final product that earns him an economic rent.”

The future of economic analysis would be brighter if economists today were more knowledgeable about its past – and thought as deeply as did earlier scholars such as Buchanan, Stigler, and Dewey about the nature of competition and the complexities of real-world markets.

Sincerely,
Don

* James M. Buchanan, “Adam Smith as inspiration,” Korea Economic Research Institute, 1996; reprinted in James M. Buchanan, Ideas, Persons, and Events [7], Vol. 19, The Collected Works of James M. Buchanan (2001).