Carpe Diem

Quotation of the day: James Buchanan on the minimum wage

“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

41 thoughts on “Quotation of the day: James Buchanan on the minimum wage

  1. A partial equilibrium model is not a general equilibrium model, which many technocrats don’t seem to understand. There are hundreds of major dynamic forces pushing and pulling a large economy.

    A 10% rise in the minimum wage (e.g. $10 to $11) may increase real economic growth 5% (e.g. 2% to 2.1%), although a 50% rise in the minimum wage may decrease real economic growth 20%, etc.

    I stated before:

    The higher wage attracts better workers, with higher reservation wages, to increase productivity.

    Minimum wage workers have high marginal propensities to consume. So, a higher minimum wage increases consumption.

    Only a portion of the higher minimum wage may be passed along in higher prices, because portions will be absorbed by “excess” wages of other workers and “excess” profits.

    Weak or poorly managed firms will lose business or fail. However, stronger or better managed firms will gain their business, and also gain from the increased demand.

    • PeakTrader apparently doesn’t understand the difference between voluntary wage scale changes and legally mandatory ones.

      It’s a shame that this needs to be repeated so often: every time Congress attempts to repeal the Law of Supply and Demand, it instead re-enacts the Law of Unintended Consequences. Every single time. Without fail.

      • Me says: “PeakTrader apparently doesn’t understand the difference between voluntary wage scale changes and legally mandatory ones.”

        Me obviously doesn’t know when he or she makes an illogical and false assumption.

    • “Only a portion of the higher minimum wage may be passed along in higher prices, because portions will be absorbed by “excess” wages of other workers and “excess” profits.”

      Those are two imaginary terms. At best excess wages is an accounting term and excess profits is an ideological one; not to be confused with meaningful, scientific analysis. I would quickly eliminate them from my vocabulary if I were you lest I be laughed at in conversations with intelligent peers.

      “Weak or poorly managed firms will lose business or fail. However, stronger or better managed firms will gain their business, and also gain from the increased demand.”

      Corporatism as understood by the Left, Ladies and Gentlemen. The concentration of market share, when the result of Progressivist Economic Ideals, is perfectly acceptable.

      And utterly stupid.

      • Magilson, I think it’s “utterly stupid” to assume an economy is static, over time, including ignoring the increasing profit to GDP ratio and the expanding income inequality gap (between high-wage earners, who have low marginal propensities to consume, and low-wage earners, who have high marginal propensities to consume).

    • The higher wage attracts better workers, with higher reservation wages, to increase productivity.

      In that case, private employers would voluntarily pay higher wages to attract better workers, without a government-mandated higher wage, that comes with the threat that it will fine/jail any employer who doesn’t comply. Besides the fact that minimum wage laws violate the laws of demand/supply, they also concede power to the government to tell private employers what wage they can or cannot pay. And those laws violate my rights as an employee to offer to work for whatever wage I find acceptable, especially when it is below an artificially mandated wage.

      • “In that case, private employers would voluntarily pay higher wages to attract better workers,…..”

        Bingo! And here lies the answer to why the majority of workers make more than minimum wage. Everyone crying about minimum wage go kick rocks. Keep raising minimum wage and it will converge on the point that it will cost less to design a robot that can do a better job than the punk on their phone.

      • Dr Perry says: “…private employers would voluntarily pay higher wages to attract better workers, without a government-mandated higher wage…”

        Then why do so many people reject jobs that pay too little?

        • How many people is that, Peak? How many highly productive people are holding out for $7.25/hr and remaining unemployed when they are offered $6.75/hr?

          • Ron, my original statement was how a small rise in the minimum wage may increase output slightly through another mechanism, i.e. a consumption-employment cycle (where consumption generates employment and employment generates consumption, etc.).

            The positive income effect, of a higher minimum wage, may be stronger than the negative employment effect.

          • “Ron, my original statement was how a small rise in the minimum wage may increase output slightly through another mechanism, i.e. a consumption-employment cycle (where consumption generates employment and employment generates consumption, etc.). ”

            this analysis seems to miss the point that increase price reduces demand.

            wages are just another price.

            if your paycheck goes up, sure, maybe you spend more, but if labor costs go up, marginal businesses go under and marginal workers are laid off from even successful businesses.

            even if businesses keep ALL their employees and none are driven under by such a hike (which is all but impossible) then profits drop, investment drops, and less money is saved which increases the cost of capital. alternately, the price of goods rises which has a real effect on consumers.

            this seems like magical thinking peak. that money to pay extra wages does not just appear. it has to come from somewhere. pay increases that do not correspond to productivity increases are, at best, zero sum and quite likely negative sum for economic output.

            you cannot price fix your way to prosperity.

          • Morganovich, there’s nothing “magical” about putting an idle resource, i.e. saving, to work, i.e. consumption, to boost production, in a recession/depression and disinflation/deflation environment.

          • Peak: “Morganovich, there’s nothing “magical” about putting an idle resource, i.e. saving, to work, i.e. consumption, to boost production, in a recession/depression and disinflation/deflation environment.

            But there IS something magical about the notion that you can put an idle resource, i.e. labor, to work, by artificially raising the price of it.

        • Peak: “The positive income effect, of a higher minimum wage, may be stronger than the negative employment effect.

          There is absolutely no evidence of that.

          Why do you have so much trouble understanding that a minimum wage is, and always has been, a political tool? To believe otherwise is to believe that central planners can have better knowledge of prices than the people who actually make exchanges – a ridiculous notion.

          But in any case, you didn’t address my question.

          • Peak does not understand that people who take minimum wage and work it past their teens put minimum work into their career choice. That also shows in their work ethic. They input as little effort into their job as they do improving their income. An increase in minimum wage means they get paid more for the same effort.

            Minimum wage increase will not increase an employees production. If it did, it would be for about a week at best. Then the old habits will return

    • The Davis-Bacon Act was passed to recognize exactly the benefit you mention — that imposing a wage floor would attract better (i.e. white) workers.

      • This was meant to be a reply to peak trader who suggested that “The higher wage attracts better workers, with higher reservation wages, to increase productivity.”

    • peak-

      “Minimum wage workers have high marginal propensities to consume. So, a higher minimum wage increases consumption.”

      they also have a lower marginal propensity to invest which slows future growth.

      this is just keynsian mistaking of the map (gdp) for the terrain (the economy).

      it’s also not likely to be true.

      if your labor costs rise 10%, that decreases profits or investment or causes an increase in prices. it has to come from somewhere. just because that money is spent by workers does not mean you get an increase in gdp. it is at best zero sum and likely negative sum, particularly over multiple periods.

      price fixing does not create growth.

      further, it reduces the marginal propensity to hire.

      wages are just like any other price. if they go up, fewer units are demanded.

      so you get fewer workers, more unemployment, and less investment.

      higher wages also trigger a shift toward automation further reducing demand for workers.

        • I would prefer that central planners quit meddling so recession/depression can end. Raising min wage won’t end it. More spending won’t end it. More counterfeit money won’t end it.

        • peak-

          that’s a complete straw man.

          your argument is that raising prices for labor can stave off recession.

          this is not only untrue, but a terrible idea even if it were.

          try thinking about this from the level of the individual.

          you probably have some savings. i’m sure i can find someone to spend it for you. sure, you might prefer to use it for other things, but hey, we need growth NOW right?

          is that going to make you feel better off?

          even just depleting your savings will increase the cost of capital for others and reduce investment (also a part of gdp and critical for future growth)

          you are using a whole set of false assumptions here.

          wealth transfer does not generate growth.

          taking money away from those who use it best (and are therefore accumulating it) and giving it to those who use it less well is not a recipe for growth. it’s a recipe for stagnation.

          you question about unemployment does not make any sense.

          i presume that you do agree that when price rises, units demanded drop, yes?

          if so, then how am i more likely to be unemployed after the price of labor is artificially increased?

          if we moved the minimum wage to $200/hr, unemployment would soar, yes?

          you seem to be arguing that water flows uphill.

      • Steven Hales says: “I believe in unicorns, do you?”

        No, but I believe when you throw that tub of water over the side of the ship and it ends up on your face, you’d be surprised.

  2. “presupposition that human choice behavior is sufficiently rational to allow predictions to be made..”

    Our Congressmen have disproved this presupposition a million times over…

  3. “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.”

    A lot has changed since 1996.

  4. Mark J. Perry (quoting): “The inverse relationship between quantity demanded and price is the core proposition in economic science”

    Well, not quite. While it is an important principle, it is not necessarily true in all circumstances, nor do exceptions equate to a “denial that there is even minimal scientific content in economics”. The Cosmos is a complicated place, and even the Theory of Gravity is anomalous in certain realms.

    Generally, a minimum wage will distort market forces. However, if the floor is near the natural floor, then there may be little distortion.

    More pertinent, the assumption of a perfect relationship between quantity demanded and price assumes a perfectly fluid market, and that is rarely the case. A common situation can occur when a locality has only one or a few large employers, so that employees can’t market their labor effectively. This is common in factory towns in newly industrial societies, for instance, or in agricultural oligarchies in pre-industrial societies.

    Nor do employers always make decisions with the best information or even based on economic criteria. Ethnic discrimination is a common example of this: Employers may have false preconceptions that influence their decision, or have a fear of being ostracized, or they may simply not care whether it will cost them money.

    • zach-

      i do not see the point of your statement.

      if macy’s has too much inventory after christmas, they put it on sale and get it moving.

      if a town loses an employer, the best way to attract a new one is cheap labor (this also makes it less likely that they WILL lose employers). if we put in a wage floor that prevents this, then unemployment will persist. this dos not protect workers, it harms them.

      implicit in your argument is the assumption that somehow a distant bureaucracy knows better than local workers and employers what labor is worth and theat they can find a clearing price better than the actual participants in the market.

      this seems pretty implausible.

      you then go on to try and establish a straw man about markets being perfect. the whole point of markets is mistakes, consequences, adaptation, and great efficiency as a result.

      you are somehow assuming that government can do a better job. of this, there is no evidence. you seem to assume that the “fixes” will be correct in a durable fashion and performed for the best of reasons.

      given that the original reason for minimum wage laws WAS discrimination (to prevent cheap black workers from taking white jobs) and that they were intended to break, not enhance a market, this seems a highly dubious claim.

      for ever bad reason a business might do something, there are 5 reasons the government might and because the government has coercive power that a business does not, the effects are greatly amplified.

      you point about a business simply not caring if it costs them money seems highly suspect. such issues tend to be self correcting. if a business does not care about profit, it tends to fail.

      the same cannot be said of government programs.

      much of your argument seems self defeating. if the hike is “near the natural floor” and creates little distortion, then why bother? i thought the whole point here was to have some effect. if it is big enough to have significant effects, then it is distorting. more pertinent is the assumption that the “natural wage floor” as you term it is a constant. it’s not. it moves all the time based on supply and demand.

      but a minimum wages does not have this flexibility.

      if the equilibrium wages is $8 and we set min wage there, maybe no one notices. if the natural wage rises to $10, still, maybe they do not notice. but if it falls to $7, suddenly you get artificial unemployment caused by that minimum wage.

      people who would work for $7 cannot, employers who would hire at $7 cannot. people get laid off. businesses fail. this has the effect of deepening recessions and widening the divide between those who have jobs and those who do not as instead of X jobs at $7, we get (X-n) jobs at $8.

      markets are not perfect. but they work a helluva lot better than top down central planning.

    • Z: “Generally, a minimum wage will distort market forces. However, if the floor is near the natural floor, then there may be little distortion.

      And if the floor is below the natural floor, there is no distortion at all. Great point!

    • Z: “More pertinent, the assumption of a perfect relationship between quantity demanded and price assumes a perfectly fluid market, and that is rarely the case.

      No one has assumed a perfectly fluid market. How is that pertinent to minimum wage?

      A common situation can occur when a locality has only one or a few large employers, so that employees can’t market their labor effectively. This is common in factory towns in newly industrial societies, for instance, or in agricultural oligarchies in pre-industrial societies.

      Not sure what you mean by “market effectively”. Workers in a a factory town in a newly industrialized society come from other employment or subsistence
      that they consider worse than the factory jobs. What’s the problem?

  5. Zachriel: the assumption of a perfect relationship between quantity demanded and price assumes a perfectly fluid market, and that is rarely the case.

    morganovich: i do not see the point of your statement.

    It’s rather straightforward. There is normally friction that impedes and delays the pricing signal. The demand curve is a simplification.

    morganovich: if macy’s has too much inventory after christmas, they put it on sale and get it moving. if macy’s has too much inventory after christmas, they put it on sale and get it moving. if a town loses an employer, the best way to attract a new one is cheap labor (this also makes it less likely that they WILL lose employers). if we put in a wage floor that prevents this, then unemployment will persist. this dos not protect workers, it harms them.

    Roughly. It’s a simplified model that often has relevance, but the real world it not always so fluid. Notably, you didn’t address the particulars, such as a factory town.

    morganovich: implicit in your argument is the assumption that somehow a distant bureaucracy knows better than local workers and employers what labor is worth and theat they can find a clearing price better than the actual participants in the market.

    Um, no. We merely point out that simplistic models don’t always capture all the relevant facets of a situation.

    morganovich: you then go on to try and establish a straw man about markets being perfect.

    It’s not a strawman. The original post insisted that a particular simplistic relationship must necessarily represent markets. We object to over reliance on such simplistic models, and pointed out why they do not always apply.

    morganovich: you point about a business simply not caring if it costs them money seems highly suspect.

    People care about all sorts of things besides money. It’s human nature. They’re rather odd that way.

    morganovich: markets are not perfect. but they work a helluva lot better than top down central planning.

    Perhaps, but that wasn’t our argument. Try rereading our comment.

  6. Ron H: No one has assumed a perfectly fluid market.

    It’s the direct implication of the original post, that any economist who denies that the demand curve applies in every case is the “equivalent to a denial that there is even minimal scientific content in economics”.

    Ron H: How is that pertinent to minimum wage?

    Because the claim is that the demand curve always applies, and that this relates to the minimum wage.

    Ron H: Not sure what you mean by “market effectively”.

    Labor can be treated as any other commodity. People sell their for the highest price.

    Ron H: Workers in a a factory town in a newly industrialized society come from other employment or subsistence that they consider worse than the factory jobs. What’s the problem?

    In many industrial regions, there may be only one or a few major employers. Once these communities are established, this can result in a non-fluid market for labor.

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