Don Boudreaux at Cafe Hayek poses some questions for his fellow economists:
What would the bulk of economists predict to be the result(s) of each of the following government actions?
1. An effective price ceiling on retail gasoline?
2. An effective price ceiling on residential rental units?
3. An effective price ceiling on condoms?
4. An effective price floor on cable-television subscriptions?
5. An effective price floor on hamburgers at fast-food restaurants?
6. An effective price floor on low-skilled labor?
I strongly suspect that a large majority of economists would predict shortages for numbers 1 through 3 (and, in addition, some other consequences – such as queueing or falling product quality). I strongly suspect also that a large majority of economists would predict, for numbers 4 and 5, surpluses – at least of the amounts that producers would be willing to sell at those ‘floored’ prices if they believed that consumers would buy those high quantities. These economists would likely also agree that the actual amounts of cable-TV subscriptions sold, as well as hamburgers at fast-food restaurants sold – that is, the quantities of these items that actually find their way into the homes and bellies of consumers – would be less than the amounts that would find their way into homes and bellies if the government did not interfere with the market’s pricing process.
But I’m less confident today about what most economists would say about number 6. It is, though, a deep mystery. There’s nothing at all about the service identified in number 6 (save for the fact that it often serves as a convenient political mascot) to distinguish it in any economically essential way from the five other goods or services identified above. I, for one, will never understand the readiness that so many economists today seem to have to regard low-skilled labor as being uniquely exempt from the economic reality and laws that are recognized to apply nearly everywhere else.
MP: I completely agree with Don that it’s a deep mystery why some economists will exempt the unskilled and low-skilled labor market from the well-established, universal laws of supply and demand. We could excuse politicians and the general public who support raising the minimum wage for their economic illiteracy, but what excuse do economists have when they have been formally trained in price theory?
Although I can’t explain Don’s mystery, let me at least propose a name for this misguided form of economic thinking (economic amnesia?) that allows for exceptions to economic reality and the market’s pricing process: the Fallacy of the Special Case.
That is, to exempt the labor market for low skilled and unskilled workers from the laws of supply and demand is to fallaciously create a “special case” for that market when in reality that “specialness” cannot be supported by the theoretical or empirical evidence. As Don correctly points out above, there is really nothing “special” about the market for unskilled labor that “would distinguish it in any economically essential way from the five other goods or services identified above.” In other words, the Law of Demand and the Law of Supply are economic laws that apply universally, without exception, and without any “special cases,” in the same way that the Law of Gravity applies universally, without any exceptions or special cases. To allow for exceptions or special cases to market fundamentals and economic reality is faulty and fallacious thinking.
Here are some other examples of the Fallacy of the Special Case:
1. After a natural disaster like a hurricane, flood, tornado or earthquake, price controls to prevent “price gouging” are often imposed because those major disruptions are somehow a “special case” that justify temporarily ignoring economic fundamentals and market pricing.
2. Tickets to concerts or sporting events are a “special case” that justify laws and price controls that prevent those tickets from being sold above face value (i.e. “ticket scalping”). In contrast, other goods like old coins that sometimes sell above face value, new cars that sometimes sell above their sticker price, bonds that sell above their par (face) value, and houses that sell above their listed price are not “special,” and there are therefore no laws against “coin scalping,” “car scalping,” “bond scalping” or “house scalping.”
3. Rental apartments in some cities like New York City, Berkeley, Washington, D.C., and Santa Monica are a “special case” of housing that justify special treatment in the form of rent control laws that exempt rental housing from the economic laws of supply and demand. Other housing options like condominiums, homes, co-ops and hotels are not special, and are therefore not subject to any special exemptions from economic reality and market pricing.
Bottom Line: The real danger of the Fallacy of the Special Case is that those allegedly special exceptions to economic fundamentals almost always result in legislation that is based primarily on political, and not economic, considerations – minimum wage laws, price gouging laws, ticket scalping laws and rent control laws. Ignoring economics and/or attempting to circumvent market pricing by allowing for some markets or goods to be “special” might make sense politically, but the legislation that follows makes us much worse off economically, makes us all poorer, and lowers our standard of living. Politicians and the general public can be excused for falling for the Fallacy of the Special Case and supporting price controls like the minimum wage that make us worse off, but shouldn’t the economics profession really know better?