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Is economics value-free?

from Lars Syll

jp-imgresI’ve subsequently stayed away from the minimum wage literature for a number of reasons. First, it cost me a lot of friends. People that I had known for many years, for instance, some of the ones I met at my first job at the University of Chicago, became very angry or disappointed. They thought that in publishing our work we were being traitors to the cause of economics as a whole.

David Card

Back in 1992, New Jersey raised the minimum wage by 18 per cent while its neighbour state, Pennsylvania, left its minimum wage unchanged. Unemployment in New Jersey should — according to mainstream economics textbooks — have increased relative to Pennsylvania. However, when economists David Card and Alan Krueger gathered information on fast food restaurants in the two states, it turned out that unemployment had actually decreased in New Jersey relative to that in Pennsylvania. Counter to mainstream demand theory we had an anomalous case of a backward-sloping supply curve.

Lo and behold!

But of course — when facts and theory don’t agree, it’s the facts that have to be wrong …

buchC6The inverse relationship between quantity demanded and price is the core proposition in economic science, which embodies the pre-supposition 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 in Wall Street Journal (April 25, 1996)

Economics — non-ideological and value-free? I’ll be dipped!

  1. Charlie ..
    October 29, 2020 at 1:23 am

    25 years and still wrong … thank you Mr. Buchanan and your employer for defending the lie.

  2. Jan Milch
    October 30, 2020 at 7:26 pm

    “The Swedish Nobel Laureate Gunnar Myrdal is the dissenting social scientist par excellence. A distinction is made between immanent and transcendent dissent. After a discussion of the nature of dissent, five lines of Myrdal’s criticism of conventional economics are analyzed: 1.
    (a) “inadequacy to reality,” misplaced aggregation, illegitimate isolation and “opportunistic ignorance”
    2.
    (b) abstracting from actual valuations of people;
    3.
    (c) the self-imposed limits of academic disciplines;
    4.
    (d) spurious objectivity
    5.
    (e) twisted and diplomatic terminology.
    Can the inclusion of all relevant variables and the explicit formulation of valuations save the social sciences? The answer is “it depends.” Myrdal’s notion of circular or cumulative causation is then critically examined. He formulated early a theory of self-interest and rent-seeking in the public sector, was one of the first to draw attention to corruption and reminded us of the importance of climate in development.”
    Paul Streeten- The cheerful pessimist: – Gunnar Myrdal the dissenter
    https://www.sciencedirect.com/science/article/abs/pii/S0305750X97100651

    • Econoclast
      November 1, 2020 at 8:02 pm

      I don’t know where to put this today, so I’ll put it here in the context of the wonderful Gunnar Myrdal and the awful James Buchanan.

      Today I discovered this most absurd argument for making love a commodity:
      https://www.researchgate.net/publication/299174888_The_Essential_Economics_of_Love

      Just one quote: “Contemplating how love is produced, however, requires
      greater reflection upon the essential nature of this commodity.”

      Really? We need to know how love is a commodity? Such economists have not only lost their senses, in my view they’ve lost their humanity.

  3. Yoshinori Shiozawa
    November 2, 2020 at 12:59 am

    David Card’s interview by Douglas Clement, Editor of “Region and Community” (Federal Reserve Bank of Minneapolis) is extremely interesting. I remarked in particular that following part concerning Skill-Biased Technology Change (SBTC) “theory”:
    (Forgive me a long citation.)

    Region: I think it’s fair to say that most economists embrace the hypothesis of skill-biased technical change as the driving force behind recent inequality trends in the United States. Do you?

    Card: Like a lot of other ideas in economics, I think that “skill-biased technical change” can be pulled off the shelf and used to explain inequality in a very superficial way. John DiNardo (of the University of Michigan) and I were troubled by the fact that there are a lot of patterns and trends in the labor market that don’t fit in very well with a skill-biased technical change explanation. We were motivated to embark on a Don Quixote mission, a noble cause that wasn’t going to go anywhere [laughs].

    One thing we pointed out, for example, is that women are lower skilled than men, if you take the fact that they have lower wages as evidence of their skill. The SBTC theory says that people with lower skills should have slower wage growth than people with higher skills. But over the 1980s, women did much better than men. It’s also the case that over the 1990s, women’s relative wages were fairly stable again. So there was a long period of stability of women’s relative wages, then a period of convergence of women relative to men that ended in 1991-92, and then stability again. That’s an important set of trends that SBTC doesn’t address. SBTC might be consistent with it; it might not be, but the theory needs a lot of auxiliary hypotheses to work.

    The same thing is true with respect to the black/white wage gaps. Blacks earn less than whites, and many people believe that the reason they do so is because they’re less skilled. Nevertheless, during the 1980s, the black/white wage differential was stable. It didn’t widen as people had predicted it might.

    Another trend that didn’t fit with the SBTC hypothesis concerns the relative wages of people with different bachelor’s degrees. There are a couple of different data sets that collect starting salaries for newly minted B.A.s. What these data show is quite remarkable. Everyone knows that the average wage of young college graduates went up over the 1980s. It wasn’t the case, however, that the gains were most pronounced in engineering or science. They were actually greater for graduates in the humanities, which doesn’t seem consistent with the idea that there is increasing demand for technically proficient, computer-savvy people.

    Another thing we looked at were wage differences across industries. Historically, economists have argued that differences in average wages across industries are related to skill differences. Wages in many manufacturing industries, like airplane construction, are well above average; wages in other sectors, like retail trade, are much lower. Those pay differences remain even after you control for the characteristics of the workers.

    This reminds me of something that would be fun to mention. A famous data set from the 1970s?the National Longitudinal Study?asked a series of questions called “Knowledge of the World of Work.” Teenagers were asked questions like: “Who earns more: a worker in a shoe factory or a worker in a steel factory?” Every labor economist knows that the steel worker earns more. (Of course, there are no shoe factories in the U.S. anymore, and not so many steel factories, so the question is obsolete.) But the wage patterns across industries were so persistent that teenagers were supposed to know about them.

    What DiNardo and I found, though, was that in the 1980s and ’90s, there was no systematic tendency for wages in the lower-wage industries (like shoe manufacturing) to fall relative to wages in higher-wage industries (like steel). The wage structure was very stable. So if you believe that the industry differentials are due to skill differences, the patterns are not what you would expect from SBTC.

    A final puzzle concerned the age structure of the increases in the relative wages of college versus high school graduates. Wages of young college-educated workers rose relative to young high school workers, but for people over age 40 or so, there really wasn’t any change in the high school/college premium.

    DiNardo and I pulled together all these facts and said: “Here are a bunch of facts about the labor market that people should be aware of and that we think should attract more research attention.” To some extent, we were lamenting the fact that research on wage determination had lost direction in the 1990s. It seemed like analysts were saying: “It’s all just SBTC. There’s nothing more to say.” We wanted to point out that there are many, many puzzles that SBTC can’t explain and that people should be working on.

    Region: So SBTC wasn’t the silver bullet that it seemed to be.

    Card: It’s definitely not a grand unifying hypothesis. I don’t know that experts in the area ever felt that it was, but to outsiders and students, it was sometimes portrayed as a unifying theory. In fact, it leads to some pretty bad predictions.

    Card is sufficiently persuasive with regards to facts. Do you know any good theoretical criticism of the SBTC explantions by neoclassical framework?

  4. Yoshinori Shiozawa
    November 5, 2020 at 4:27 pm

    There are several clear facts that are hardly explained by Skill-Biased Technology Change (SBTC). Even though, SBTB had become a standard theory in explaining why wage disparity increased after 1980’s. If we efficiently refute SBTC theory, it will be a deep blow to neoclassical economics, marginal theory of factor prices in particular.

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