The post-autistic economics review

Politics and religion
41

I’m probably coming off as more radical here than I actually am - formalism is probably the way to go, yes, I’m just disagreeing with the assumptions of the models.

My point on the World Bank and IMF is that they were using consensus economics to create those disasters, consensus economics has some serious issues to work out before it should be taken seriously as policy advice. Obviously people are analyzing the results, but the bull in china shop nature of the whole thing is disturbing. Introspection about “boy we sure fucked everything up with our advice” other than in a “this is a fascinating problem” way seems to be restricted to Sachs, Stiglitz, and a few others.

I think the EITC is great, but I’d prefer to have a mix of competing alternatives around to end poverty. For that matter, the political economy of the EITC appears totally different; is it easier to sustain and increase it than the minimum wage, which has proven pretty politically reliable? Don’t know

On a “way beyond my expertise” note, I’ve read some interesting stuff about reswitching and how it might relate to the minimum wage. For example, in California most fruit harvesting is done by cheap imported Mexican labor. In Eric Stossler’s Reefer Madness, he talks about how plenty of automatic fruit picking machinery has been invented - it’s just cheaper to have migrant labor do it. This strikes me as rather ridiculous; you could probably hire tons of migrants to emulate a backhoe for slightly cheaper - especially if everyone did it - but no one would consider that a respectable alternative arrangement if you suggested it today. The minimum wage might be a lever to get the industry over the “reswitching” hump where the economies of scale make it profitable to automate it all.

42

Why would automation be desirable? Tell me how what you just said isn’t “We should have a minimum wage to reduce employment.”

43

Automating fruit picking would free up those people to do something more useful with their time, probably at a higher wage. Kind of like how automating an assembly line “reduces assembly line employment” in the short run, but does make everyone better off in the long run.

44

Jason, you’ve just captured the mechanic by which a (high) minimum wage eliminates jobs. Unfortunately, you’ve misdiagnosed the effect.

A high minimum wage can kill jobs in basically two ways. The most discussed one is that it causes businesses that rely on low-skill, low-wage workers (i.e. restaurants, etc.) to either reduce employment, or close altogether.

But the other way is that it causes businesses to substitute labor for capital. If I have a machine that can do the work of 10 workers, at a cost (amortization of the purchase price, plus ongoing maintenance and operation) of $150,000 per year, then that machine is only cost effective if the cost of workers is >$15,000 year (which is perhaps a rough estimate of a $6 wage, 40 hours a week, plus taxes and overhead).

But if the minimum wage goes up, there’s not necessarily some magical higher wage paying fairy-land that those 10 workers can go get jobs in. Rather, they’ll have a harder time finding new jobs than if they had quit 3 months before the minimum wage went up (because the higher minimum wage has cut employment across a variety of industry sectors, and put a whole lot of low-skill workers on the streets, looking for jobs).

Note that this assumes the minimum wage hike is enough to be significant - to make a difference in such calculations. Increasing the minimum wage by $0.25 would have the same general effect, but at such a modest level that it might not be easy to notice the effect (from amongst random economic data ‘noise’). Increasing the minimum wage by $2.00 or so, all at once, would have a noticeable short term effect on employment (case 1A - restaurants and service industries reducing headcount), a noticeable medium term effect (case 1B, some struggling low wage employers, after a period of time, can’t make it at all and go out of business), and a noticeable long term effect on employment (case 2 - industries would be more inclined to substitute capital for low-skill labor, but this takes a while to kick in. You can’t evaluate alternatives, make a decision, and install a $150K piece of equipment overnight…)

45

Sorry - meant to add a bit more on the ‘effect’ of improved assembly lines.

In general, a better assembly line for widgets is going to benefit widget consumers. Let’s say the widget is light bulbs, which everyone uses. More efficient production = lower manufacturing costs = (in a competitive environment) lower cost to consumers, who all benefit.

But, it depends somewhat on how this assembly line improvement happens.

Going back to my previous example - if a given piece of capital equipment can replace 10 workers at a cost of $150,000 annually, but the workers only cost $12,000 each to employ, then the factory has no economic incentive to install the machinery, and in fact, the cost of the light bulbs would likely go up if they did.

If a new minimum wage law increases the cost of the workers to, say $17,000 annually, then the factory would, in the long term, have the incentive to install the machinery. But the cost of the light bulbs would go up (it now costs the equivalent of $15K per worker to get the job done) - it would just go up less than if the machinery were not installed (in which case the cost would now be $17K / worker).

The long term ‘win’ of industrialization - why we are so much more prosperous now than 50 or 100 years ago, is not due so much to factories being forced to make such choices, but rather, to higher productivity per worker (more efficient techniques), and cheaper, more productive capital goods. i.e. Over time, that machine will come down in price to $75K annually, and do the work of 20 workers instead of 10.

46

My textbook has no clue whether or not minimum wage has an effect on reducing unemployment or not. But it does provide scenarios that may cause said problem. Or not. Conclusion: we’re not sure. It does say that the minimum wage isn’t very good at fighting poverty though. Shocking…;P

Largest problem: various methods of estimating various data using various models. Question: Who’s right? Answer: No idea.

47

All of the above is certainly true. The former statement is true because those who recognize the fallacies of Economics and have any talent would mostly know better than to stay in a field that would view them as pariahs. Academia shuns original thought. Meanwhile, the field of Demographics would welcome such individuals, even embrace them, so why remain in Economics?

As for the latter statement, it’s true because economists are a bunch of fools engaged in a gigantic circle-jerk. No matter how brilliant an economist is, the mere fact that he’s spending his life pursuing such a masturbatory field means he’s either not intelligent enough to be aware of it’s fallacies or is perfectly happy allowing his talents to be buried, never to positively contribute to the betterment of humanity.

It reminds me of an ex-girlfriend of mine once believed she could go to the #1-ranked sociology department to study gender and relationships and allow the facts to speak for themselves. Once she realized that not following the party line would make her a pariah, naturally she abandoned ship. She had too much sense to stick around. The hacks are those who have no other skills, and so must stick around, ostracism or no.

48

That’s all correct, but also a very short term outlook. Economies as a whole correct for that kind of unemployment… Substituting capitol for labor is known as increasing productivity (more work done with less workers) and is in almost all cases a good thing.

Yes in the short term some people hit the streets unemployed. But all that available labor gets sucked up as the productivty gains elsewhere grow the economy increasing overall demands for labor.

If one enjoys a little futurstic speculation, it’s fun to consider that eventually we will hit a point where capital can completely displace labor. Whether it’s nano factories endless cloning whatever object they were given blueprints of or robots cleaning my house, human effort will eventually be an obsolete part of the economy. And we’ll still have a pretty high employment rate I bet, in lots of meaningless silly jobs.

49

It’s probably highly dependent on the wage and job distribution at the bottom. My example was that I have a hard time believing there’s people, even mexican immigrants who can’t read, write, or speak english, who can’t cost-effectively do something more productive than pick fruit for a living, either here or in their home country.

50

And yet that’s what they do. The workers are not foolish. If another industry could produce more value with these workers, they would hire them (at a higher wage than the farming industry) and make their profits.

Note that fruit picking may not be an ideal example to use in a minimum wage discussion, as many fruit picker are probably illegal immigrants who cannot select from all available jobs on the market (some are stricter about hiring illegals). So this particular example is also heavily affected by immigration policy. Then again, those employing illegal immigrants are probably not paying as much attention to minimum wage laws in the first place.

51

Do you think that the negative income tax improves anyone’s well being?

52

Well, as far as I can tell Bethamite utilitarianism is alive and kicking in mainstream economic theory today. The indifference curve is a way of graphically representing the idea of utility in a way where the “units” of utility can be hidden (because the curves are contours of equal height on a utility slope). It may be that economists refrain from saying they know what the height of those curves is, but… this doesn’t take away the idea that under those “ordinal” numbers which they do know, there is a cardinal number, which they don’t know, but they do claim is there. Perhaps at a later stage in the career of academic economists, they learn that indifference curves aren’t valid either; but most people who graduate with an undergrad degree in econ won’t be familiar with those more advanced critiques.

This is actually a big part of what I see as the problem with orthodox economics; what academic economists do in their research is often quite sophisticated and interesting (although not always…) but that’s not what’s taught to undergrads. Undergrads don’t get taught economics as a discipline with a history, with conflicting ideas, with differing philosophies and approaches and reasons why particular approaches are accepted and rejected and so on - instead they are taught it as though it were a technical discipline, like engineering or medicine, where everyone just does things one way because everyone knows that “that’s how things work”.

And the reason that what happens in undergrad education is so important is that most people out in the “real world” who are advocating the “economics perspective” are not Nobel-prize winners or advanced economic theorists; they’re people who’ve done a three or four year undergrad degree in Economics and nothing more. Peter Costello, Australia’s current treasurer, didn’t even do that much.

As for agreeing that utility can’t be meaningfully aggregated across people, this is the first I’ve heard that that’s a mainstream perspective in economics. Doesn’t that mean, though, that having conceded this, economists agree that they don’t have anything meaningful to say about how to best manage a society for the welfare of its members?

It is a while since I did my undergrad education in economics, but are you saying it’s now standard practice to teach that the SMD conditions are not realistic, and that models that require them are not meaningful?

53

If you’re just going to assume the current situation is optimal, than yeah, I guess it is optimal. I have to disagree there. Yes, fruit picking isn’t the best example, but it does have the nice benefit of being a twofer on low wages and immigration.

54

Speaking as an undergrad econ major, a qualified yes. The models have meaning, but the fact that they are not omniscient is frequently reinforced.

EDIT: It seems to me that your problem is with statistics, not economics. In my econ class, we created a model by choosing random variables, gathering data, and using statistics to determine how much weight each variable had on the model. No one thought that the model was perfect, but it did make sense to remove unimportant variables (noise) from the model to improve its relation to reality.

I probably explained that poorly, and didn’t provide one jot of evidence, but its all I have time for.

55

I’m not quite getting what you are trying to illustrate with this example?

It looks like, if I’m reading your example right, the minimum wage hike accelerated the process of machinery improving productivity. So the machine that does 10 workers worth of stuff got more economically attractive a few years earlier than it would have due to a minimum wage hike. So a few people hit the street unemployed (new technology always does this, it’s not a bad thing) a little earlier than they otherwise would have. Where’s the big downside here?

56

Artificially forcing machine automation is probably poor economic policy, for multiple reasons.

It distorts the economy (causes money to be spent inefficiently), distorting capital spending in particular (over-emphasizing machinery that eliminates labor), and lowers wages and/or employment of the unskilled (because the excess automation of low-end jobs prevents those jobs from being fulfilled by workers rather than machines.)

There is a finite (though generally growing) amount of capital out there - if it suddenly becomes very expensive to employ unskilled workers, then a lot of that capital will be spent in ways that replace those workers with capital/machinery. This hurts the workers, and also prevents the capital from being spent in other ways that, absent government interference, would be more efficient.

57

The basic formulation of rational choice theory starts with a preference relation. Suppose there are three outcomes, A, B, and C, which someone can rank such that if A is preferred to B and B is preferred to C then A is preferred to C. Then these preferences can be represented by any three numbers such that A > B > C. The predicted choice is the feasible outcome with the largest number assigned to it. To see these numbers do not obtain a cardinal measure, simply assign any any other three numbers preserving the ordering but not necessarily preserving the ratios or the differences. Note also that we have not said anything about “pleasure,” indeed we have not invoked any underlying psychological process beyond the ability rank outcomes.

These numbers are called “utility.” The “utility function” is merely a mathematical convenience, representing preferences in such a way that calculating the preferred outcome in any given situation is relatively easy. But all of canonical consumer theory can be derived from the underlying preference relation without ever invoking “utility.” In practice, applied research typically places more structure on preferences: assuming that people want more goods and services and less work, for example. The researcher in effect specifies people’s goals. Hence my comment that “utility maximization” should instead be referred to as “goal-directed behavior.”

Since utility is not a cardinal concept, it cannot be summed over people. The standard normative concept in economics is “Pareto efficiency,” which occurs when no one can be made better off without making at least one person worse off. Utility need not be summed across people to identify Pareto efficient states of the world. Theoretical models often make normative conclusions by deducing that one regime Pareto dominates (everyone weakly prefers it) another, or invoking a weaker condition, “potential dominance,” which means that the losers in moving from one regime to another could potentially be more than compensated by the winners. Rarely, economists still fall back on “Social Welfare Functions,” which are attempts to aggregate utility across people. Those attempts cannot be rigorously grounded in consumer theory. I haven’t read much on the history of that concept, but it’s my impression Arrow’s Possibility Theorem pretty much dealt the death blow to that sort of analysis.

This is not really advanced stuff. Any first-year graduate microeconomics course will go over all of this very formally, and a good second-year undergraduate micro course will present the same ideas minus the formalism. To be honest, I haven’t taught 101 in more than a decade and I don’t recall how these ideas are presented in intro courses.

This is actually a big part of what I see as the problem with orthodox economics; what academic economists do in their research is often quite sophisticated and interesting (although not always…) but that’s not what’s taught to undergrads.

I think that’s a fair comment. But I think it’s also probably true of every other discipline. You have to learn the basics before you can get to the interesting issues at the cutting edge.

It is a while since I did my undergrad education in economics, but are you saying it’s now standard practice to teach that the SMD conditions are not realistic, and that models that require them are not meaningful?

You mean the Sonnenschein-Mantel-Debreu Theorem? I’m not quite sure how the properties of excess demand schedules in general equilibrium theory relate to this discussion. Nor do I even know what the SMD “conditions” are; it’s been quite some time since grad school. Very, very little economic modeling is done in a full-blown general equilibrium setting — there are very few models in which SMD type considerations come into play. For example, if I wanted to model, say, the competition between Sony, Nintendo, and Microsoft for console games, I wouldn’t start by writing done an abstract representation of the world economy for all possible goods and factors of production for all time.

58

I guess I’m not following. Yes, the wage hike displaced those workers but it was just a slight acceleration of something inevitable. A small hit to efficiency, to be sure, but that seems more like a nuisance than a problem.

That’s not ringing true for me. Capital seems to be to less finite than labor. We can build more of labor-replacing machine X, and open more mines to get the materials for more machine Xs, and so forth. It would be just as logical to make the flipside argument, that there is a finite amount of labor out there, so if it suddenly becomes more expensive to employ unskilled workers then a lot of capital will be spend in ways to free up those workers for more productive tasks.

59

If it merely accelerated the purchase of an otherwise inevitable piece of equipment by a month or so, then you’re right, the effect would be very small - barely noticeable.

But changing the cost of labor at the bottom end of the labor market by ~40% (i.e. a ~$2 increase in the minimum wage from $5.15) would potentially cause a variety of capital for labor trades that would not necessarily be inevitable.

Even artificially pushing up the purchase of a piece of new machinery by, say, a year, has a negative economic consequence. For instance:

I’ll assume you are a fairly typical inhabitant of geekdom (like myself), and that you replace your computer every 3 years or so. Let’s say your computer is now 2 years old. If I break into your house and smash that computer to bits with a hammer, have I hurt you significantly, economically? After all, you would have bought a new computer in about 12 months anyways - all I’ve done is pushed up the purchase a bit.

Obviously, I have in fact hurt you, because I’ve forced you to spend capital now rather than later (the capital could have been doing something else productive for you), and because, in replacing the computer, you have to accept the standard of machinery that’s on the market today, rather than that which will be available in 12 months (and will likely be much better, at the equivalent price point). There’s even a one time disruption cost, in the switch from your old system to the new one.

On a broader level, you can look at almost any economic issue and say - well the alternative is something that’s just a bit less efficient. But all those inefficiencies add up. The U.S. economy is the strongest in the world (or nearly so), largely because, for the most part we have the most free economic system (or nearly so), without quite so many of the little economic inefficiencies that governments like to pile up.

Bleh - I sound like an Ayn Rand-ian libertarian, which in fact I am not (by a long measure). And I do think that it is worthwhile for governments to implement policies that may reduce the size of the economy as a whole (or the mean income) in exchange for boosting outcomes for those nearer the bottom (or even just the median income). And I can even see a couple of points in favor of a higher minimum wage:

  1. Politically more feasible than alternatives (costs are hidden).
  2. Sets forth a sort of standard of ‘decency’ in employment.
  3. Recipient of excess wages via this mechanic may feel more that he/she has earned it, rather than gotten a government handout via EIC or similar.

I think a lot of it is a matter of degree. At $5.15, negative consequences of a minimum wage aren’t too much. Perhaps even at $7, it might be ok. But it’s not a free lunch - at some level, you start pricing low-skilled workers out of the market. They can’t climb the ladder if they can’t reach the bottom rung. My gut instinct is that while $7 or $8 might be reasonable in some parts of the country (California), that it would be overly damaging in lower-cost areas of the country (Appalachia, etc.), where employers lack pricing power/productivity to readily swallow that increase.

60

To bring this discussion out of the abstract, I’ll throw out 3 real-life examples of various scales:

  1. [Smallest scale] - We use various neighborhood girls to babysit for us once every other week or so. They’re generally 13-16 year olds, and definitely unskilled. We’ve generally paid $6 an hour in the past (occasionally $7, but not too often, I think). Missouri just hiked it’s minimum wage up to $6.xx. (I can’t remember the pennies amount.) This means we’ll have to pay babysitters $7/hour (because it sounds, and is, chintzy, to tell the babysitter you’ll pay her $6.55 an hour or something like that). Conceivably, there’s some exemption to the minimum wage for this kind of thing, but a 5 minute internet search couldn’t find any, and I don’t want to spend more time than that. As a result, a 5 hour outing for my wife and I now goes up $5 in cost, and yes, I think that will affect (slightly) the number of times we go out and the length of those outings. Not a huge deal, but annoying…

For a factory work paying their neighbor $5.15 to watch their kids after school so they can work a $12/hour job, a major increase in the minimum wage would either force them to change work habits, or likely break the law by going off-books or something like that.

  1. I ran PopTop Software for a number of years. As you can imagine, a game company attracts a lot of eager wannabes, looking to get a foot in the door, but often with VERY limited skills. Sometimes, we’d get somebody asking to work for us for free for the summer or for a semester. All other things equal, I would have accepted this sometimes - giving the worker some skills and exposure to the industry, and us some low-value labor. While there are some provisions for internships and training wages and such, they’re really complicated. The little that I read suggested that that these were very tricky to use (tightly defined and somewhat difficult to comply with). I could pay our lawyer $225/hour to parse them for me or spend a couple of hours parsing them myself (and probably inadvertantly breaking the law in some fashion). In the end, I just bagged it. I don’t think we ever used an unpaid intern, and we generally avoided paid, unskilled interns, because simple gopher work wasn’t worth $6/hour to us.

  2. Inner city employment. In many poor inner city cores, not only are jobs rare (and generally bad), but many/most of the workers are not ideal job candidates (criminal records, poor previous work history, possible substance abuse problems). In fact, the street drug trade seems to be advanced somewhat by this. According to a book I’m reading now (Blue Blood), and, to the best of my recollection, some of the stuff in Freakonomics, the actual wage earned by front line workers in the drug trade (i.e. lookouts and those making the $10 sales), is often below the minimum wage. And to get these jobs, they’re breaking the law and running a very high risk of jail time or violent death. But the problem is, there aren’t many legitimate jobs available at the minimum wage, and even for those that are available, many of these people would be unhireable. The personal note to this is that I was delivering stuff to a food pantry a couple weeks ago and had to step around an apparently homeless man to do so. I presume he had a substance abuse problem (he was dozing in the doorstoop in the middle of the afternoon). Assuming you get this guy clean/dried out, and into a shelter for 30 days, what then? His labor value is probably not $5.15 an hour, much less $7.00 an hour. There are some social services that will employ the unemployable, essentially subsidizing their wage (i.e. paying them $6/hour even though their labor value is only really $2/hour), but this is effectively a charity, and the number of such jobs are limited. But if you could get some of these workers on the bottom rung for 3 or 6 months, and they stayed clean, then their labor value would increase, and then perhaps they WOULD be worth $7 or $8/hour. But are they worth that much for their first 1,2,3 months? Not likely. And given the very high turnover rates in low-skilled jobs, a non-charitable employer has little incentive to hire 20 such workers, put up with their low output and problems for 3 months, to locate the 5-10 who really want to work and stick it out, when even that last group is likely to move on in perhaps 12 months.