Bad Economics
bostonreview.net
bostonreview.net
The premise misses the "why". Up until the early 80s, macro was seen like an airplane control system where you could inject things here or there and make things work.
Then Bob Lucas came out with his critique for rational expectations, and since most economics (sans early Keynesian and MMT) have grounded decision and policy making in microeconomic foundations. Why? Because people make rational decisions across the distribution. This led to Huggett and Aiyigari models, as well as tweaks on computational/agent-based models to account for microeconomic foundations. It was a necessary evolution.
The critique in this article connects disparate things and misses much of the bigger picture.
The entire modern economics profession is irredeemably corrupt and has led to unfathomable amounts of human misery due to blind allegiance to beautiful models against all obvious evidence that they had no actual relationship to how the world works. This was especially true in Microeconomics and doubly true when it comes to talking about Lucas and Sargent and the nonsense that is Rational Expectations, as well as of course EMH and other related delusions.
Our public policy would probably better served if most of the profession was put on a cruise ship and launched out to sea. Just saying.
Ah, the Khmer Rouge strategy. I wonder how that worked out..
It's not a coincidence that the "Nirvana fallacy" concept was coined by an economist.
In my view, the economics academic profession is no more or less corrupt than other academics, and I can't hazard to judge the industry side beyond my own experience.
Economic policy will be made, whether we like it or not. This policy must be based on some type of model, whether that model is simple or complex. So here's the question: do you have a falsifiable, demonstrably better model than one of those used in mainstream economics? If so, you can simply show it to us. If not, then we're sticking with one of the models used in mainstream econ.
This goes for every single complaint about economics being "corrupt". Show us your better model. If you can't, well then, it doesn't matter.
The current approach is abhorrent because of its effects on human lives today and needs to be ended for that reason. No one here is the author of the future and it's not their responsibility to present a vision of it that you will accept before you acknowledge horrors that exist now.
The onus is definitely on the persons wanting change to make an actual case for that change. So yes, it is their responsibility to present a vision of their alternative future that I will accept.
No it's not. The onus is on the people who created policies that lead to massive inequality and human misery to explain why we shouldn't string them up as an example to others.
Complaining about the status quo is extremely easy, and everyone does it. That doesn't mean they have a clue how to fix it. If you think you have a solution, prove it. Otherwise, I'll keep supporting the devil I know.
Sure don't. But I don't expect my ideas will exacerbate it.
Sounds good. Totally normal to be angry in today's environment. We disagree fundamentally. Not a lot more to be said.
We do that with a lot of nature disasters, earthquakes, volcanos, we simply don't know when they gonna happen, and build according (no buildings near volcanos, better and better buildings earthquake resistant, instead of trying to predict when and where they happen and evacuate people, that we can't).
I would be more happy if a economist said right now: "I don't know what's gonna happen, I have no idea what to do".
Than: "We should not raise minimum salary, etc, etc.." And it turns out to be wrong.
Do you perform work in exchange for money? Then you believe your currency will hold a reasonable amount of its value until you get paid, and you might believe that based on things like the currency's historical performance, etc. That is part of your economic model, and every single person who participates in the economy has a model like that. The difference in the academic discipline is that one should be precise in one's descriptions (which is what the math is for) so if they're wrong, they have no wiggle room to make ad hoc adjustments and pretend their model was actually right. So if anyone wants to criticize mainstream economic models, the real criticism should be that they aren't precise enough.
Yes, I have/use economic models in my life. The difference is I don't use them to justify changing the life of millions of people, not even my own family. I advice them, and tell them what is in my opinion in what best to do. But I always start with "I am not a financial advisor". Talking about economy now one can be 100% sure about anything.
Now change the camera to the hundreds of "economists" making predictions without any track record, without any disclamer and with 100% certains. Not just "TV"/news economists, I live in Europe, which has 27 Financial Ministers, when there is a crisis all off them always come out announcing "measures" as they know how we get out of the crisis, that none of them imagined it could happen, but knows for sure how to get out of it...
I actually don't have anything against Krugman (that actually won the Sveriges Riksbank Prize in Economic): https://www.snopes.com/fact-check/paul-krugman-internets-eff... He never aknowledge his error, didn't even reflected why he failed this, and how to avoid it in the future, and no one asks him about it... And he is one of the "best" ones.
The news is full of this kind of "predictions" and "economic models", that are mostly wrong all the time, and then we come back and ask the same guys how to fix things now? What credibility to they have? As much as me?
Now you might think you're not applying that faulty logic here, but you really are. I don't care what some paid pundit on TV was trying to sell you; use your head.
If they would give the Nobel of Medicine to Dr. Oz, without much general commotion from other doctors: I would for sure consider Medicine a quack, or at least 90% of it, which is the one I use.
Now the questions is, are 90% of economists more close to Doctors or to astrologers?
If most of economist are quackers and I cannot distinguish them, and most of the quackers end up in Government positions and Universities: economy is quackery!
Yes. My model is:
Care about full employment more.
Free trade can have benefits but without a plan it causes permanent generational harm.
Purposefully exporting your industrial base to another country will risk societal collapse.
Supply chains are fragile.
And so on. This may seem facile but it would be loads better than the current mainstream economics models. Have you actually seen any of the current models? Do you think that working up some sort of IS/LM analysis is going to lead to better outcomes? Do you think that more partial differential equations are helping somehow?
The entire fucking premise of the thing is fucked. I wrote my economics thesis on it. I don't feel like writing a long essay here but I'll tell a small story that maybe will illustrate the concept:
Ask yourself how you'd apply the concept of rational expectations or the efficient market hypothesis to the simple game of chess. Would it be a useful analysis to put two players on opposite sides of the table and say "each agent will maximize their utility and engage in actions that are understandable as rational".
I mean you could say that but what the fuck would you even mean? What is the rational next step for a participant in a game of chess? It's taken us generations of computing power to even sort of get a handle on this, and we're talking about a completely bounded game with 64 squares and 16 players on each side. Yet despite the fundamental simplicity of the system we still have a possibility space that resists analysis and is certainly not one where a normal person could optimize their strategy in any meaningful way.
But then we shift to an unbounded competitive game with billions of participants and think there's such a thing as a rational utility optimizing strategy that agents can discern and follow? GTFO. It's a nonsensical argument.
The fact is that economic systems are complex adaptive systems that display properties of chaotic behavior, non-linear responses to inputs, sensitive dependence on initial conditions, and lock-in effects.
Someone might come along and point out that actually modern economics models do take that stuff into account and there's all sorts of people working in that context, that we've handed out Nobel prizes for research on asymmetric information decision making and all that.
Cool. And yeah the people who get the premise I'm getting at, which is that neoclassical models are fucking useless at any kind of policy level, will probably be the ones that salvage economics, if in fact it's a thing that can be salvaged.
But in the meantime, I disagree with your premise. Sometimes it's better to know you don't know anything than to use your beautiful and wrong model to override people that would otherwise be making common sense decisions, like maybe we shouldn't implement austerity measures because people will die if we do.
That's why I specifically said a falsifiable model. The one you provide here is intentionally vague, so its shortcomings can't be critiqued.
>Do you think that working up some sort of IS/LM analysis is going to lead to better outcomes? Do you think that more partial differential equations are helping somehow?
That's a common misunderstanding of the purpose of mathematical and empirical models. The point of their precision isn't to feign perfection, it's so we can measure exactly how wrong they are for comparison; that's why they are superior to your vague model.
The models used in mainstream economics are easily disproven, which is why it's so easy to complain about them. Your model can't really be disproven or even measured at all, which places it beyond reproach. That's why I reject it. In short, you don't have a better one.
We can try things the neoclassical way and see them predict economic growth and stability and then watch the world fucking burn and inequality metastasize as a transnational global elite siphons off the resources of the masses.
Oh look, we've falsified their theory.
Now we can try mine.
This is called science.
But I'm also pointing out that this line of criticism is fucking bullshit. It's like textbook for mainstream economists to say WE HAVE THE MODELS and LOOK AT MY MODELS like they're fucking something worth bragging about. Supply, demand, regressions, Edgeworth Boley boxes, you name it one thing they are never short of is models and the smug proclamations you're making here, as a kind of generic appeal to "science" and "rigor" and so on.
Except they are wrong. Like really fucking wrong. Constantly, systematically wrong. So wrong that a lot of times the analysis is "not even wrong" levels of wrong.
I'm being specific here. I'm talking about what used to be called the "Washington Consensus" and it's one of the dumbest fucking ideas ever promulgated by supposedly smart people. Google it if you're not familiar it's well documented.
It never made sense and plenty of people pointed that out at the time and yet the 1990's were dominated by these policies and we set the stage for the world we're living in now with these catastrophically misguided ideas.
So maybe every single person responsible for that should shut the fuck up and stop talking about their fucking models. Or commit some kind of ritualistic honor driven suicide even.
Instead you have Larry Summers in the pages of the New York Times STILL somehow going on about how everyone should be listening to him. And Jason Furman. And plenty of others who should never again be allowed anywhere near a position of authority.
This is why people fucking hate economics and economists and they have VERY good reason to. Maybe one day the discipline will be reborn and redeem itself but until then I plan on staying mad.
You're illustrating my point. Making edgy rants about how everything sucks is easy, and that's why everyone does it. I can make perfectly valid complaints about economic models all day; there's really nothing to it. What's not so easy is putting forth a superior solution, and supporting that solution with evidence. I don't care how much you hate the field of economics if you can't convince me that you have something better.
A superior solution is the status quo ante.
The evidence is that neoliberal economic policies caused mass misery and instability.
The analysis isn’t particularly complicated.
> I mean you could say that but what the fuck would you even mean?
Strange choice of example since "rational" forward looking optimizations rather than dumb heuristics is how we get dumb silicon to play chess in a very effective (and very human-like) manner.
I get the argument that the real world is less constrained and more chaotic than chess and that lots of people suck at playing chess anyway, but rational expectations in most models isn't the assumption that every individual in the economy is always right in their predictions, it's the absence of an assumption about the types of mistake the average human must always make in response to policy changes which was explicitly or implicitly embedded in all the non ratex models. A model of chess which assumes the opponent considers the best possible moves available to them will make fewer bad mistakes than one which assumes they always take the pawn even if the opponent isn't very good and likes taking pawns.
It's perfectly possible to argue against austerity policies with a rational expectations model or without any kind of model at all, it's just better we don't make them based on models with dumber assumptions like assuming nobody will predict that austerity will leave them with less money than before.
Models which are too sensitive to the assumption people get things right are bad, but not as bad as models sensitive to the assumption they'll never adapt to stop getting things wrong in a particular way.
Not sure you actually get my argument. I could have articulated it better.
My argument is that there is no such thing as a rational strategy in something as complex and nonlinear as a global economy.
There just isn't. It's not that some participants are more or less rational. It's that you (the implicit analyst in the discussion) have no ability to define rationality at all.
The chess metaphor is to show that in chess which is profoundly simple, the idea of a rational strategy is just barely discernable at best, and only after decades of supercomputing research.
The assumption inherent in the concept of rationality in the context of economics is the argument that one has the ability to base current strategy on the ultimate outcome. But you can't.
The outcome is unknowable and the system is non-linear, often random, and resistant to cause and effect analysis to a degree that the basic premises of rational expectations and EMH type theories are useless. Or to use jargon, economic systems display emergent behavior which does not follow in an orderly fashion from initial inputs.
The only way to proceed in an environment like this is via a heuristic approach. Which, of course, is how agents in economic decisions actually formulate strategy.
The EMH/rational expectations argument implicitly states that there IS an optimal path for agents in the system, and that while it may be difficult to discern for any given participant, the sub-optimal decisions are random and cancel out leading to the system at large acting rationally.
It's bullshit. The world just doesn't work like that. And one of the reasons is that optimal strategy isn't a concept that actually exists, the system isn't orderly. The entire premise is unworkable.
It's as much a disruption of certain classical/neoclassical models as quantum physics is to classical physics. The rules work, until they don't. And when they don't what you thought you knew is worse than useless.
Anyway, epistemological agnosticism about outcomes is arguably much more compatible with the laissez-faire positions you seem to hate the most. If responses to and outcomes from public policy are unknowable, why do anything?
The classical physics analogy fits my position so perfectly I'm pretty sure I've used it before. Sure, Newton's theory of classical mechanics has no concept of subatomic particles and quarks simply don't behave like it suggests. But just because it's oversimplification at best and fundamentally wrong in other areas, and careless physics costs lives doesn't mean "caring about stuff falling down" and handwaving about complexity theory will build better bridges than the gravity-obsessed professional engineers you've confined to the cruise ship.
The academic economists are the ones that claim to be professional engineers but keep building bridges that fall down while everyone keeps screaming they have no idea what they are doing.
The Midwest‘s jobs empty out, the former Soviet Union is plunged into violence, the top 1% capture nearly all the productivity gains from the digital revolution, entire generations are unable to house themselves, pay for school, or raise children. Yet these assholes keep saying just trust me and let’s try more “free markets.”
Who’s handwaving again?
People don't listen to economists, and it's not "free markets" that are being tried. You're raging against a system where market rights have been increasingly encroached upon over the last century, as a result of politically instituted government interventions, that according to basic economics, reduce productivity growth, exacerbate income inequality, or both.
Two major examples:
1. The rapid rise of social democracy:
https://ourworldindata.org/grapher/social-spending-oecd-long...
Which is feeding the emergence of a highly paid cadre of government workers:
https://www.hoover.org/research/140000-year-why-are-governme...
To say nothing of the rapid expansion of the regulatory bureaucracy, and the barriers to competition it creates for major private sector incumbents, and highly paid consultants/lawyers/lobbyists who know how to navigate it.
2. The rapid increase in land-use restrictions in the major high-productivity population centers, which according to many analyses, has massively increased income inequality, while inhibiting productivity growth. E.g. this study estimates that reducing land-use restrictions in just three cities: New York, San Francisco and San Jose would increase GDP by 36.3 percent:
https://www.aeaweb.org/articles?id=10.1257/mac.20170388
This finding was echoed by the White House's Council of Economic Advisers in 2016:
https://obamawhitehouse.archives.gov/sites/whitehouse.gov/fi...
Although that would be the logical response to concluding that modelling public policy outcomes is impossible so government should just give up trying, which is why the Koch brothers have invested so much money in promoting that view...
(No but seriously, rational expectations works pretty well in the limited sense of showing that economic models making other assumptions about how human behaviour expect humans to persistently make systematic errors that there's usually no justification for. It's of no value in understanding human behaviour and rather limited value in predictive modelling, especially when it emerges as the assumption that expectations are always correct in their priors, as opposed to the assumption that they eventually adapt to making random rather than systematic error. Similarly the New Keynesian paradigm is pretty good at showing that even in idealised market conditions it only takes one bit of friction to create a situation where economic stimulus results in less economic pain than letting the economy sort itself out, but if you're actually trying to predict the size of the stimulus required by estimating menu costs you're doing it wrong.
Since the New Keynesians managed to adapt their models to the Lucas critique whilst having quite different policy preferences to Lucas himself, it's also pretty clear that the allegiance to models isn't blind and economists are perfectly capable of formulating different proposals for better and for worse despite rather than because of modelling orthodoxy)
Versus, oh I don't know, getting all scientific, and try to understand how things really are, be able to make predictions, and then maybe test one's theories. Just a thought.
Is that the kind of corruption you're talking about?
An article bemoaning the flawed state of modern economics also reflects the fundamental flaw of the culture of economics-the-study: not a flying fuck is given about existential environmental dangers and the very very real role economics-the-institution played in downplaying, avoiding, exacerbating, and denying their existence.
This despite an ever growing flood of REAL science that backs it up. The non-science of economics was in denial the whole time.
I was hoping this article reflected progress. Instead, it is the same old crap.
If you can find me an intro micro class at any university in the United States which doesn’t cover externalities and use global warming as an example I’ll give you a dollar.
This is literally the fourth or fifth thing we teach students in their first class in the field.
Your comment is uninformed.
But they don't want to ruffle the feathers of the masters, they want the gravy train of getting paid to rubberstamp right wing laissez faire U of Chicago cult dogma.
Here's another fun one. Let's look at the not-really-a-Nobel-prize winners in Economics:
https://en.wikipedia.org/wiki/List_of_Nobel_Memorial_Prize_l...
Hmmmmmmmmmm. Any mention of environmentalism or issues with economic models resulting in exigent danger to the human race?
Nope, just a bunch of rich old white guys rewarding price theory and trade models.
Your "science" is corrupt to the foundations. I hope I am wrong, because your "science" has been used to marginalize the findings of REAL science for 50 years now.
You're pretending that laissez-faire economists represent the majority in the field, but that simply isn't true and hasn't been for quite a while. Your rants are about 30 years too late to be relevant.
I'll give you a pat on the head for trying your best, but your "science" has wrecked the world, and still can't see three months into the future. Externalities can't be accurately quantified by the dismal science. What is the value of a swampland drained? Of an extinction of a species? Please tell me what economics has magically awoken to value these travesties.
The endgame of labor in pure economics is still serfdom at best.
Globalization, championed by armies of economists for decades, has not just been a disaster but doomed the world by arbitraging what little environmental regulation existed into oblivion.
Even the most BASIC externality policy, the carbon tax on gasoline even for just the 20 pounds of CO2 created by currently burning gas, hasn't been instituted in 30 years.
In the 30 years of economics magically modernizing, workers have become, what 10x more productive and saw, at best wage stagnation. The rich have become ultra rich, and the governments of the world nakedly bow to their every whim.
And the "financialization" of the world. Oh please tell me that isn't the fault of economics. It has completely ruined higher education, housing, was responsible for the second-worst recession in American history, has ruined dozens of corporations such as Intel and GE.
Congratulations.
The only legitimate point you've made here is about globalization, which has actually been part of prevalent theory. The rest is an irrelevant, sanctimonious rant that I don't care about.
Okay, why hasn't a carbon tax, the most basic example of an applied cost externality been applied yet? 1 gallon of combusted gasoline is 20 pounds of carbon dioxide. It costs about 100$ to sequester a ton of CO2.
It is chemistry 101.
Show me you can do the math. At a MINIMUM for the offset of JUST THAT GALLON OF GAS, how much should the carbon tax be?
"I've had it with your irrelevant sanctimonious rant"
Okay, bury your head in sand, professor. It's not your fault. It's not the fault of your, ah, "field of study", you guys were just publishing papers about meaningless game theory and "ideal conditions" equations that had no applicability to the real world.
A bunch of right wing zealots took your little brain teasers and overapplied them to the world to justify their positions. Milton Friedman got a little full of himself and overstepped his bounds and had fun yukking it up with the fat cats. Your central bankers just throw darts at the wall, print some fiat currency, and cross their fingers, and enjoy a nice pension.
Keep handing out your "in memory of Alfred B. Nobel" prizes.
Meanwhile, real science and technology marches on, and actually improves people's lives.
Greed. Politicians are afraid to try it. But you knew that already and you're grasping at straws. Pretending that the majority of economists are against externality taxes like the carbon tax is a lie, and you've already been corrected for it. Not much more to say, but keep trying.
https://abcnews.go.com/International/11000-scientists-sign-d...
This is what I got when I type in the equivalent for "economists":
https://en.wikipedia.org/wiki/Economists%27_Statement_on_Cli...
Do you see the difference? Do you see the collective shrug? Do you see the eye rolling, the cultural alignment with entrenched industrial interests? Do you see how they position themselves as the science -> policy gateway, and basically only offer "weak sauce" solutions? Ones that anyone with any superficial awareness of politics, globalization, undermining regulation, and bending the law would recognize that those "market based solutions" were designed to fail?
Can you see that, or are you blind?
That statement is EXACTLY what I'm talking about. Worship of markets above all else. Contempt of regulation. Ok sure, it was 1997.
... why isn't there anything more recent? STRONG statements by the critical economic think tanks and departments of the land, those critical policy translators providing guidance to politicians... why isn't there a statement on par with the scientific community?
WHY?
One other thing... are you an adjunct professor or a TA? Even if you are chaired, you know about adjuncts and TAs. The slave labor class of higher education, part of the disenfranchisement of the current generation. The result of market forces to undermine the entrenched rent-seeking behavior of chaired tenured professorships.
Does anyone in your economics department care? I doubt it.
Economics in action.
"All the same, her title cannot help but evoke other, perhaps more frightening monsters—ecological breakdown, deadly pandemics, secular stagnation, rising inequality, authoritarian resurgence—that her analysis relegates to the margins when it mentions them at all."
In the section on the book by Elizabeth Popp Berman, the author of the piece lays emphasis on the way the "economic style" has been involved in "downplaying, avoiding, exacerbating, and denying" dealing with carbon emissions:
"This was the first step in the marketization of pollution rights that ultimately led to cap-and-trade approaches to ozone regulation; economists would propose the very same approach to climate for years, leading to a spectacular failure of implementation in the United States and negligible impact on emissions in Europe to date. As the Intergovernmental Panel on Climate Change recently reiterated, the costs of this comprehensive failure have been staggering."
Economics is hard, there's a million factors. Why doesn't increasing the minimum wage increase unemployment? Because increasing minimum wage has supply and demand-side effects but also because it doesn't happen in a vacuum, we don't know what happens if you increase minimum wage but keep everything else exactly the same because we've only ever increased minimum wage in the real world, where growth has steadily happened over the years, where there's a ton of other factors. Also because companies won't not hire, they'll just raise prices to compensate if the demand is still there for their products.
Every supply/demand curve just puts pressure on prices, which way the price moves and how far depends on many supply/demand curves.
A safer bet would be that people in 50 or 100 years times will be expecting people in 100 years time to regard it as astrology.
Edit: good catch(es), mobile commenting and I missed a key phrase (source of many methodologies).
RCT's were developed by psychologists (for educational purposes) and promoted by medical statisticians.
Causal inference was essentially invented by a computer scientist.
You can definitely thank geographers for GIS, and ML is basically a rebranding of statistics by Comp Sci researchers.
Game theory I'll definitely concede to economics, but political science is it's own discipline, and shouldn't be regarded as part of economics.
https://en.m.wikipedia.org/wiki/Rubin_causal_model
Pearl credits it in The Book of Why.
Plato would be surprised to learn that.
He falls more into political theory anyhow.
But to clarify my original point, the methodologies of economics are imperialistic.
At a minimum in 100 years I expect current macroeconomic theory to get as much respect as phrenology does. One of the basic failures is you can’t abstract away the underlying mechanics of societies. Changing the federal funds rate doesn’t help if your in the Zombie apocalypse movie. Granted in the real world you might be dealing with drought, soldiers, or empty oil wells rather than Zombies, but the same basic mismatch still applies.
I think we will see these fields as attempts at science while completely lacking the instruments to properly study the field so all kinds of nonsense conclusions were drawn.
Economics though is so especially perverted because of monetary incentives for economists. A somewhat correct prediction is worth so much but terrible predictions don't really harm much at all. "It is economics!?! It is stochastic, the coin came up heads, not my fault. The theory is still correct".
Or maybe in 50 years we will just have an honest econ textbook that is just a 1 page pamphlet that says "When the stock market goes down, print money. Make up everything else as you go along to justify this".
Say you have a business which employs ten staff at $10 an hour, who work at 85% capacity, and your business is breaking even. The minimum wage is raised to $11. Now, you have a choice. Either your business starts losing money and will fail, or you lay off one staffer and increase the workload of the other 9. You could also raise prices (which will increase the cost of living and nullify the benefits of increased wages across the board). Or most likely you do both - lay off one staffer and increase prices to make up for the difference in productivity. Your 10th worker is now unemployed, at a time with a great many ‘tenth workers’, and the cost of living has just increased. Sound familiar?
Look at the minimum wage of Singapore. There is no minimum wage. And observe their unemployment rate - one of the lowest of any developed nation. These statistics are closely linked, due to the above mentioned facts which have been known for hundreds of years.
Economics has been poisoned by vested interests, lobby groups and general ignorance for so long, that people don’t understand that it’s an incredibly simple and intuitive discipline. It’s just that so much profit can be made by obfuscation and promises of ‘free money’. People are extraordinarily easy to fool if they haven’t had a classical education in economics (or an ability to grasp the concepts, which many are counter intuitive).
And yes, you're right, in a vacuum raising the minimum wage would reduce demand for labour. But we don't live in a vacuum and there's a lot of other factors at play.
> You could also raise prices (which will increase the cost of living and nullify the benefits of increased wages across the board)
Yes, this is what happens in real life, most of the time. Now the real question is does the increase in price fully nullify the increase in wages?
Again, lots of other stuff to consider.
Card/Krueger have a fascinating paper on minimum wage that really launched the causal inference revolution in applied economics, based on a 1992 policy change.
For example, they say immigration doesn't affect wages. In Canada our government and top banks literally all say it does. There's also a wide body of evidence that increased labour supply does put downward pressure on wages (now whether they actually fall or stagnate depends on a combination of other factors).
Card/Krueger's work is like perfectly fitting a regression line to historical data. It has predictive power until it doesn't...
Causal inference has progressed a lot since their paper.
[0] https://projecteuclid.org/journals/statistical-science/volum...
Many, many economists cite this study to say that immigration doesn't reduce wages. And it is true, often. However it's not because an influx of workers doesn't create downward pressure on wages. It's because there's other factors which keep wages rising.
Now in Canada we have a situation where our immigration levels are so high that we don't even pretend it doesn't affect wages anymore.
https://www.baystreet.ca/economiccommentary/3472/Canada-Wage... https://financialpost.com/news/economy/immigrant-influx-is-s... https://www.bloomberg.com/news/articles/2021-11-24/immigrant...
So one of the main theories about that paper is that the immigrants were in a largely separate labor market in terms of skills/experience from local workers. When they raised the labor supply in their particular market, it increased entreprenurial activity and more labor was hired across many labor markets as a result.
I think of the economy as a biological extension of our species. Any attempt to control or regulate it can only result in inefficiency (beyond the obvious maintenance of contracts and outlawing of violence).
Another way to look at money is as analogous to energy - and like with energy, it cannot be created nor destroyed (which is different from growth of the economy as a whole due to innovation). So any time you see a policy which appears to “create value” by shifting it around, will create slightly more losers than winners, if you take a holistic view (eg, increase cost of labour, decrease comparative advantage and decrease spending on research and development).
How many counter-examples do I need to give to prove your "theortical example" false? Just one example would be enough to make your "theory" wrong, right?
How many countries do you want me to give you as a example where they RAISED minimum Wage, and unemployment LOWERED?
Do you think this is possible? If it's possible, what does it say about your "theoritical example"?
Look at any EU country after the financial crisis in the last 10 years, they both RAISED minimum wages, and unemployment FELL!
Portugal, Spain, Sweden, Denmark, Baltic Countries, Poland?
"Minimum Wages and Employment: A Case Study of the Fast Food Industry in New Jersey and Pennsylvania." (with Alan Krueger), American Economic Review 84, September 1994.
Furthermore, the important factor with is compared to your competition. I'll give an example - let's say you want to buy a gas station. You can pick from a rural location and a highway next to the city. Which do you pick? That's not enough information, because obviously the gas station that gets more traffic, the city highway one, and thus higher profits, is going to cost more.
What happens if both gas stations get a raised minimum wage? You claim that their profits will drop, and if their profits drop then so does their land value. For the existing owner this is going to be a hit they have to take, but for you, someone who wants to buy after the change, you just put the numbers into Excel and it spits out a new formula for what you bid. The new number is lower, but your new ROI is exactly the same as it was. The only thing you really need to check is if the new land value for the rural gas station is negative, if it is, don't buy it. You don't have to fire anyone.
Minimum wages produce dead-weight loss, yes. But it's minimally small dead-weight loss, and in return they give workers collective bargaining. That collective bargaining gives workers more money, which can they be spent(which will in-turn allow you to raise gas prices slightly, this and many many other side-effects occur), which then creates incentive for more businesses to expand. It's countering the dead-weight loss coming from monopolistic practices. I wish we didn't need that bargaining, but until anti-trust has some teeth it's a required hack in the system. If we could remove rent-seeking behavior, I would love to remove minimum wage with it.
I think evidence is important here. Look at the unemployment level of Singapore (no minimum wage). Now look at the same for Australia (high minimum wage). A great many jobs exist in Singapore that wouldn’t exist in Australia (such as people who conduct customer experience surveys at airports in SG) because it wouldn’t be profitable.
If you can give me a clear, direct, non vague, logically justified, and non conspiratorial alternative explanation, I’ll eat my hat.
A minimum wage is a game of power not economics.
It's counter-intuitive, to be sure, and there are vested interests who want minimum wage to stay down or be removed, but "the facts" are there and observable in the real world.
“The inverse relationship between quantity demanded and price is the core proposition in economic science, which embodies the presupposition that human choice behavior is sufficiently rational to allow predictions to be made. Just as no physicist would claim that “water runs uphill,” no self-respecting economist would claim that increases in the minimum wage increase employment. Such a claim, if seriously advanced, becomes equivalent to a denial that there is even minimal scientific content in economics, and that, in consequence, economists can do nothing but write as advocates for ideological interests. Fortunately, only a handful of economists are willing to throw over the teaching of two centuries; we have not yet become a bevy of camp-following whores.” ~James M. Buchanan, 1986 Nobel laureate in economics, writing in the Wall Street Journal on April 25, 1996
Reality doesn't care about models, though. In reality, you can increase minimum wage without decreasing employment.
If you understood economics, you would understand the absurdity of what you just said.
You’re rejecting the most fundamental basic of economics. It’s what you learn on day one. Changes to price will alter the equilibrium point and therefore quantity demanded.
For example: If I raise the price of milk, people will buy less milk. How much less they buy depends on elasticity of demand. But to say that increasing the price of milk will result in increased demand for milk is the equivalent of saying that water flows uphill.
In reality, people act against their own self-interest, people don't always act rationally, and people have limited knowledge.
This is why when we look at specific real world examples of price changes, sometimes a change to price does not affect quantity demanded. With minimum wage, a common explanation for this is that minimum wage workers have limited knowledge of the available supply of workers, and don't realise they could bargain for higher wages. In other words, there is a market inefficiency that they are unable to exploit because of limited knowledge; moving the minimum wage higher results in that inefficiency being reduced or removed, despite the workers not having increased knowledge.
We can see this at a very simple level: I have worked with colleagues who are unaware that they are being significantly under-paid for their skills and experience. Technically, the price on offer for their services is set at a higher point than what they are being paid, but due to limited information, they are not selling their services at that point.
Sometimes, even though they have the information, they don't act in their own self-interest and don't change job or bargain for higher pay, for a variety of reasons. Now, if the software firms around collectively increased pay to all those under-paid workers by $10,000, there would be no reduction in employment. There would be a reduction in profits for the software firms, because they were exploiting a market inefficiency that was reduced, but they are still making sufficient profits that they won't change their number of employees in response.
My college's entire department relied on grants largely funded by private libertarian think tanks who promulgated nonsense like removing the minimum wage. Correct economic theory and practice are cold comfort when they're still routinely applied decades after the field has moved forward allegedly. Especially as incorrect and dogmatic economics are used to justify screwing over people living paycheck to paycheck decades onwards.
I don't doubt the applications of economics and its uses, but the suffering, inequality, and excesses caused in its name (even if economics is being applied incorrectly) are where others and I angrily and perhaps justifiably ascribe economics and economists blame. One can blame politics or lobbying or what-have-you, but one cannot deny the culpability in part of economics and its (incorrect) application. What others and I rightly critique is the practice and promulgation of economics that cause suffering for the benefit of the those funding these economists.
I highly doubt I'll change anyone's mind or that there's much point in my discussing this further. Others more articulate than me have tried already.
>> Why? Because people make rational decisions across the distribution.
> Do you mean that the average consensus converges on a rational decision? From an economists perspective, where does that assumption tend to break down and what are the best mechanisms for mitigating it?
To clarify, on average people make microeconomics decisions that move a macroeconomic distributions in a measurable (and sometimes predictable) fashion.
Connecting microeconomics foundations to macro models also allows for structural estimation of unobservable parameters, but that's really a tangent.
Your question is getting more at behavioral economics/mechanism design (e.g bounded rationality), on which topic I am not deeply studied. The aphorism "the market is rational on average" seems related, perhaps?
Goes along with the equally well-proven:
"The market can remain irrational longer than you can stay solvent."
Don't worry this has no effect except for those times when people or governments are trying to become or remain solvent to begin with.
Macroeconomics is not just big amounts of money, it's also big amounts of time.
If you come up with a new working paradigm to predict macroeconomic variables, and you manage to use it to great practical success, the discipline is not going to freeze you out of publishing or whatever. You can precipitate a scientific revolution.
Of course, the vast majority of critics aren't even pretending they can do this. Instead they'll attack the status quo without having anything better to offer, as if showing the flaws of a theory provide rhetorical justification for believing whatever you want. It's like a secular version of the "god in the gaps" argument.
The reoccurring criticisms of GDP are fundamentally clueless as complaining that gasoline poisons you when you drink it, therefore energy density per volume or mass is invalid. GDP is still power but the things they complain about are applications. The whole point of trade is that you can convert funds from like gold or tourism to tractors and medicine.
Frankly they tend to be childish tantrums calling economists evil for not reflecting their sacred imperatives of how they believe the world should be.
Here is the alternative model proposed by Skidelsky:
"These deep methodological issues do not render economic knowledge utterly useless, Skidelsky suggests. But they do mean economics as we know it may have to be thrown out. [...] We should instead take a more provisional, open, and flexible attitude toward economic phenomena and treat economics as (just) another social science, rather than one supposedly purified of uncertainty by its logical prowess. Concretely, this means we should abandon dreams of an immaculate science of economic life—and stop deferring to those who claim to speak in its name. More abstractly, in place of a discipline that neglects the 'mesoeconomic' level—the institutions, firms, unions, banking systems, social movements, digital platforms, states, and other social entities that shape our behavior—Skidelsky proposes an approach 'which is more modest in its epistemology and richer in its ontology.'"
> What this argument misses is that the stakes of bad economics are often far higher than bad physics: being wrong about gravitational waves may cost you tenure, but being wrong about the minimum wage might condemn tens of millions to poverty.
Which leads me to believe that the author has a seriously myopic view of Physics and how much it permeates everyday life.
The author is not referring to ordinary people though. Let me paraphrase the quoted text:
> What this argument misses is that the stakes of bad economics are often far higher than bad physics: [physicists] being wrong about gravitational waves may cost [them their] tenure, but [economists] being wrong about the minimum wage might condemn tens of millions to poverty.