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Economism—or vulgar economics

from David Ruccio

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In discussing the textbook treatment of the minimum wage, James Kwak provides a perfect example of how contemporary mainstream economics “can be more misleading than it is helpful.”

Kwak refers to the problem as “economism.”* For me, borrowing from a different tradition, it is a case of “vulgar economics.”  

The argument against increasing the minimum wage often relies on what I call “economism”—the misleading application of basic lessons from Economics 101 to real-world problems, creating the illusion of consensus and reducing a complex topic to a simple, open-and-shut case. According to economism, a pair of supply and demand curves proves that a minimum wage increases unemployment and hurts exactly the low-wage workers it is supposed to help. The argument goes like this: Low-skilled labor is bought and sold in a market, just like any good or service, and its price should be set by supply and demand. A minimum wage, however, upsets this happy equilibrium because it sets a price floor in the market for labor. If it is below the natural wage rate, then nothing changes. But if the minimum (say, $7.25 an hour) is above the natural wage (say, $6 per hour), it distorts the market. More people want jobs at $7.25 than at $6, but companies want to hire fewer employees. The result: more unemployment. The people who are still employed are better off, because they are being paid more for the same work; their gain is exactly balanced by their employers’ loss. But society as a whole is worse off, as transactions that would have benefited both buyers and suppliers of labor will not occur because of the minimum wage. These are jobs that someone would have been willing to do for less than $6 per hour and for which some company would have been willing to pay more than $6 per hour. Now those jobs are gone, as well as the goods and services that they would have produced.

That’s exactly the argument presented by Harvard’s Gregory Mankiw in his best-selling textbook Principles of Microeconomics. He uses neoclassical economic theory to distinguish (as in the figure above) a “free labor market,” where the market is in equilibrium and there is full employment, and a “labor market with a binding minimum wage,” where there is a surplus of labor or unemployment. In the latter, at a minimum wage above the equilibrium wage, the quantity demanded of labor (by employers) is less than the quantity supplied of labor (by workers). Thus, in his view,

the minimum wage raises the incomes of those workers who have jobs, but it lowers the incomes of workers who cannot find jobs.

Mankiw then supplements his discussion of the negative effects of the minimum wage by asserting it “has it greatest impact on the market for teenage labor.” Low wages, he argues, are appropriate for such workers because they “are among the least skilled and least experienced members of the labor force.”**

Only after presenting the model of unemployment created by a minimum wage and focusing on teenage workers does Mankiw admit that the minimum wage “is a frequent topic of debate” among economists, who “are about evenly divided on the issue.”***

Nowhere does Mankiw discuss the history of the minimum wage nor the determinants of either the supply of or demand for workers who are forced to have the freedom to sell their ability to work for a wage at or below the minimum wage. He is thus content, like many nineteenth-century economists, to “interpret, systematise and defend in doctrinaire fashion the conceptions of the agents of bourgeois production who are entrapped in bourgeois production relations.”

That is the very definition, in our own time, of vulgar economics.

 

*I hesitate to use Kwak’s term economism because, in my view, it signifies something different: the reduction of all social phenomena, in the first or last instance, to the economy (or some part thereof, such as the relations or forces of production). In other words, economism is an economic determinism—the positing of some kind of economic essence. The irony, of course, is that neoclassical economics represents an essentialism but of a different sort: it reduces all economic and social phenomena to a given human nature. Neoclassical economics is therefore a theoretical humanism.

**Later, he adds that such teenagers are “from middle-class homes working at part-time jobs for extra spending money.” Even less reason, then, to worry about such low-wage workers. According to the Bureau of Labor Statistics, minimum-wage workers do tend to be young. But they’re not just teenagers. In 2015, more than 2.5 million workers in the United States received wages at or below the federal minimum wage (3.3 percent of the labor force), of whom 1.4 million were 25 years or older (2.2 percent of the labor force).

***The 2006 survey Mankiw refers to was conducted only among members of the American Economic Association, the main organization of mainstream economists in the United States. It is interesting that the minimum wage is one of the few issues on which there was no consensus, even among mainstream economists. About 38 percent wanted it increased, while 47 percent wanted it eliminated entirely.

  1. January 26, 2017 at 9:32 pm

    I left my small college teaching career to finish my working years as a house husband and part time carpenter working with three other men who had twenty or more years of carpentry experience. We worked together in our own business for three years before I moved with my family to another state. During those three years we decided the three guys with about equal experience would earn the same hourly wage. We came to an agreement on my hourly wage to be less than theirs. None of us had any confidence in our ability to determine how much I produced per hour compared to them. They thought the idea of measuring our “individual marginal products” quite hysterical. We chose my hourly wage by some strange combination of “fairness, compassion, humility, and humor!”

    The notion behind the demand for labor curve – that business owners have knowledge about an employee’s marginal revenue product is humorous.

  2. January 26, 2017 at 9:48 pm

    I believe that I first coined the term ” economism” in the 1990s in my Paradigms in Progress : Life Beyond Economics ( Berrett-Koehler,1991). I used this term to describe a philosophy based on economic models and reasoning, such as in the USA. I reviewed Kwak’s book ” 13 Bankers” with Johnson on seekingalpha.com . My current title ” Mapping the Global Transition to the Solar Age : from Economism to Earth Systems Science ,ICAEW and Tomorrows Company, London,2014 is now an e-book,downloadable free from ethicalmarkets.com

  3. January 26, 2017 at 10:27 pm

    Can we please be done with these textbook supply and demand curves? The demand curve is reasonable enough, but the supply curve is misleading. It’s a good conceptual supply curve for oil fields or traditional farming, where more production can only be achieved at higher cost. It’s not a representative supply curve for modern industrial production, information goods, or labour. Which is most of our economy.

    The supply curve of labour is vertical. People don’t trade off labour for leisure, they’re either compelled to work for a living or they’re not. To the extent there’s a curve at all, it’s because women trade off wage against the cost of childcare and transport needed to access that wage.

    The supply curve of industrial goods like smartphones is horizontal. Component costs are fixed, and the factory cranks up more phones until all the people who want one and can pay the set price have got theirs.

    The supply curve of information goods is downward sloping. Bespoke research is sold to a few customers for thousands of dollars. Google’s services get cheaper the more people are using them.

    If you write textbooks or give classes, maybe worth to point out such post-Victorian supply curves.

  4. January 26, 2017 at 11:24 pm

    I have three thoughts in response.

    One, my eyes opened wide at seeing that 2006 survey on the AEA poll concerning the minimum wage, *** where a near majority – 47 percent, wanted to do away with one entirely. Alan S.
    Blinder certainly didn’t cite that statistic when he was arguing against Jeff Madrick’s observations about where the mainstream of economists was located on the political spectrum (not as conservative as Madrick lamented) in his Dec. 18, 2014 (print edition) article in the New York Review of Books, “What’s the Matter with Economics?” I don’t know where the AEA members would be today, but I believe that current opinion polls among mere citizens place support for $15.00 per hour in the 70% range.

    Second, there is no mention in David’s article or the responses so far, of the impact upon American labor markets of the vast immigration from Mexico and Central America upon the service industries’ wages, especially fast food. “Walled off” from popular experience our economists are.

    Third, don’t look now, but over the past three decades, the world’s labor market for manufacturing has been changed for good (if anything is for “good” in this age) by the addition of 2 billion or more souls from Asia and India. Professor Rogoff celebrated this progress for humanity here https://www.project-syndicate.org/commentary/kenneth-rogoff-says-that-thomas-piketty-is-right-about-rich-countries–but-wrong-about-the-world?barrier=accessreg ; however, I think he vastly underestimated the pain of dislocation and stagnant or declining living standards this progress delivered to the now rebelling working classes in the West.

    Old line economists to these unhappy Western workers: get over it, look at all the good you’ve done – over there. You would be surprised at how many Clintonistas in the US still utter this chant publicly, including my Congressman John Delaney. It’s getting tougher to run and win election on it though.

    For those wanting a good insight into the consequences of globalization on these “classical curves” in labor markets, readers can do no better than the opening chapter of John Gray’s “classic,” “False Dawn.” Appearing in 1998, it lays out the broad outlines of the revolt we are witnessing today.

  5. January 27, 2017 at 3:49 am

    I saw my first $2 Snickers candy bar at the supermarket checkout counter just yesterday.

    I earned a minimum wage as a random barefoot kid from a dirt road in California.

    Statistics were on my mind. What was the chance of me running to work faster than the school bus could get me there.

    Marginal thinking played heavy on my mind. Candy bars were 5¢ each. Twenty candy bars per hour caused me to run for miles.

    Minimum wage today in constant candy bar currency would be $40 per hour. I believe a lot of people would be running to work like I did if the minimum wage was equal to what mine was.

    I also believe there are zero economists that believe humanity will ever be as wealthy as it once was.

  6. patrick newman
    January 28, 2017 at 1:21 pm

    These demand and supply curves were the rationale for making trade unions illegal because they were ‘cartels’ corrupting the unseen hand of the labour market ensuring there is never any unemployment. There are still so called economists who object to the state setting minimum hourly rates!

  7. January 29, 2017 at 9:01 am

    Whether it’s action or human nature, each and every day people assert themselves against the assumptions of economists about both. Obvious question, why do economists continue to make assertions that are rejected in word and in action by the world around them? What’s the end game here?

    Art Laffer is my poster child for why economists continue to make foolish and harmful assumptions, and work very hard to put these into policy. Laffer holds the distinction of having never created a policy that performed as advertised and never made a prediction that was anywhere near correct. The father of “supply side” economics (Reaganomics) Laffer is Policy Co-Chairman (with Lawrence “Larry” Kudlow) of the Free Enterprise Fund and serves on the “Board of Scholars” of the American Legislative Exchange Council (ALEC). This tells you all you need to know about why Laffer does what he does. But the cork in the bottle of late is found in Laffer’s defense of Donald Trump’s economic claims that he would eliminate the $19 trillion national debt in 8 years as President. Laffer’s answer to the question, how can Trump achieve this?

    HARLOW (CNN reporter Poppy Harlow): Then how does he get to that number?

    LAFFER: By asset sales. I mean, you have all these properties, you have the post office. You have Camp Pendleton, who’s worth $65 billion there, all sorts of asset sales.

    HARLOW: Who are you going to sell it to? Who are you going to sell it to?

    LAFFER: Oh, you’re going to — Southern California beachfront property is still going very nicely. You’ve got the oil reserves you’ve got sitting there, you’ve got gold in Fort Knox, you’ve got of all these assets that can probably bring down the national debt.

    HARLOW: I’m asking, but who are you going to sell it to, to eliminate $19 trillion in national debt?

    LAFFER: Well, you couldn’t eliminate the whole $19 trillion with asset sales. But if you brought the budget back in, you got economic growth, you wouldn’t reduce it to zero, but you could make a huge hit. I mean, the tax amnesty program by itself, Poppy, if with a good tax plan, it could probably bring in $800 billion. I mean, just past taxes being paid.

    HARLOW: But he wants to cut taxes.

    LAFFER: You know, he wants to cut tax rates, Poppy. He does not want to cut taxes. He wants to cut tax rates to bring economic growth back in. He wants to bring jobs back into the United States by having a corporate tax of 15 percent versus the highest tax in the OECD [Organisation for Economic Co-operation and Development], and he is completely right on that. And by the way, so is Ted Cruz, completely right on that. Everyone else is missing this.

    Enough said!

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