Two ways of thinking about economics
econlog.econlib.org
econlog.econlib.org
Valuing unregulated markets over other priorities is a moral philosophy, one that is meaningless since there is no such thing as a completely free market. Claiming you know what the result of a huge national policy like raising the minimum wage based on the extremely limited data of the field is disingenuous, at best.
Krugman is interesting because he appears to have given up on the amorality angle. This does not make him a traitor to the field, this simply acknowledges that the field is not impartial.
The questions that economists should answer in a political context is not "why is regulation bad/good?" but instead "What is the best policy given that my values are x,y,z?"
Adam Smith saw himself as a moral philosophy specialist. He spent way more time and effort on it that economics. He saw economics as an important tangent to moral philosophy.
His most important book in his eyes was "A Theory of Moral Sentiments" not "Wealth of nations."
It's when you draw up an employment contract and expect the government to enforce it that, well, the government begins to consider what kinds of contracts it will lend its enforcement to.
The answer "Laws requiring employers to pay [higher wages, better pensions, healthcare coverage] increases unemployment because regulation has negative unintended consequences" a) is useless to policy makers and b) is a dismissal of the original moral position. It is thus a moral stance in itself. It says "I value freedom of the market more than I value your goals." I don't know if most economists have been manipulated into this role or are willing contributors, but the result is that they are being taken less seriously by society.
Economists are currently in the role of saying that the rising tide of a free market will eventually lift all boats, don't be distracted by the losers... but we seem to be reaching the limits of the effectiveness of this strategy and society seems to be uncomfortable with the casualties.
The question that generally needs answering is: "How can I reduce the negative consequences of free markets and what is the most effective way to compensate the losers?"
Not that I necessarily agree with that position, but saying that minimum wage raises unemployment isn't (necessarily) being dismissive of the moral issues behind minimum wage. It's just saying "it won't work out the way you want".
Yes, unemployment might increase in the short term, but if cheap workers can't fill a need then people will look for alternatives like increased automation.
For a concrete example, machines can automatically dispense correct change, yet due to low wages this is fairly uncommon.
PS: To make this work we long term we need a minimum income, but that's a side issue.
WHOA! Non-wartime! That's some amazing historical revisionism there.
Spiraling energy costs, an expensive war abroad, skyrocketing interest rates, the final decoupling from the gold standard had a lot more to do with inflation than the minimum wage.
How do both those alternatives play out when considered in terms of total take-home wages and the split of revenues between labor and capital?
When you are a hard core Libertarian or Objectivist even a modest tax increase or bump in CAFE standards seems like creeping communism to be resisted at all costs.
When I started looking at actual data across many countries I really couldn't see a correlation between my beliefs and the outcomes I desired. Many countries economic success or failures seem related to other factors outside the tax or regulatory regime.
E.g. Silicon Valley is a bastion of innovation but also high is costs, taxes, and regulations, with a politics structure that is essentially a basket case. That's because the nexus of people and network effects and culture are more important than the tax regime unless said regime is crazy bad.
Ergo, Krugman is somewhat right -- it's about people and structure (his work on international trade and industrial nexii).
Too much obsession over taxes and regulation "amount" rather than on what's contextual right is what's wrong with economic debate today.
Many classical and neoclassical economic propositions are of a fundamentally epistemological nature, not strictly positivist. Such as the reasoning that, if without interference person A does action X at time T, X may be taken as the action they most preferred to do at time T, as if it wasn't then why would they have done it? In which case any interference with their taking of action X necessarily produces an inferior outcome in terms of their preferences at time T, as they're forced to take an action other than their most-preferred action. In this sense a person's preference for an action is defined by their taking of that action over all other possible ones when not interfered with, and as a definition its validity is a matter of epistemology, not something subject to empirical analysis. The Austrian school uses this ordinal form of utility as its basis, building upon the idea that interfering with someone's free action is the one thing that can clearly be shown to be undesirable as above.
The Chicago school, on the other hand, also incorporates a quantitative form of utility, to allow for interpersonal utility comparisons. This requires some epistemological assumptions, for instance that preferences don't change over time or their rate of change follows a particular mathematical function, or that if someone buys 3 apples for $30 they value each at $10, rather than e.g. the first at $13, the second at $2, and the third at $15. Austrians dispute the validity of any such assumptions, and hence reach different conclusions.
These epistemological foundations are matters of logic/philosophy, and hence no more amenable to empirical analysis than a proposition like 'abortion is immoral'.
Modern economics tends to ignore epistemological issues, and instead focuses on finding the best way to maximise particular empirical metrics, without going into detailed study of the epistemological and philosophical validity of the metrics in question. So it's important to distinguish between economics as a tool for predicting and assessing the effects of particular phenomena on particular metrics (econometrics) and economics as an epistemological approach.
Polemicists have the job of explaining meaning to others while persuading them. I will show you various pieces of data supporting my thesis and my thesis will give you understanding of how and why things work. If you write an opinion column, this is your job.
This is not the same at all as trying to minimize assumptions and simply show relationships.
I'm well aware of the differences between the Chicago and Austrian schools, but I think this quote is a dubious assumption because it assumes human beings are primarily rational creates that act according to rules and reason. It's actually possible for people to take actions which they don't prefer to take.
Praxeology IMHO is thoroughly unscientific, contradicts modern neuroscience and psychology with many of its assumptions about people, and a dubious exercise, and its use by Austrians to argue against public policy actions extremely weak.
To me the purpose of economics is to study the real world as close as you can, and make predictions that can be used to not only understand our condition or future problems, but to make adjustments so as to create better outcomes.
It is not to provide an ideological, philosophical basis for those actions, or for no actions at all. It's the difference between Medicine and Bioethics.
Both the Chicago school and the Austrian school start out with assuming the outcomes -- a free market s what's desired, and produced the best outcomes. They they work backwards using different methods to justify their conclusions.
I prefer not making the assumption that the unfettered free market produces the best outcome always. For example, when externalities are not priced in for things human beings care about in the abstract but not in their day to day preferences, like the long term ecosystem, or the health and welfare of future generations, I prefer a system of economics that works on a case by case basis, looking at problems, and figuring out experiments to run or course corrections.
If economics is unpredictable, or the consequences of actions unknowable it also means the consequences of inaction or the 'free market' are unknowable, but that's no basis for siding against government action. We live in a complex evolutionary system, and it may be the only way to get out of local optima is to run lots of experiments that fail, including government intervention.
That's why I think a mixed economy is a more evolutionary stable strategy than a pure free market or marxist one.
I also think it's more moral than either of those.
Perhaps you might mean that a person's preferences might change over time and depending on the situation (e.g. I might prefer today that I save more money tomorrow than I would actually feel like saving tomorrow, or I would prefer not to become a heroin addict, etc.) -- but I can't see how a person can take a decision that is not preferred at the moment s/he is taking it (except perhaps in the case of being indifferent and picking a decision at random)?
It doesn't assume any of these things. It defines preference based on the action an individual takes when not interfered with, and builds a value system based around taking this form of preference as a "good". You're assuming the existence of some absolute concept of "rationality" by actions may be judged; Austrian economics does not make this assumption.
>It's actually possible for people to take actions which they don't prefer to take.
Not if you define preference as what is demonstrated by people's action at a given point in time when not interfered with. Which is what the Austrians do. If you want to give a different definition of preference, that's fine, but the issue of what definition of preference forms the best basis for a value system is a matter of philosophy, not science.
>Praxeology IMHO is thoroughly unscientific, contradicts modern neuroscience and psychology with many of its assumptions about people
Praxeology treats the acting individual as just that: an individual, a black box. Not a collection of competing mental components. Which model of the mind to use is a matter of philosophy. We could for instance treat the mind as nothing more than a deterministic product of atoms, neurons and the like, but then we'd have to make our models much more complicated. It's a matter of philosophical debate which part of the brain and its experience constitutes the mind, and the Austrian approach is to sidestep this issue by just treating the person as a black box.
>Both the Chicago school and the Austrian school start out with assuming the outcomes -- a free market s what's desired, and produced the best outcomes
This is simply not correct. They work forward from first principles to reach the conclusion that a free market produces better outcomes, because how they define "better outcomes" is based on the first principles they have chosen. An Austrian thinks a free market is good because a free market minimises interference with people's freedom of exchange, and Austrians define interference with freedom of exchange as a fundamental negative. A socialist may think a free market is bad because it leads to unequal distribution of wealth, and the socialist views unequal distribution of wealth as a fundamental negative. The issue of who is right about free markets, the socialist or the Austrian, cannot be settled by empirical methods, as it's a matter of philosophy: the Austrian and the Socialist have fundamentally different notions of what is morally good/bad.
>when externalities are not priced in for things human beings care about in the abstract but not in their day to day preferences, like the long term ecosystem, or the health and welfare of future generations
The importance of the condition of future generations is again a matter of philosophy. For an Austrian, its importance is determined by the consideration for it that is implied by the actions of the current generation. For an extremely passionate environmentalist, the living conditions of generations thousands of years in the future might be viewed as more important than the preferences of the current generation. These valuations are based on the philosophical underpinnings of the belief systems of the individuals in question, not on propositions subject to empirical verification.
>If economics is unpredictable, or the consequences of actions unknowable it also means the consequences of inaction or the 'free market' are unknowable, but that's no basis for siding against government action.
The use of ordinal forms of utility in economics is meant to account for this. E.g. if an economist argues that action Y is bad by virtue of stopping person P from doing action X, which they'd otherwise do, then it doesn't matter what the consequences of action Y is, as their argument against Y is not based upon its predicted consequences.
>I also think it's more moral than either of those.
This is almost tautologically true. Unless you have the same moral foundations as a pure free marketer or a Marxist, you're not going to view their approaches to economics as more moral than one based on your own moral and epistemological foundations.
This definition of "preference" and the assumption that it is equivalent to "good" is essentially just recasting the rational actor model from a (demonstrably failed) empirical model into a moral axiom; that is, rational choice model posits that there is an underlying utility function that people efficiently maximize through their uncoerced choices, whereas your description of the Austrian school's position takes this demonstrably disproven, though in some conditions still useful empirical model, inverts it by assuming, whether or not they are maximizing any utility function, that people's uncoerced choices define a good, and proceeds from there.
While I think this is certainly accurate of some Austrian, it takes those who follow it out of the domain of economics-as-a-science and into the domain of a particular moral philosophy detached from science.
> An Austrian thinks a free market is good because a free market minimises interference with people's freedom of exchange
Actually, by your definition, an Austrian holds, as a first principle, the free market as a good. There can be no "because" there, it is simply a moral axiom for Austrians that the behaviors that people make in free market conditions define what good is.
That's exactly my point! Which is why arguing against an Austrian position (or for that matter a Marxist one, or one from any economic school based around a specific moral system) can only be done philosophically, not empirically, as their core tenants are moral axioms, not testable empirical propositions.
I believe many/most/all Austrians would agree that economics IS detached from science.
http://www.nobelprize.org/nobel_prizes/economic-sciences/lau...
Both Krugman's quoted passages acknowledge that conventional economic theory would tend to suggest that minimum wages reduce the size of the work place, but both labour economists' theories of labour supply and some empirical work suggests that this isn't universally the case, especially where increases are small. Neither say very much on the subject.
But the 1998 one is attacking a book which (according to Krugman) suggests that compelling employers to pay more - 57% more in the example - will reduce welfare costs and have no adverse effect on employment
The recent article attacks a more general view that wage reduction is essential to get the nation's economy out of a rut, and is particularly approving of quasi market-based mechanisms to raise minimum wages (trade unions and Walmart's justification in terms of efficiency wages)
It's the political line of argument rather than the use of economic theory that has changed (and given that Krugman doesn't exactly pull his punches, it's not surprising that one article reads almost like an attack on the other). He's not having to turn his back on economic theory to argue that the US would be better off if minimum wages were a little higher, and it wasn't slavish devotion to economic theory that caused him to contest what he described as a "moral" argument for wage regulation over redistribution from Pollin and Lice.
Then economics absolutely needs to stop being called a "science".
We need a Universal Basic Income and then to get rid of welfare and minimum wage and such.
But seeing as that won't happen soon, there's a very interesting positive aspect to minimum wage: People working for only social reasons such as volunteers or unpaid apprenticeships have a different psychosocial relationship to their situation than those who are paid an hourly wage. It's far better to be paid nothing than to be paid 10¢ an hour. Paid nothing means everyone acknowledges that you are volunteering your time, and it doesn't mean you are worthless. Paid 10¢ means you are worth 10¢. This has been studied by folks like Dan Ariely.
So, a minimum wage requires that people's time have a dignified enough value put on it, and anything less you must work with them on a volunteer, social basis.
I still think it has problems and UBI is better, but this issue of dignified pay should be appreciated.
Sumner doesn't seem consider how the minimum wage interacts with Earned Income Tax Credit and that the minimum wage is essentially unchanged since that era - what was high then could be low now. "How much?" matters.
There is also new theory since then, much more empirical evidence than the few flawed studies, and of course it is OK to change your mind.
I suspect the debate ( such as it is ) between the Monetarists and... whatever Krugman is now is the most productive thing in economics. It's about what and how we measure.
The last sentence is the money shot. "Krugman is...the economist for people who hate economics". Just my guess here, but I think that has much more to do with whether or not the Efficient Markets Hypothesis holds over what domains. In a post-Lehman world...
My interpretation of Krugman's interpretation ( see the error bars grow without bound in this sentence ) is "won't happen."
Krugman's narrative is ( and it is correct in his dimension ) that the privileged want poor policy for reasons of epistemic closure or something like religious ( deontological ) reasons. This provides an 'oppressor' platform for the polemics, which is what makes him famous.
All in all, not a bad suite of tradeoffs.
Couple 'a $500 words there but space is limited... they are also hard to substitute for, and they're precise.
For instance if he previously saw the liberals holding a disproportionate amount of power to sway public opinion, he may have attempted to re-balance the situation.
More recently, he may see conservatives using economic rhetoric to push their own agendas, and follows his previous pattern of re-balancing the playing field.
In both cases, he may be subtly promoting his own view, just in response to a changing audience.
Of course my opinion is just a projection of my own perspective.
Put another way, if one were to ask an economist how does the price artificially increasing the price of X affect the quantity demanded of that product, an economist would easily be able to answer without much hesitation or inquiry into the product X. I think a higher burden of proof should be placed on those claiming that artificially increasing the cost of labor doesn't affect quantity demanded. Since there are never any real controlled experiments in economics (states or municipalities all have their own history and other factors at play), you have to rely on theory.
Someone can agree for an increase in the minimum wage, but at least be honest about it being based on a moral trade-off between decreased employment opportunities for those whose labor is not above the current clearing rate and the benefit to others who would keep their jobs and enjoy higher pay.
But it isn't only the experiments that are less reliable in economics than in physics. The theory is less reliable too. (For two reasons. Firstly, because it's so hard to do experiments whose results you can trust, the evidential basis for the theory is weaker. Secondly, because people are more complicated than, say, electrons.)
How does this cash out in the case of the minimum wage? We have some empirical evidence suggesting that minimum wage increases don't increase unemployment much if at all, but we can't trust it too much for the usual reasons (not enough data, too many confounding factors, small effect sizes). And we have some simple theoretical arguments suggesting that minimum wage increases should increase unemployment quite a bit (supply and demand from Econ 101), but we can't trust those much either because the real people involved in the labour market are not the perfectly rational perfectly selfish perfectly spherical agents with which Econ 101 is concerned. It simply isn't true that increasing cost always reduces demand: there are multiple mechanisms by which in particular circumstances it can do the reverse. It simply isn't true that the labour market behaves exactly like the market for, say, corn. People are complicated.
So I don't agree with what I take to be your argument about the minimum wage, namely that because we don't have great empirical evidence we must rely on theory and firmly believe that increasing the minimum wage will severely increase unemployment, and that this means that an honest supporter of minimum wage increases is obliged to accept that their preferred policy will increase unemployment substantially.
Incidentally, I'm not even so sure about that pebble thrown into the ocean. The sea-level rise is a tiny effect, after all, so we can't just ignore other tiny effects. For instance: a slight variation in the shape of the earth, with less mass on land and more on the ocean bottom; a tiny change in ocean currents, which might change erosion patterns and change the volume of the oceans one way or another; maybe some funny effect via disturbing local ecosystems and ultimately affecting human food supplies a little. These are all really small, but so is the obvious effect of throwing the pebble in.
For that matter, if you're on a boat when you throw the pebble in, the pebble goes from displacing its own mass of water (thank you, Archimedes) to displacing its own volume of water, which is smaller, so the immediate first-order effect is that the water level goes down.
http://3.bp.blogspot.com/-4xn6oZYpEMI/VYLQtGGFhiI/AAAAAAAASZ...
http://4.bp.blogspot.com/-zvNRPOtoIjM/VYLQ1-n-CAI/AAAAAAAASZ...
When free market is interrupted by state, union power or lack of workers with a special skill, the nominal wages rise. But the situation for the workers will stay same, because of the Iron Law of Wages constrain. There will still be some days left end of the month, when he runs out of money. Because when wages rise at a local market, the housing cost will rise next at this market.
This can be seen best in Switzerland where wages, taxes, and housing costs differ in every canton. Similar if you compare housing costs and wages in upper state New York, and in NYC. Housing costs and taxes will rise, if wages rise. Pushing those with the lower wages out of the market of better housing.
So if a state wants that minimum wages or unconditional income grants have a positive effect on the people, then the same state must invest in social housing first, to lower the housing costs, before raising wages.
I don't want to be inflammatory but pretty much all economic blogs are intellectually dishonest junk where economists, Nobel Prize winners and all, write simplistic pop-economics supporting the political leanings of whoever funds their research.
I'm somewhat bothered that these blogs, make it to the top of HN. Surely smart people should be bothered by the intellectual dishonesty, even if it might reaffirm their beliefs.
Economically, the US right is very vocal and ideologically clear about its beliefs, economic liberalism. The politicians, pundits and supports cite fundamentals quite a lot. The efficiencies and incentives of free markets, with policies relating fairly directly to economic textbooks (of agreeable persuasions).
I don't want to stigmatize by calling it "economic ideology" as this implies an irrationality that I don't mean to imply, but ideology is more or less what I mean, sans value judgements. Its unfortunate that has become a bad word.
This writer is calling it "economistic" and means a strong expectation that the basic economic models like supply and demand are predictive of the real world effects. So, he expects the minimum wages to result in unemployment. This may be the real rationale for him, but I think the wider political weight of this is only there because it dovetails with other (US-sh) freedom concepts. IE, I think the idea that two people can decide on a wage contract without outside intervention has an appeal beyond just it's economic effects to many in that political camp.
In any case, my point is that this kind of theoretical grounding and economic fundamentalism (again sans-value judgment, I just mean they often tie policies to theoretical fundamentals) is something in recession in other places and political camps. The big examples are the bastard descendants of communism, arguably the most confidently touted and complete economic-political big-T Theory in history.
For example, take "labour-socialism" the big central-left camp in europe. Once upon a time, they believed in labour unionism a variant of socialism. Not just as a means to an end, but as a fundamentally grounded ideology. The way to make industry thrive, create prosperity for workers, etc. It still exists as a real-politic hodgepodge of policies and rhetoric roughly espousing old labour values, but not really labour unionism ideology. It's not comparable to the economic liberalism of the US right.
The Chinese communist party was once… communist. 5 year plans. means of production, the whole shebang.
The remaining left in Europe and elsewhere is very non theory based. The have strong a social and economic goals and values, but not really a big theory about how everything works best. There is no consistent, underlying economic theory like the US right has. It still holds a lot of socialist values and even
We get back to words like idealist or fundamentalist that have negative connotations, an interesting thing in itself. I think that's what this article is arguing for, essentially. Fundamentals say minimum wage increases yield unemployment. Trust in the fundamentals.