Economics in One Lesson(steshaw.org)
steshaw.org
Economics in One Lesson
http://steshaw.org/economics-in-one-lesson/
21 comments
econ in one lesson comprising 6 slides:
1. people are animals and are part of the animal kingdom.
2. animals have basic resource needs.
3. e.g. people need food, water, shelter, safety and the company of other people.
4. the struggle to meet those basic needs in the face of competition from other animals, e.g. other people, is called economics. this is the "one true economics". it is not simply an idea in the mind of man. it is a physical reality observed throughout the animal world.
5. once people's basic resource needs have been met, they attempt to "explain" the one true economics, often in more complex terms, despite the absolute clarity of the one true economics. this is also called "economics" and is subdivided into many different ideas and ways of thinking.
6. if people's resource needs are not met as in slide 5., they cannot reach the thinking referred to in slide 5. they will only ever know and understand the one true economics.
1. people are animals and are part of the animal kingdom.
2. animals have basic resource needs.
3. e.g. people need food, water, shelter, safety and the company of other people.
4. the struggle to meet those basic needs in the face of competition from other animals, e.g. other people, is called economics. this is the "one true economics". it is not simply an idea in the mind of man. it is a physical reality observed throughout the animal world.
5. once people's basic resource needs have been met, they attempt to "explain" the one true economics, often in more complex terms, despite the absolute clarity of the one true economics. this is also called "economics" and is subdivided into many different ideas and ways of thinking.
6. if people's resource needs are not met as in slide 5., they cannot reach the thinking referred to in slide 5. they will only ever know and understand the one true economics.
[deleted]
[deleted]
Economics is a subject I regrettably evaded throughout school. Now I find it interesting, but I'm curious about how much of its edifice is built upon the dubious notion of a "rational actor". That is: how much of economics would remain if that assumption were swept away?
This is a huge problem in macroeconomics - and for many years the profession has just sort of looked the other way because they haven't had other good models. This is beginning to change with the advance of subfields such as behavioral economics where psychology is incorporated into the models.
The field was advanced tremendously by people like Daniel Kahneman who won the Nobel prize in economics in 2002. The field of economics is being transformed, but as with all big changes it takes time.
Kahnemans nobel prize lecture is worth watching if you want some insights into how people are irrational in predictable ways: http://www.nobelprize.org/nobel_prizes/economics/laureates/2...
The field was advanced tremendously by people like Daniel Kahneman who won the Nobel prize in economics in 2002. The field of economics is being transformed, but as with all big changes it takes time.
Kahnemans nobel prize lecture is worth watching if you want some insights into how people are irrational in predictable ways: http://www.nobelprize.org/nobel_prizes/economics/laureates/2...
While the assumption of rational actors is a problem in Macroeconomics, I wouldn't go so far as to sat that it's a huge problem. Almost certainly the larger problems of Macroeconomics are problems of endogeneity. Problems associated with assuming rational actors are relegated to the definition of Macroeconomic models. Very little work in economics is done by defining models, but rather by analyzing data in the context of these models.
Problems of endogeneity [1] occur for many different reasons, but are present (to some extent) in nearly every empirical macroeconomic study. They arise whenever there is a circular dependency among the parameters you're trying to measure (economic growth is dependent on education is dependent on economic growth). While we do have statistical tools to help control for endogeneity biases, like instrumental variable regressions [2], we often don't have enough data points (we can only measure economic growth accurately for 100 some countries for 60 some years).
All of this wouldn't be a problem if Macroeconomists could run controlled experiments, but this isn't really possible for fairly obvious reasons (Good luck convincing a country or three that they need to change how they run their country to validate some economic model).
So sure, Macroeconomic models may be somewhat invalid because of assumptions of rational actors, but I'd argue that Macroeconomists have looked the other way, not because there wasn't anything better (as you've said, behavioral economics is making a lot of advances) but because there were larger issues that need to be addressed.
The Microeconomists and game theorists can work out the rational actor problems.
[1] http://en.wikipedia.org/wiki/Endogeneity_(economics)
[2] http://en.wikipedia.org/wiki/Instrumental_variable
Problems of endogeneity [1] occur for many different reasons, but are present (to some extent) in nearly every empirical macroeconomic study. They arise whenever there is a circular dependency among the parameters you're trying to measure (economic growth is dependent on education is dependent on economic growth). While we do have statistical tools to help control for endogeneity biases, like instrumental variable regressions [2], we often don't have enough data points (we can only measure economic growth accurately for 100 some countries for 60 some years).
All of this wouldn't be a problem if Macroeconomists could run controlled experiments, but this isn't really possible for fairly obvious reasons (Good luck convincing a country or three that they need to change how they run their country to validate some economic model).
So sure, Macroeconomic models may be somewhat invalid because of assumptions of rational actors, but I'd argue that Macroeconomists have looked the other way, not because there wasn't anything better (as you've said, behavioral economics is making a lot of advances) but because there were larger issues that need to be addressed.
The Microeconomists and game theorists can work out the rational actor problems.
[1] http://en.wikipedia.org/wiki/Endogeneity_(economics)
[2] http://en.wikipedia.org/wiki/Instrumental_variable
I think you mean microeconomics
"Rational" is a loaded term but in the context of the Austrian school of economics, to which Hazzlitt subscribed, it's not such a big problem. The Austrians assume that man is rational in the sense that he acts purposefully. Joe chooses to exchange A for B because he believes that will be better for him. That is all. There's no assumption that B is in any way objectively better than A, or that Joe will be happy after the exchange.
That is actually the way "rational agent" is used in much of philosophy and has been taken up by AI researchers - a rational agent is one that seeks to obtain its goals within the scope of its beliefs about the world.
Assuming people are "rational actors" is a horrible idea when you're talking about individuals confronting a challenge once, but not a horrible one when you have communities of people who can all experiment and learn from each other's successes and failures.
There's also the special case of, well, capitalists where the actors in a market are mostly those people who have demonstrated that they can act in what an economist would call a rational manner, or else they would have lost their money.
A lot of economics is models built on this idea, but a lot is also empirical work looking at how people behave in aggregate in practice. Sometimes you get chances to test models built on rational actor models against reality and they do pretty well. For instance, theory says that if you outlaw speculation the price will swing around a lot more than in commodities that are speculated in. Luckily for lawmakers, the growers of onions managed to get together to lobby the government to ban speculation in onions. The law was passed, and now if you look at the cost of buying onions in bulk it swings around a lot more than other vegetables.[1] Sometimes speculators mess up and cause price swings themselves, but they tend to even out the swings caused by demand shocks more than they do that.
I guess I'd say, in the end, to only worry about those theories that have been around long enough to be tested and which pretty much the entire economics profession agrees on.[1] Really, you ought to be doing that for any field of human inquiry where you aren't directly involved, since most new surprising findings turn out to wrong.[2]
[1]http://money.cnn.com/2008/06/27/news/economy/The_onion_conun... [2]http://gregmankiw.blogspot.com/2009/02/news-flash-economists... [3]http://lesswrong.com/lw/ow/the_beauty_of_settled_science/
EDIT: Also, there's a lot of economics, even from way back when, that is predicated on people being irrational. Like, loss aversion[4] leads to sticky wages leads to the price level having real effects on the economy.
[4]http://en.wikipedia.org/wiki/Loss_aversion
There's also the special case of, well, capitalists where the actors in a market are mostly those people who have demonstrated that they can act in what an economist would call a rational manner, or else they would have lost their money.
A lot of economics is models built on this idea, but a lot is also empirical work looking at how people behave in aggregate in practice. Sometimes you get chances to test models built on rational actor models against reality and they do pretty well. For instance, theory says that if you outlaw speculation the price will swing around a lot more than in commodities that are speculated in. Luckily for lawmakers, the growers of onions managed to get together to lobby the government to ban speculation in onions. The law was passed, and now if you look at the cost of buying onions in bulk it swings around a lot more than other vegetables.[1] Sometimes speculators mess up and cause price swings themselves, but they tend to even out the swings caused by demand shocks more than they do that.
I guess I'd say, in the end, to only worry about those theories that have been around long enough to be tested and which pretty much the entire economics profession agrees on.[1] Really, you ought to be doing that for any field of human inquiry where you aren't directly involved, since most new surprising findings turn out to wrong.[2]
[1]http://money.cnn.com/2008/06/27/news/economy/The_onion_conun... [2]http://gregmankiw.blogspot.com/2009/02/news-flash-economists... [3]http://lesswrong.com/lw/ow/the_beauty_of_settled_science/
EDIT: Also, there's a lot of economics, even from way back when, that is predicated on people being irrational. Like, loss aversion[4] leads to sticky wages leads to the price level having real effects on the economy.
[4]http://en.wikipedia.org/wiki/Loss_aversion
> how much of its edifice is built upon the dubious notion of a "rational actor"
This is not a tenet for the Austrian school of thought. In Human Action, Ludwig von Mises establishes that humans reveal their preferences through action. There are no hangups about whether these preferences are "rational" or free of mistakes.
This is not a tenet for the Austrian school of thought. In Human Action, Ludwig von Mises establishes that humans reveal their preferences through action. There are no hangups about whether these preferences are "rational" or free of mistakes.
Well, there's behavioral economics. That would remain by definition, since it is the study of how people actually behave, i.e. it does not start from the assumption of a rational actor.
Another part that would remain is the purely descriptive, e.g. the study of how the monetary system actually works.
Finally, it's not so much that the notion of a "rational actor" is entirely flawed, it's just that it's taken much too seriously.
Another part that would remain is the purely descriptive, e.g. the study of how the monetary system actually works.
Finally, it's not so much that the notion of a "rational actor" is entirely flawed, it's just that it's taken much too seriously.
Traditional economics, quite a bit--though most of the principles are still valid as a first approximation. But the various irrational ways in which people make decisions is the fundamental concept behind behavioral economics which has gained considerable attention over the past 20 years or so.
I think one common error people make is to say "Oh, well, rational actors are wrong therefore I can throw rational actors out of the model entirely, everything goes, nobody knows anything, case closed." As you say, it's still a good first approximation, and to the extent various irrationalities are found, they too are actually reasonably regular and predictable as well. Irrational isn't a synonym for random.
(Moreover, there's a certain relativity to "irrational"; as tempting as it may be, irrational isn't a synonym for "disagrees with the given economic theorist" either....)
(Moreover, there's a certain relativity to "irrational"; as tempting as it may be, irrational isn't a synonym for "disagrees with the given economic theorist" either....)
I am not so sure the notion is as dumbass as you believe. There are certainly those who act stupidly but, in general, people tend to act somewhat reasonable (if not they wouldn't be able to e.g drive since way to many people would be killed).
So you don't have to entirely rational for economics to apply to you.
But in any event studying economics has enabled me to understand and (correctly) estimate the likely course of future government laws. In some cases it enables me to be even more rational (fx currently the local government is going to make it much cheaper to buy fuel efficient cars. Since I was going to buy one anyway I won't buy one now since that will cost me more money. On the other hand I could have brought a non fuel efficient car and then sold it when prices went up).
So you don't have to entirely rational for economics to apply to you.
But in any event studying economics has enabled me to understand and (correctly) estimate the likely course of future government laws. In some cases it enables me to be even more rational (fx currently the local government is going to make it much cheaper to buy fuel efficient cars. Since I was going to buy one anyway I won't buy one now since that will cost me more money. On the other hand I could have brought a non fuel efficient car and then sold it when prices went up).
I rziaele taht olny the fsirt and last letrtes are riureqed to raed Esniglh, but the ohrtes are ruriqeed to notice the dncfeeirfe between dibuous and damsbus. They are not snoynyumos.
[deleted]
Irrationality can be seen as an externality, in that when it outweighs rational thinking, the economy suffers.
Worth reading, but I had a couple of quibbles.
First marginal tax rates tend to have less of an effect on how hard people work than you might naively suppose when working from a simple economic model. People are committed to lifestyles they want to maintain, and categories of jobs often demand a certain minimum commitment, meaning people can't just reduce their hours for less pay. A much strong effect is in people deciding whether to spend time perusing more education or enter the workforce immediately, since the extra years would be taxed mostly at low rates, whereas the higher income from more education all comes at the top marginal rate.
Also, I'd point out that a mimimum wage law has less overhead than forming a union, and so when the economy is at full employment it might be a genuinely good idea - though still probably worse than, say, a negative income tax. In our current circumstances, though, it really is about transferring money from the really badly off to the sort of badly off (though the really badly off are less likely to vote...).
First marginal tax rates tend to have less of an effect on how hard people work than you might naively suppose when working from a simple economic model. People are committed to lifestyles they want to maintain, and categories of jobs often demand a certain minimum commitment, meaning people can't just reduce their hours for less pay. A much strong effect is in people deciding whether to spend time perusing more education or enter the workforce immediately, since the extra years would be taxed mostly at low rates, whereas the higher income from more education all comes at the top marginal rate.
Also, I'd point out that a mimimum wage law has less overhead than forming a union, and so when the economy is at full employment it might be a genuinely good idea - though still probably worse than, say, a negative income tax. In our current circumstances, though, it really is about transferring money from the really badly off to the sort of badly off (though the really badly off are less likely to vote...).
Well I'd argue that it is the same with good vs. bad doctors. The bad ones just try to fix your symptoms while the good ones try to fix the underlying problems.
The bad ones can also be driven by selfish greed. If they "heal" their patients, they don't need them as often and therefore they loose potential money.
This is an excellent book, and is also available as a pdf from here - http://www.fee.org/pdf/books/Economics_in_one_lesson.pdf
I could swear there is a free kindle version someplace, but I can't find the source at the moment. ETA: I was thinking of one of his other books "Thinking as a Science" which is available from archive.org - http://www.archive.org/details/thinkingasascie00hazlgoog
I could swear there is a free kindle version someplace, but I can't find the source at the moment. ETA: I was thinking of one of his other books "Thinking as a Science" which is available from archive.org - http://www.archive.org/details/thinkingasascie00hazlgoog
In MOBI and EPUB formats for the Kindle and Sony e-readers: http://dl.dropbox.com/u/15497688/Hazlitt%2C%20Henry%20-%20Ec...
How did you do this?
I have something (http://boxerbiography.blogspot.com/) I want to convert to either Mobi or just a single page. I was thinking of writing a ruby script to do it, but if there is an easier way, would love to know.
Thanks.
I have something (http://boxerbiography.blogspot.com/) I want to convert to either Mobi or just a single page. I was thinking of writing a ruby script to do it, but if there is an easier way, would love to know.
Thanks.
TBH, I had this one lying around from a torrent I obtained someplace a while back.
In general though, Calibre can handle conversion between various formats (http://calibre-ebook.com/) - I use it to convert the odd HTML ebook to MOBI for my Kindle with reasonably good results.
In general though, Calibre can handle conversion between various formats (http://calibre-ebook.com/) - I use it to convert the odd HTML ebook to MOBI for my Kindle with reasonably good results.
Here's my review from last time this book was mentioned on HN:
Economics in One Lesson is a horrible book for people with no background in economics. Within economics there are several schools of thought, and this book is little more than an outright attack by a proponent of one (fairly niche) school on another (far more prominent) school. Despite its title it isn't an textbook, but a manifesto, and as such Hazlitt's goal isn't to educate you, but to convert you. Hazlitt sets out to do this with great skill, employing every rhetoric tool at his disposal.
And I'll admit he's really good at it as well. He presents theories as gospel truth, making no mention of any caveats or qualifiers that you'd find in a more serious work. There is a complete lack of any sort of critical analysis of the ideas present, or any notion that they may be anything other than universal truths. He greatly misrepresents the ideas of his opponents and loves to use quotes out of context. He makes great use of leading rhetorical questions to lead the reader to make incorrect conclusions, without having to stick out his own neck and make the incorrect statement himself.
So in my opinion the real problem with this book is that it is so convincingly written that a naive and uncritical reading of it will lead the reader to come away with the belief that economics is really simple and that all economic problems have trivial solutions, as spelled out in this book.
That being said, the ideas present in this book aren't completely without merit, it's just that the few actually useful and interesting nuggets are buried in far too much polemic brow beating.
Economics in One Lesson is a horrible book for people with no background in economics. Within economics there are several schools of thought, and this book is little more than an outright attack by a proponent of one (fairly niche) school on another (far more prominent) school. Despite its title it isn't an textbook, but a manifesto, and as such Hazlitt's goal isn't to educate you, but to convert you. Hazlitt sets out to do this with great skill, employing every rhetoric tool at his disposal.
And I'll admit he's really good at it as well. He presents theories as gospel truth, making no mention of any caveats or qualifiers that you'd find in a more serious work. There is a complete lack of any sort of critical analysis of the ideas present, or any notion that they may be anything other than universal truths. He greatly misrepresents the ideas of his opponents and loves to use quotes out of context. He makes great use of leading rhetorical questions to lead the reader to make incorrect conclusions, without having to stick out his own neck and make the incorrect statement himself.
So in my opinion the real problem with this book is that it is so convincingly written that a naive and uncritical reading of it will lead the reader to come away with the belief that economics is really simple and that all economic problems have trivial solutions, as spelled out in this book.
That being said, the ideas present in this book aren't completely without merit, it's just that the few actually useful and interesting nuggets are buried in far too much polemic brow beating.
Criticizing Hazlett of being too rhetorical, while typing a wall of text without a single objective refutation to one claim is hypocritical at the least. It sounds like you don't want to stick your own neck out and make an incorrect statement.
I don't see why one needs to refute a text to point out that polemics written by authors who eschew the use of conventional economic methodology is a less than ideal introduction to economics for the uninitiated. Its like pointing out the writings of Seventh Day Adventists aren't a particularly good introduction to Christianity, particularly when it comes to understand what Catholics believe in.
If you want a specific examples of arguments omitted he criticises inflationary policies at great length whilst ignoring the underlying reason for favouring some level of inflation (incentivising investment)
If you want a specific examples of arguments omitted he criticises inflationary policies at great length whilst ignoring the underlying reason for favouring some level of inflation (incentivising investment)
The real problem Hazlett ignores is the existence of market failures in the actual world. The labor market in particular is rife with failures, in areas from search costs to market power, to the point where many labor economists model the labor market as a monopsony, i.e. a single-buyer market, which is one of the classic situations where government intervention to raise prices can increase total surplus. There's a whole discipline of labor economics that deals with the fact that the labor market is imperfect in excitingly complex ways.
In general a real market is imperfect in any case where firms make profit above their cost of capital -- i.e. most of it -- since perfect competition is supposed to drive profits to zero everywhere. The employees of a firm making profits certainly can be paid more without imperiling production, since the profits could simply be reduced.
Almost throughout, Hazlett makes exactly this (very common, for those with a political axe to grind) fallacy, supposing implicitly everywhere that no company is profitable despite the fact that we are manifestly not living in that world.
In general a real market is imperfect in any case where firms make profit above their cost of capital -- i.e. most of it -- since perfect competition is supposed to drive profits to zero everywhere. The employees of a firm making profits certainly can be paid more without imperiling production, since the profits could simply be reduced.
Almost throughout, Hazlett makes exactly this (very common, for those with a political axe to grind) fallacy, supposing implicitly everywhere that no company is profitable despite the fact that we are manifestly not living in that world.
In general a real market is imperfect in any case where firms make profit above their cost of capital -- i.e. most of it -- since perfect competition is supposed to drive profits to zero everywhere.
This is simply false. You are confusing profit with economic profit - they aren't the same thing. Profit is revenue in excess of costs, while economic profit is risk-adjusted profit in excess of other investment opportunities.
I.e., in a noncompetitive market, your best investment is to seek out companies with high economic profit and invest in them. In a competitive one, your best investment is a diversified portfolio indexed to the broader economy.
Incidentally, monopsony models of the labor market have pretty terrible predictive power. They are loved by PhD holding activists since they justify many feel-good policies, but they don't work very well outside of certain narrow fields (e.g., PhD chemists).
This is simply false. You are confusing profit with economic profit - they aren't the same thing. Profit is revenue in excess of costs, while economic profit is risk-adjusted profit in excess of other investment opportunities.
I.e., in a noncompetitive market, your best investment is to seek out companies with high economic profit and invest in them. In a competitive one, your best investment is a diversified portfolio indexed to the broader economy.
Incidentally, monopsony models of the labor market have pretty terrible predictive power. They are loved by PhD holding activists since they justify many feel-good policies, but they don't work very well outside of certain narrow fields (e.g., PhD chemists).
Could you elaborate on some of what he got wrong? I found that the big problems with the book were errors of omission, with the book only talking about the ways that economic consensus supports government non-intervention, but ignoring the places where mainstream economic thought says that the government can safely be doing more. It always annoys me here in the US when Republicans act like they are the party blessed by economists, when most economists vote Democrat.
I would agree that most are errors of omission. The most obvious one is that he completely ignores the problem of collective action, for example when he talks about taxes. There are certain problems that private enterprise simply cannot solve for game theoretical reasons. A nice example is in this recent thread on HN on bicycle lanes: http://news.ycombinator.com/item?id=3149320
Here is an example of a different type of error, from the part on Minimum Wages:
The first thing that happens, for example, when a law is passed that no one shall be paid less than $106 for a forty-hour week is that no one who is not worth $106 a week to an employer will be employed at all.
There is plenty of empirical evidence against this from countries that actually have introduced minimum wage laws. Even worse, not having minimum wage laws perverts economic incentives. Here's an example.
In Germany, people earning below a certain amount receive a basic subsidy from the state. It is a pitiful amount, but it allows them to pay the rent and survive. The problem is that this causes low-end employers to consciously pay their workers a ridiculously low amount, fully aware of the fact that their employees will receive additional income from the state.
In effect, the government subsidizes employers that practice wage dumping. That is clearly inefficient.
Now people react to this in two different ways. One camp says that the government subsidy should be abolished. But the latter is short-sighted, because society always pays somehow when people do not earn enough to make a living. Ideally, they pay via social safety nets, but if such nets do not exist, society pays in the form of increased black market employment and crime.
The other camp (me included) argues that this abuse of the system should be prevented via a minimum wage law. That would cut into the employers profits, but there's nothing wrong with that. It also wouldn't eliminate jobs, because we're talking about low-end sectors where demand is highly inelastic anyway, such as cleaning services. Hotels will still pay for the cleaning service, even if it costs them twice as much.
Here is an example of a different type of error, from the part on Minimum Wages:
The first thing that happens, for example, when a law is passed that no one shall be paid less than $106 for a forty-hour week is that no one who is not worth $106 a week to an employer will be employed at all.
There is plenty of empirical evidence against this from countries that actually have introduced minimum wage laws. Even worse, not having minimum wage laws perverts economic incentives. Here's an example.
In Germany, people earning below a certain amount receive a basic subsidy from the state. It is a pitiful amount, but it allows them to pay the rent and survive. The problem is that this causes low-end employers to consciously pay their workers a ridiculously low amount, fully aware of the fact that their employees will receive additional income from the state.
In effect, the government subsidizes employers that practice wage dumping. That is clearly inefficient.
Now people react to this in two different ways. One camp says that the government subsidy should be abolished. But the latter is short-sighted, because society always pays somehow when people do not earn enough to make a living. Ideally, they pay via social safety nets, but if such nets do not exist, society pays in the form of increased black market employment and crime.
The other camp (me included) argues that this abuse of the system should be prevented via a minimum wage law. That would cut into the employers profits, but there's nothing wrong with that. It also wouldn't eliminate jobs, because we're talking about low-end sectors where demand is highly inelastic anyway, such as cleaning services. Hotels will still pay for the cleaning service, even if it costs them twice as much.
> this abuse of the system should be prevented via a minimum wage law. That would cut into the employers profits, but there's nothing wrong with that.
Hazlitt uses the whole book to drive home the most important lesson about economics, and that is: One must consider not just what is seen, but also unseen.
Let's apply this to the case for minimum wage for hotel workers. Sure, the minimum wage helps hotel workers. Sure, hotels will still pay for cleaning services. That is all seen. That is the naive analysis. What is unseen? What is the unseen result of a higher-than-market hotel-cleaning wage?
Workers who would best be employed in other tasks will now be employed cleaning hotels. Other goods and services that are more valued won't be produced because the people who would produce them are busy cleaning hotels.
In general, the low-productivity employment sector will be made less efficient, because of lack of price information. For example, suppose the minimum wage is $7/hr, and the market wage for hotel cleaning is $5/hr while the market wage for cooking is $6/hr. A worker who could do either should, in a free market, choose cooking, because it is more valued (hence the higher wage). But a minimum wage hides this information. So if the worker chooses cleaning, the economy will be $1/hour poorer than it would otherwise have been.
Also, the sector of the economy that employs large number of low-wage workers will become comparatively less efficient because of the high-than-market wage costs. This will encourage capital to flow out of this sector and into other sectors. The unseen effect of the minimum wage is a missing low-wage industry.
This was made very obvious when the US Congress raised the minimum wage on the small pacific island of American Samoa. The result was that major employer on the island left the island and instead built a more mechanized plant in the state of Georgia. A lot of low-tech, low-wage jobs in American Samoa disappeared and were replaced by a lot fewer, higher-wage jobs in Georgia. This was the direct and visible effect, but over time, the unseen effect is the same: industries and jobs that won't exist because the minimum wage makes them illegal.
Hazlitt uses the whole book to drive home the most important lesson about economics, and that is: One must consider not just what is seen, but also unseen.
Let's apply this to the case for minimum wage for hotel workers. Sure, the minimum wage helps hotel workers. Sure, hotels will still pay for cleaning services. That is all seen. That is the naive analysis. What is unseen? What is the unseen result of a higher-than-market hotel-cleaning wage?
Workers who would best be employed in other tasks will now be employed cleaning hotels. Other goods and services that are more valued won't be produced because the people who would produce them are busy cleaning hotels.
In general, the low-productivity employment sector will be made less efficient, because of lack of price information. For example, suppose the minimum wage is $7/hr, and the market wage for hotel cleaning is $5/hr while the market wage for cooking is $6/hr. A worker who could do either should, in a free market, choose cooking, because it is more valued (hence the higher wage). But a minimum wage hides this information. So if the worker chooses cleaning, the economy will be $1/hour poorer than it would otherwise have been.
Also, the sector of the economy that employs large number of low-wage workers will become comparatively less efficient because of the high-than-market wage costs. This will encourage capital to flow out of this sector and into other sectors. The unseen effect of the minimum wage is a missing low-wage industry.
This was made very obvious when the US Congress raised the minimum wage on the small pacific island of American Samoa. The result was that major employer on the island left the island and instead built a more mechanized plant in the state of Georgia. A lot of low-tech, low-wage jobs in American Samoa disappeared and were replaced by a lot fewer, higher-wage jobs in Georgia. This was the direct and visible effect, but over time, the unseen effect is the same: industries and jobs that won't exist because the minimum wage makes them illegal.
In general, the low-productivity employment sector will be made less efficient, because of lack of price information. For example, suppose the minimum wage is $7/hr, and the market wage for hotel cleaning is $5/hr while the market wage for cooking is $6/hr. A worker who could do either should, in a free market, choose cooking, because it is more valued (hence the higher wage). But a minimum wage hides this information. So if the worker choose cleaning, the economy will be $1/hour poorer than it would otherwise have been.
In this particular scenario, do you believe that a person chooses between cleaning (an unskilled job) to cooking (a skilled job) based on the wage that is paid?
Either the person is unskilled; then they have no choice. Or they have the skill to be a cook; then they presumably have the skill because they like being a cook, and will certainly prefer to do that over cleaning even if both are paid the same (in fact, they will probably prefer cooking even if it were slightly higher paid; wages only start coming into consideration when the difference is larger).
Now you might argue that people will be deterred from even learning to become a cook in the situation you have outlined. That is doubtful, because again, price plays a much smaller role than you might think. But even if it were the case, the wages of cooks would eventually rise above the minimum wage if demand for cooks is high enough.
It is a mistake to assume that there is always a God-given market price that is the "right" price for goods to have. The development of prices is always a negotiation within society. In the case of the minimum wage, society says that labour should have at least a certain price, because that is the morally right thing (and also avoids certain externalities that opponents of the minimum wage like to ignore). If society agrees on that, then minimum wage is efficient by definition.
In this particular scenario, do you believe that a person chooses between cleaning (an unskilled job) to cooking (a skilled job) based on the wage that is paid?
Either the person is unskilled; then they have no choice. Or they have the skill to be a cook; then they presumably have the skill because they like being a cook, and will certainly prefer to do that over cleaning even if both are paid the same (in fact, they will probably prefer cooking even if it were slightly higher paid; wages only start coming into consideration when the difference is larger).
Now you might argue that people will be deterred from even learning to become a cook in the situation you have outlined. That is doubtful, because again, price plays a much smaller role than you might think. But even if it were the case, the wages of cooks would eventually rise above the minimum wage if demand for cooks is high enough.
It is a mistake to assume that there is always a God-given market price that is the "right" price for goods to have. The development of prices is always a negotiation within society. In the case of the minimum wage, society says that labour should have at least a certain price, because that is the morally right thing (and also avoids certain externalities that opponents of the minimum wage like to ignore). If society agrees on that, then minimum wage is efficient by definition.
I think it is really funny that you consider cleaning to be an unskilled job and cooking to be skilled job. They are both low skilled job that are a lot of work. Your anecdotal "they like being a cook" misses the point. On the margin, some people will choose cleaning over cooking.
Society agreeing on a minimum wage does not make it efficient by definition. First of all, "society" is only the majority of voters. Voters pass things that are inefficient all the time. Secondly, efficient has a specific meaning in economics. It means that goods are allocated to where they are most highly valued and produced where they are can be most cheaply made. Given the definition, the minimum wage clearly does distort people incentives to work and leads to economic inefficiency.
Society agreeing on a minimum wage does not make it efficient by definition. First of all, "society" is only the majority of voters. Voters pass things that are inefficient all the time. Secondly, efficient has a specific meaning in economics. It means that goods are allocated to where they are most highly valued and produced where they are can be most cheaply made. Given the definition, the minimum wage clearly does distort people incentives to work and leads to economic inefficiency.
> wages only start coming into consideration when the difference is larger
I would think that wage differences would be most important when wages are small. The difference between $5/hr and $6/hr is a lot more important than the difference between $50/hr and $51/hr.
> It is a mistake to assume that there is always a God-given market price that is the "right" price for goods to have. . . . In the case of the minimum wage, society says that labour should have at least a certain price, because that is the morally right thing . . .
I'm not sure what you're trying to say in your last paragraph. There is no such thing as a "morally right" wage. Wages are just prices set by the market unless they are interfered with.
For example, unless you're being paid a government-mandated minimum wage, your wage is set by a mutual agreement between you and your employer. At the time of the agreement, you thought the proposed wage was the best of your options and so did your employer. Had your employer offered you less, then presumably you would have had a better option and would have chosen a different employer. Had you demanded more, presumably your employer would have had a better option and would have chosen a different employee. This is a market wage.
The market, all the people together each choosing as they see best among their various options, this is what generally determines all prices including wages. The market is efficient because each actor chooses what is best for them given the choices of the other actors. Whenever the market is intervened with by government-imposed price controls, like minimum wage, the result is inefficiency (waste): the market acts differently than it would if each actor were free to choose.
I would think that wage differences would be most important when wages are small. The difference between $5/hr and $6/hr is a lot more important than the difference between $50/hr and $51/hr.
> It is a mistake to assume that there is always a God-given market price that is the "right" price for goods to have. . . . In the case of the minimum wage, society says that labour should have at least a certain price, because that is the morally right thing . . .
I'm not sure what you're trying to say in your last paragraph. There is no such thing as a "morally right" wage. Wages are just prices set by the market unless they are interfered with.
For example, unless you're being paid a government-mandated minimum wage, your wage is set by a mutual agreement between you and your employer. At the time of the agreement, you thought the proposed wage was the best of your options and so did your employer. Had your employer offered you less, then presumably you would have had a better option and would have chosen a different employer. Had you demanded more, presumably your employer would have had a better option and would have chosen a different employee. This is a market wage.
The market, all the people together each choosing as they see best among their various options, this is what generally determines all prices including wages. The market is efficient because each actor chooses what is best for them given the choices of the other actors. Whenever the market is intervened with by government-imposed price controls, like minimum wage, the result is inefficiency (waste): the market acts differently than it would if each actor were free to choose.
One thing conventional economists (not just the hypercapitalist Austrians) ignore is bargaining power. It's fashionable to speak of employers and employees as if both were spheres with equal power. In reality of course, people rent themselves into something which is accurately called wage slavery, where they spend their time under someone's command, watching their tongues. The hotel owner is far more powerful than the room cleaner, and it's very common for bosses to steal wages. (After all, which one can dish out the humiliation while the other takes it?)
Another fallacy of mainstream economics is that markets exist without government. In reality, it is government which creates markets. And yet another fallacy is that markets do not have morality associated with them. Yet markets are intertwined with moral taboos about debt, even in cases where the powerless owe debts to the powerful. (Like with rotten healthcare systems.) David Graeber discusses the history interestingly in _Debt: The First 5000 Years_.
Since the linked article is right-wing, here's a left-wing one which discusses some of these fallacies. (http://www.zcommunications.org/debt-slavery-and-our-idea-of-...)
BTW, if I had to choose between being a well-paid coal miner and a significantly lesser-paid doctor, I'd choose the lower pay.
Another fallacy of mainstream economics is that markets exist without government. In reality, it is government which creates markets. And yet another fallacy is that markets do not have morality associated with them. Yet markets are intertwined with moral taboos about debt, even in cases where the powerless owe debts to the powerful. (Like with rotten healthcare systems.) David Graeber discusses the history interestingly in _Debt: The First 5000 Years_.
Since the linked article is right-wing, here's a left-wing one which discusses some of these fallacies. (http://www.zcommunications.org/debt-slavery-and-our-idea-of-...)
BTW, if I had to choose between being a well-paid coal miner and a significantly lesser-paid doctor, I'd choose the lower pay.
> In reality, it is government which creates markets.
This seems like a obviously false statement. The norm is for people to trade. Just watch children play: it's extremely common to see them trade toys with each other.
The "black markets" enabled the soviet union and the communist-block countries to survive as long as they did.
The reality is that it is governments are the destroyer of trade and markets through taxation, embargoes, price controls, and trade restrictions.
A significant portion of America's prison population are drug offenders: essentially people who tried to operate in an illegal market.
If governments were necessary for markets, why are there all these markets existing despite governments' attempt to stamp them out?
This seems like a obviously false statement. The norm is for people to trade. Just watch children play: it's extremely common to see them trade toys with each other.
The "black markets" enabled the soviet union and the communist-block countries to survive as long as they did.
The reality is that it is governments are the destroyer of trade and markets through taxation, embargoes, price controls, and trade restrictions.
A significant portion of America's prison population are drug offenders: essentially people who tried to operate in an illegal market.
If governments were necessary for markets, why are there all these markets existing despite governments' attempt to stamp them out?
I think your last paragraph is a point that is genuinely worth having a serious debate about. You are probably familiar with the Prisoners' Dilemma, right?
More abstractly, there are situations where it is in the individuals' self interests to behave in a certain way that will lead everybody to end up in a place where they are worse off than if everybody coordinated to achieve an outcome that is not a Nash equilibrium.
If you define "efficiency" as being "the outcome that you get when there is no cooperation between actors", then you're basically saying "efficiency = Nash equilibria with no cooperation". Then government action (which is simply one possible form of cooperation between actors) is inefficient by definition. But then that's simply a tautology, and a useless one at that. After all, whether the outcome is a Nash equilibrium or not is not a moral category.
If you define "efficiency" as being "the outcome is optimal according to some welfare function" (e.g. social optimality, Pareto optimal, sum of logs, or whatever), then Nash equilibria and efficient outcomes are not the same thing, unless you can somehow exclude the possibility of Prisoner Dilemma-type situations.
Do you have an argument against the existence of Prisoner Dilemmas when it comes to price-setting dynamics?
Edit: And to answer your question about a "morally right wage", I think there was simply a misunderstanding between us. There is a moral argument that human labour should be given some appropriate value. This is similar to more general arguments for human dignity and human rights. This is a question of morality and ethics, and it can be the basis upon which a society decides to introduce a minimum wage law. My personal understanding of morality is in line with such a view, but I am not trying to persuade you to change your system of values, if it happens to be different.
More abstractly, there are situations where it is in the individuals' self interests to behave in a certain way that will lead everybody to end up in a place where they are worse off than if everybody coordinated to achieve an outcome that is not a Nash equilibrium.
If you define "efficiency" as being "the outcome that you get when there is no cooperation between actors", then you're basically saying "efficiency = Nash equilibria with no cooperation". Then government action (which is simply one possible form of cooperation between actors) is inefficient by definition. But then that's simply a tautology, and a useless one at that. After all, whether the outcome is a Nash equilibrium or not is not a moral category.
If you define "efficiency" as being "the outcome is optimal according to some welfare function" (e.g. social optimality, Pareto optimal, sum of logs, or whatever), then Nash equilibria and efficient outcomes are not the same thing, unless you can somehow exclude the possibility of Prisoner Dilemma-type situations.
Do you have an argument against the existence of Prisoner Dilemmas when it comes to price-setting dynamics?
Edit: And to answer your question about a "morally right wage", I think there was simply a misunderstanding between us. There is a moral argument that human labour should be given some appropriate value. This is similar to more general arguments for human dignity and human rights. This is a question of morality and ethics, and it can be the basis upon which a society decides to introduce a minimum wage law. My personal understanding of morality is in line with such a view, but I am not trying to persuade you to change your system of values, if it happens to be different.
I think many times we (and especially governments) mistakenly believe that their intervention in a market is going to bring that market to an equilibrium with a higher social optimum. Governing bodies are drawn to intervene because they get to extend their power, and even those with good intentions are often overly optimistic about their abilities to predict the outcomes of their intervention.
I don't think that it's an error, in fact the argument he is making about minimum wage exists in a world without a state provided safety net.
The main argument he is making in the book is that economics is a complex system and is hard, and that we always need to look at the forgotten man. Those that think policy decisions are simple - have a minimum wage or not - will cause a whole host of unintended side effects as your post describes.
The main argument he is making in the book is that economics is a complex system and is hard, and that we always need to look at the forgotten man. Those that think policy decisions are simple - have a minimum wage or not - will cause a whole host of unintended side effects as your post describes.
It is not an error, it is just a manifestation of the same point consequential to a different situation. In the US, the subsidized wage-dumping just turns into 100% subsidy with 0 work.
Minimum wage laws in effect outlaw functional poverty. We hear much of shady businesses who hire those who work under-the-table for less than minimum wage, and in the next breath decry high above-the-table unemployment. The work is there, the laborers are there, but alas it is illegal to pay what some jobs are worth.
Another consequence, little noted, is that minimum wage laws in effect create a "mundane labor" based currency. Instead of fixing a dollar to a weight of gold, or floating the currency outright, the value of a dollar is fixed to ~8.3 minutes of menial work. A gallon of gas thus costs about a half-hour of work ... and regardless of what minimum wage is, supply-and-demand realities mean that a gallon of gas[1] will _always_ cost about a half-hour of menial work; raise the minimum wage by fiat, and the price at the pump will rise to match. Sub-minimum-wage living becomes legally unviable precisely because low-end prices rise to match the absence of legal sub-minimum-wage incomes - at which point the government becomes obligated to confiscate and redistribute wealth to rescue those who are drowned by the consequences of minimum-wage laws.
[1] - assuming oil itself is in consistent supply and consistent demand.
Minimum wage laws in effect outlaw functional poverty. We hear much of shady businesses who hire those who work under-the-table for less than minimum wage, and in the next breath decry high above-the-table unemployment. The work is there, the laborers are there, but alas it is illegal to pay what some jobs are worth.
Another consequence, little noted, is that minimum wage laws in effect create a "mundane labor" based currency. Instead of fixing a dollar to a weight of gold, or floating the currency outright, the value of a dollar is fixed to ~8.3 minutes of menial work. A gallon of gas thus costs about a half-hour of work ... and regardless of what minimum wage is, supply-and-demand realities mean that a gallon of gas[1] will _always_ cost about a half-hour of menial work; raise the minimum wage by fiat, and the price at the pump will rise to match. Sub-minimum-wage living becomes legally unviable precisely because low-end prices rise to match the absence of legal sub-minimum-wage incomes - at which point the government becomes obligated to confiscate and redistribute wealth to rescue those who are drowned by the consequences of minimum-wage laws.
[1] - assuming oil itself is in consistent supply and consistent demand.
> Another consequence, little noted, is that minimum wage laws in effect create a "mundane labor" based currency. Instead of fixing a dollar to a weight of gold, or floating the currency outright, the value of a dollar is fixed to ~8.3 minutes of menial work. A gallon of gas thus costs about a half-hour of work ... and regardless of what minimum wage is, supply-and-demand realities mean that a gallon of gas[1] will _always_ cost about a half-hour of menial work; raise the minimum wage by fiat, and the price at the pump will rise to match.
Why would that be the case unless the overall worldwide demand of gas was gated by the ability of minimum wage workers in a particular jurisdiction to buy gas? Even this, this would appear to assume that their demand was completely elastic, such that cheaper gas would cause them to buy enough more until it was that expensive again?
And why gas? Is the price of all staples (bread, milk, etc.) inescapably tied to the minimum wage? If so, I'd love to concrete evidence for that claim -- it seems like quite a surprising conclusion to me.
Why would that be the case unless the overall worldwide demand of gas was gated by the ability of minimum wage workers in a particular jurisdiction to buy gas? Even this, this would appear to assume that their demand was completely elastic, such that cheaper gas would cause them to buy enough more until it was that expensive again?
And why gas? Is the price of all staples (bread, milk, etc.) inescapably tied to the minimum wage? If so, I'd love to concrete evidence for that claim -- it seems like quite a surprising conclusion to me.
I use gas as the example because it has the by-far fastest price adjustment _and_ the broadest commodity usage. Other prices will also catch up, but take longer to do so.
(Keep in mind we're talking in short posts, not peer-reviewed treatises. The ability to extrapolate to reasonable consequences is assumed.)
Consider an extreme case. A popular retort to minimum wage laws is "well, just set the minimum to $1000/hr and everyone will be rich!" Doesn't work that way because paying someone $1000 to sweep a floor for an hour means $1000 represents no greater value than sweeping a floor for an hour. Given that $1000/hr for any/all menial jobs does not mean that all workers can run out and buy ~300 gallons of gas after working an hour - supply-and-demand will kick in and the sudden demand for "cheap" gas of limited supply means prices will shoot up to ~$500/gal to match "normal" sales/usage. Ditto other prices, commodities in particular. If the clerk behind the gas station register is making $1000/hr, the gas sure won't go for $3.25/gal.
Why would the conclusion be surprising? It's supply and demand. The currency acts as a ratio modifier adapting the value of one thing to the value of another; whatever the units of that ratio are, a gallon of gas will (given current social norms) always be worth about half an hour of menial labor. Raise the minimum wage, the dollars available to the mundane laborer will increase, the supply of goods/services remains about the same, so the price of goods/services will rise to match the availability of dollars earned thru mundane labor. Prices rise to what the market will bear; ensuring everyone earns more currency means it will take more currency to buy.
(Keep in mind we're talking in short posts, not peer-reviewed treatises. The ability to extrapolate to reasonable consequences is assumed.)
Consider an extreme case. A popular retort to minimum wage laws is "well, just set the minimum to $1000/hr and everyone will be rich!" Doesn't work that way because paying someone $1000 to sweep a floor for an hour means $1000 represents no greater value than sweeping a floor for an hour. Given that $1000/hr for any/all menial jobs does not mean that all workers can run out and buy ~300 gallons of gas after working an hour - supply-and-demand will kick in and the sudden demand for "cheap" gas of limited supply means prices will shoot up to ~$500/gal to match "normal" sales/usage. Ditto other prices, commodities in particular. If the clerk behind the gas station register is making $1000/hr, the gas sure won't go for $3.25/gal.
Why would the conclusion be surprising? It's supply and demand. The currency acts as a ratio modifier adapting the value of one thing to the value of another; whatever the units of that ratio are, a gallon of gas will (given current social norms) always be worth about half an hour of menial labor. Raise the minimum wage, the dollars available to the mundane laborer will increase, the supply of goods/services remains about the same, so the price of goods/services will rise to match the availability of dollars earned thru mundane labor. Prices rise to what the market will bear; ensuring everyone earns more currency means it will take more currency to buy.
> Sub-minimum-wage living becomes legally unviable precisely because low-end prices rise to match the absence of legal sub-minimum-wage incomes - at which point the government becomes obligated to confiscate and redistribute wealth to rescue those who are drowned by the consequences of minimum-wage laws.
Excellent point. The minimum wage creates a need for welfare for the unskilled because it makes it outlaws their jobs and it raises prices on them.
Excellent point. The minimum wage creates a need for welfare for the unskilled because it makes it outlaws their jobs and it raises prices on them.
Prices are not set by the cost of production but by supply and demand. In a healthy market the cost increase of a wage minimum cannot affect the prices, it may only make it uneconomical to produce certain goods (but this almost never happens because margins aren't usually that tight). What the minimum wage actually amounts to is wealth redistribution, from the holder of capital to the provider of labor. It doesn't change the amount of goods and services sold, it just affects who is buying them.
Like all social redistribution schemes, it can be good if wealth isn't distributed equally enough for healthy market interaction, and harmful if wealth is distributed too equally for market incentives to exist.
Like all social redistribution schemes, it can be good if wealth isn't distributed equally enough for healthy market interaction, and harmful if wealth is distributed too equally for market incentives to exist.
> The first thing that happens, for example, when a law is passed that no one shall be paid less than $106 for a forty-hour week is that no one who is not worth $106 a week to an employer will be employed at all.
> There is plenty of empirical evidence against this from countries that actually have introduced minimum wage laws.
Few employers run at a loss for very long.
So, if they pay $y for something that is only worth $x, where y > x, they make up the difference somewhere.
The four options are the salary for other employees, money for supplies, profits, and price of goods/services sold.
Customers will walk if they're not getting value. Service providers will sell to the highest bidder. Other employees will go elsewhere, but not all employees are portable.
That leaves stranded employees and employers.
> There is plenty of empirical evidence against this from countries that actually have introduced minimum wage laws.
Few employers run at a loss for very long.
So, if they pay $y for something that is only worth $x, where y > x, they make up the difference somewhere.
The four options are the salary for other employees, money for supplies, profits, and price of goods/services sold.
Customers will walk if they're not getting value. Service providers will sell to the highest bidder. Other employees will go elsewhere, but not all employees are portable.
That leaves stranded employees and employers.
"There is plenty of empirical evidence against this from countries that actually have introduced minimum wage laws."
So you are saying that an employer would hire someone that only produces $96 worth of value per week for $106 per week?
So you are saying that an employer would hire someone that only produces $96 worth of value per week for $106 per week?
> employer would hire someone that only produces $96 worth of value per week for $106 per week?
The argument is a little more complex than that. No business will operate at an outright loss. But the minimum wage can cut into a business's profits. A hotel likely won't go bankrupt and shut down if it payed its workers a higher than market rate. And it still needs to pay for cleaners. But a higher-than-market cleaning rate will skew the market from the optimal. For example, a higher cleaning wage would make robot cleaners comparatively more attractive to a hotel. Investing in a robot might not make sense if wages were at market, but if they are raised too much, then it might be worth it to pay for an expensive robot that can replace a large portion of the cleaning staff.
In general, the minimum wage encourages capital investment. If people are expensive, then you should try to replace them with machines.
The argument is a little more complex than that. No business will operate at an outright loss. But the minimum wage can cut into a business's profits. A hotel likely won't go bankrupt and shut down if it payed its workers a higher than market rate. And it still needs to pay for cleaners. But a higher-than-market cleaning rate will skew the market from the optimal. For example, a higher cleaning wage would make robot cleaners comparatively more attractive to a hotel. Investing in a robot might not make sense if wages were at market, but if they are raised too much, then it might be worth it to pay for an expensive robot that can replace a large portion of the cleaning staff.
In general, the minimum wage encourages capital investment. If people are expensive, then you should try to replace them with machines.
"But the minimum wage can cut into a business's profits."
Sure, part of the burden of minimum wage falls on the employer, and part on the potential employees that aren't hired.
While what you say sounds plausible -- a hotel running a 20% profit every year might bear the entire burden of the higher wages and may still hire the same number of people. But there are many businesses (in the hotel industry or elsewhere) that will end up scaling back rather than pay higher wages.
While minimum wage may encourage the building of machines, workers versus machines is a false dichotomy. Sure, those are alternatives, but there's another alternative as well: no machine and no worker, just a smaller business (or less service).
To say that the same number of people will be hired at the higher wage is to say that the demand curve for employees is perfectly flat near the lower wages. I would have to see some evidence of that.
Sure, part of the burden of minimum wage falls on the employer, and part on the potential employees that aren't hired.
While what you say sounds plausible -- a hotel running a 20% profit every year might bear the entire burden of the higher wages and may still hire the same number of people. But there are many businesses (in the hotel industry or elsewhere) that will end up scaling back rather than pay higher wages.
While minimum wage may encourage the building of machines, workers versus machines is a false dichotomy. Sure, those are alternatives, but there's another alternative as well: no machine and no worker, just a smaller business (or less service).
To say that the same number of people will be hired at the higher wage is to say that the demand curve for employees is perfectly flat near the lower wages. I would have to see some evidence of that.
People that only produce $96 of value a week would probably have been unemployed anyway; because theres no shortage of labour at the bottom end of the market companies would have been able to hire better staff at $96 per hour before the minimum wage, who would be worth retaining at $106 per hour.
The correlation between wages and employee productivity is pretty loose.
The correlation between wages and employee productivity is pretty loose.
So you are arguing that there's nobody who produces a value of $1 - $105 per week?
I would expect the correlation between wages and production to be much stronger at the low-income levels and for hourly positions. Regardless, it's what the employer thinks the employee is worth (or will be worth). If the employer doesn't expect at least $106+X dollars of productivity, they won't hire at $106.
This is pretty basic microeconomics; supply and demand. Even if you're right that the first employee nets more than $106, that might not be true for the tenth one. The demand curve for employees is downward-sloping, right?
I would expect the correlation between wages and production to be much stronger at the low-income levels and for hourly positions. Regardless, it's what the employer thinks the employee is worth (or will be worth). If the employer doesn't expect at least $106+X dollars of productivity, they won't hire at $106.
This is pretty basic microeconomics; supply and demand. Even if you're right that the first employee nets more than $106, that might not be true for the tenth one. The demand curve for employees is downward-sloping, right?
I'd expect the correlation to be significantly less strong at the lower end of the market, particularly in a service-based economy like the US; worker productivity has a pretty minimal impact on number of burgers flipped per hour. They're minimum wage jobs because virtually anyone can do them, but unfortunately for people in low wage brackets there isn't an infinitude of unskilled employment opportunities to go around. It's pretty basic microeconomics that labour markets don't clear.
Sure, intuitively you'd expect some very marginal employment opportunities to disappear, but the empirical evidence shows that companies prefer other options; raising prices, cutting profits or non-labour costs, increasing worker productivity where possible adjusting opening hours etc. so the effect on net unemployment is often minimal or non-existent.
Sure, intuitively you'd expect some very marginal employment opportunities to disappear, but the empirical evidence shows that companies prefer other options; raising prices, cutting profits or non-labour costs, increasing worker productivity where possible adjusting opening hours etc. so the effect on net unemployment is often minimal or non-existent.
Is any textbook or mainstream economist any different?
Hazlitt is responding to other people's economic claims and refuting them with his own reasoning from an Austrian perspective. Chances are the reader already believes a lot of the errors pointed out by Hazlitt in the book so Hazlitt doesn't really need to get lip service to ideas that politicians and mainstream economists promote without a second thought about it.
Hazlitt is responding to other people's economic claims and refuting them with his own reasoning from an Austrian perspective. Chances are the reader already believes a lot of the errors pointed out by Hazlitt in the book so Hazlitt doesn't really need to get lip service to ideas that politicians and mainstream economists promote without a second thought about it.
actually, plenty of economics textbooks present alternative schools of thought and relative merits of those ideas. i think that's pretty standard for textbooks
The problem with considering long term effects and indirect consequences is - it's hard, and often there's no way to know for sure what the consequences will be.
If we have 2 opposite effects going on, and one school of economics says this one will be more powerful, and the other says the other one will be more powerful, and there's no way to know who is right, then how can we expect people to consider these effects, if people don't know what the efects will be.
Short term effects are mostly obvious. Long term effects are harder to predict, and people suck at estimating probabilities. So it's easier to ignore the long term effects altogether.
If we have 2 opposite effects going on, and one school of economics says this one will be more powerful, and the other says the other one will be more powerful, and there's no way to know who is right, then how can we expect people to consider these effects, if people don't know what the efects will be.
Short term effects are mostly obvious. Long term effects are harder to predict, and people suck at estimating probabilities. So it's easier to ignore the long term effects altogether.
its like the dianetics of economics
I found "Wealth of Nations" by Adam Smith to be an excellent book. He explains things very well. You can tell he has done extensive analyses to back up his conclusions. Free on Gutenberg (http://www.gutenberg.org/ebooks/3300). I actually listened to the recording on librivox.org (read by Stephen Escalera):
http://librivox.org/the-wealth-of-nations-book-1-by-adam-smi... http://librivox.org/the-wealth-of-nations-book-2-and-3/ http://librivox.org/the-wealth-of-nations-book-4-by-adam-smi... http://librivox.org/the-wealth-of-nations-book-5-by-adam-smi...
http://librivox.org/the-wealth-of-nations-book-1-by-adam-smi... http://librivox.org/the-wealth-of-nations-book-2-and-3/ http://librivox.org/the-wealth-of-nations-book-4-by-adam-smi... http://librivox.org/the-wealth-of-nations-book-5-by-adam-smi...
While the Wealth of Nations was a great book for its time, I suspect that the time it takes to read it would be better spent reading four shorter economics books.
I do recommend P. J. O'Rourke's book On The Wealth Of Nations, though, which summarises and discusses the whole thing in a hundred pages.
I do recommend P. J. O'Rourke's book On The Wealth Of Nations, though, which summarises and discusses the whole thing in a hundred pages.
This is an interesting book, but I think it's inferior to Friedman's Capitalism and Freedom when it comes to illustrating the core concepts underlying a free market viewpoint.
Can you give an example to substantiate your claim?
Friedman's approach is more scientific. He asks a lot of "Why?" questions to begin his discussion of various issues. His approach always has the strong feel of being scientific and falsifiable, and most importantly data driven.
Economics in One Lesson is also a good read, but to me it comes across as a bit more dogmatic... the examples are a bit less falsifiable, etc. In general, it's not the sort of book that is likely to be quite as convincing to a skeptic as Friedman's.
C&F (unlike some of Friedman's other books) is very welcoming to those with different ideas, and focuses on the goal of the discipline of economics and does not get caught up in political issues. I found the opposite tone in "Free to Choose", for example.
Economics in One Lesson is also a good read, but to me it comes across as a bit more dogmatic... the examples are a bit less falsifiable, etc. In general, it's not the sort of book that is likely to be quite as convincing to a skeptic as Friedman's.
C&F (unlike some of Friedman's other books) is very welcoming to those with different ideas, and focuses on the goal of the discipline of economics and does not get caught up in political issues. I found the opposite tone in "Free to Choose", for example.
I read a lot of economics and policy blogs (Marginal Revolution, Felix Salmon, Brad DeLong, etc...) and have come to the conclusion that the macro side of economics is still so in its infancy that it's can barely be called scientific. What you see is that various ideologies adopt their particular model (Keynsian, Austrian, etc...) and from there, the general lack of empiricism (never possible to run an experiment without confounding variables) plus confirmation bias (all deviations from your model can be explained by special circumstances) fuels a never ending debate.
So I try to remain skeptical of (seemingly polemical) works such as this one.
So I try to remain skeptical of (seemingly polemical) works such as this one.
Your conclusion is well-founded. The micro side of economics is one part science and one part logic; the macro side is one part logic and one part hand-waving.
The most objectionable and frustrating aspect of Austrian economics, to me, is the almost complete abandonment of formal mathematical models in their analyses.
To be clear, I am an empiricist and believe that the study of systems can only come about through careful experimentation, modeling, and formal mathematics. Mathematics, in my opinion, is the only objective measure by which we can analyse systems and trends.
I would concede that many of the macroeconomic models and experimentation in mainstream economics are weak and misused. However, I think any mainstream economist would agree with you and say that they are working hard to deal with the explosion of mathematical complexity in these kinds of analyses. They don't present their results as gospel, but they do formally state the models, meaning that they also formally state the assumptions being made.
Austrian economics, meanwhile, seems whole unscientific. Almost all Austrian economic systems eschew formal mathematics in favor of cute rhetorical devices. This book is a perfect example -- where are the mathematical models and formal reasoning? Formalism is good. Formalism is how we know what we are actually discussing and what we are trying to deduce. An example of how formalism is essential is Turing's PhD thesis. Without getting into details, Turing was trying to find the answer to a certain intuitive mathematical relation. What Turing found, however, was that there was no answer -- the statement itself could not be well-defined in a formal sense, meaning that it was not a good question.
This small example simply represents the large class of problems which can't be analyzed without formal breakdowns, simply because what seems interesting in rhetoric may be wholly untrue in a strict sense.
Rothbard, especially, seems guilty of my criticism. In a number of works he stated that he believed that historical analysis and modeling could never apply to economics and that all of economics could be explained by a priori relations. The troubling thing is that Rothbard should have known from physics and chemistry (and now somewhat formalized by statements about Turing machines and automata) that there can be underlying principles in mathematical systems and that can still be absolutely useless in analyzing the results of those systems. The three body problem, for instance, operates on very simple principles, but those principles are of almost no use in predicting the results of such a system.
So, in conclusion, I'm not saying that Austrian economics has no useful ideas, but what I am saying is that an underlying philosophy of many of Austrian economics' most celebrated evangelists is directly in conflict with my own. I don't believe that the right way to do economic or systems analysis is through rhetorical flourish or logical argument. These things are convincing on Internet boards but are not scientific and not well-defined. We should be trying to bring more science and formalism to economics, not less.
To be clear, I am an empiricist and believe that the study of systems can only come about through careful experimentation, modeling, and formal mathematics. Mathematics, in my opinion, is the only objective measure by which we can analyse systems and trends.
I would concede that many of the macroeconomic models and experimentation in mainstream economics are weak and misused. However, I think any mainstream economist would agree with you and say that they are working hard to deal with the explosion of mathematical complexity in these kinds of analyses. They don't present their results as gospel, but they do formally state the models, meaning that they also formally state the assumptions being made.
Austrian economics, meanwhile, seems whole unscientific. Almost all Austrian economic systems eschew formal mathematics in favor of cute rhetorical devices. This book is a perfect example -- where are the mathematical models and formal reasoning? Formalism is good. Formalism is how we know what we are actually discussing and what we are trying to deduce. An example of how formalism is essential is Turing's PhD thesis. Without getting into details, Turing was trying to find the answer to a certain intuitive mathematical relation. What Turing found, however, was that there was no answer -- the statement itself could not be well-defined in a formal sense, meaning that it was not a good question.
This small example simply represents the large class of problems which can't be analyzed without formal breakdowns, simply because what seems interesting in rhetoric may be wholly untrue in a strict sense.
Rothbard, especially, seems guilty of my criticism. In a number of works he stated that he believed that historical analysis and modeling could never apply to economics and that all of economics could be explained by a priori relations. The troubling thing is that Rothbard should have known from physics and chemistry (and now somewhat formalized by statements about Turing machines and automata) that there can be underlying principles in mathematical systems and that can still be absolutely useless in analyzing the results of those systems. The three body problem, for instance, operates on very simple principles, but those principles are of almost no use in predicting the results of such a system.
So, in conclusion, I'm not saying that Austrian economics has no useful ideas, but what I am saying is that an underlying philosophy of many of Austrian economics' most celebrated evangelists is directly in conflict with my own. I don't believe that the right way to do economic or systems analysis is through rhetorical flourish or logical argument. These things are convincing on Internet boards but are not scientific and not well-defined. We should be trying to bring more science and formalism to economics, not less.
Austrians do not "eschew" mathematics nor empiricism, rather they reject the claim that what is commonly called empirical evidence actually is, and admit to the limits of empiricism in social sciences. Aping the physical sciences in some form of cargo-cult formalism is not only wrong, but leads to flawed conclusions.
Austrians assert that the only way to empirically know a person's preferences is through observing their choices. There is no objective meaning to graphs that rely on the assumption that people have these scales of numbers in their heads that say, "An apple is five utils, a banana is ten." The only meaning comes from decisions - either you prefer the apple to the banana, or you prefer the banana to the apple.
Austrians further assert that any macroeconomic model must be a result of (or at least 100% consistent with) valid microeconomic principles. A macroeconomic model which concludes something that is not explainable in terms of human decisions is necessarily wrong.
Austrians assert that the only way to empirically know a person's preferences is through observing their choices. There is no objective meaning to graphs that rely on the assumption that people have these scales of numbers in their heads that say, "An apple is five utils, a banana is ten." The only meaning comes from decisions - either you prefer the apple to the banana, or you prefer the banana to the apple.
Austrians further assert that any macroeconomic model must be a result of (or at least 100% consistent with) valid microeconomic principles. A macroeconomic model which concludes something that is not explainable in terms of human decisions is necessarily wrong.
rather they reject the claim that what is commonly called empirical evidence actually is, and admit to the limits of empiricism in social sciences. Aping the physical sciences in some form of cargo-cult formalism is not only wrong, but leads to flawed conclusions.
Empirical evidence is exactly what it says it is and mathematics is exactly what it says it is. That's what makes them facts and mathematics. What you argue using those facts is completely different.
Austrians assert that the only way to empirically know a person's preferences is through observing their choices.
No they don't. Because then they could collect data on these choices, produce a model, and formally define it mathematically. This is the fundamental truth of falsifiable systems.
There is no objective meaning to graphs that rely on the assumption that people have these scales of numbers in their heads that say, "An apple is five utils, a banana is ten." The only meaning comes from decisions - either you prefer the apple to the banana, or you prefer the banana to the apple.
There are more systems of mathematics than ones based on continuous distributions. Consider the following definition:
forall people, exists pref : (fruit, fruit) -> {-1, 1} st. forall a,b in fruit => pref(a,b)
This is math. This formally encodes your statement. This is the kind of thing that Austrian economics should define and use. The fact that they don't is why I don't take them seriously.
Austrians further assert that any macroeconomic model must be a result of (or at least 100% consistent with) valid microeconomic principles. A macroeconomic model which concludes something that is not explainable in terms of human decisions is necessarily wrong.
So? I can both know that all quantum particles obey the Schrödinger wave function in all atomic structures and be completely unable to derive the properties of Si just from the wave construction of protons, electrons, and neutrons. Just because we know microeconomic models doesn't make them useful in a macroeconomic context.
Empirical evidence is exactly what it says it is and mathematics is exactly what it says it is. That's what makes them facts and mathematics. What you argue using those facts is completely different.
Austrians assert that the only way to empirically know a person's preferences is through observing their choices.
No they don't. Because then they could collect data on these choices, produce a model, and formally define it mathematically. This is the fundamental truth of falsifiable systems.
There is no objective meaning to graphs that rely on the assumption that people have these scales of numbers in their heads that say, "An apple is five utils, a banana is ten." The only meaning comes from decisions - either you prefer the apple to the banana, or you prefer the banana to the apple.
There are more systems of mathematics than ones based on continuous distributions. Consider the following definition:
forall people, exists pref : (fruit, fruit) -> {-1, 1} st. forall a,b in fruit => pref(a,b)
This is math. This formally encodes your statement. This is the kind of thing that Austrian economics should define and use. The fact that they don't is why I don't take them seriously.
Austrians further assert that any macroeconomic model must be a result of (or at least 100% consistent with) valid microeconomic principles. A macroeconomic model which concludes something that is not explainable in terms of human decisions is necessarily wrong.
So? I can both know that all quantum particles obey the Schrödinger wave function in all atomic structures and be completely unable to derive the properties of Si just from the wave construction of protons, electrons, and neutrons. Just because we know microeconomic models doesn't make them useful in a macroeconomic context.
"To be clear, I am an empiricist and believe that the study of systems can only come about through careful experimentation, modeling, and formal mathematics. Mathematics, in my opinion, is the only objective measure by which we can analyse systems and trends."
I think we have to be a little careful about approaching economics as a problem to be solved. Logic, math, and empiricism have their limits (even if they are the best tools we have).
For one thing, empiricism relies on being able to control the variables. But that's hard to do, because others can always refute the results by introducing other variables and factors.
And (as you point out) the possibilities explode so quickly that it's very difficult to reason purely based on logic from base principles. And there are humans involved, which makes it even more difficult (if not impossible).
I'm not criticizing logic and empiricism as tools. But I think they can very easily give a false confidence in the answers you get. You have to realize how small a piece of the problem space your logic actually covers; and how difficult it is to distill real world events into a nice clean, unbiased data set.
I think we have to be a little careful about approaching economics as a problem to be solved. Logic, math, and empiricism have their limits (even if they are the best tools we have).
For one thing, empiricism relies on being able to control the variables. But that's hard to do, because others can always refute the results by introducing other variables and factors.
And (as you point out) the possibilities explode so quickly that it's very difficult to reason purely based on logic from base principles. And there are humans involved, which makes it even more difficult (if not impossible).
I'm not criticizing logic and empiricism as tools. But I think they can very easily give a false confidence in the answers you get. You have to realize how small a piece of the problem space your logic actually covers; and how difficult it is to distill real world events into a nice clean, unbiased data set.
I would argue that mathematics can only give you false confidence if you fail to understand it completely. A sound formal mathematical definition holds all assumptions within the definition itself.
Note that I think that if you can't encode your theory in mathematics than it is non-predictive by definition. If it is non-predictive then I see no use for it in any real sense.
I hold all economic systems to the same level of critique, by the way. If your Keynesian system doesn't encode its assumptions and predictions in mathematics then it is by definition useless.
Note that I think that if you can't encode your theory in mathematics than it is non-predictive by definition. If it is non-predictive then I see no use for it in any real sense.
I hold all economic systems to the same level of critique, by the way. If your Keynesian system doesn't encode its assumptions and predictions in mathematics then it is by definition useless.
"I would argue that mathematics can only give you false confidence if you fail to understand it completely."
Yes, that's the problem. In economics, it's difficult to know what all of the relevant variables are and the basic inputs are not well-understood (like the behavior of people).
Even if you did create a perfect model, most of the assumptions would have to be nearly wild guesses, and probably even small errors in the assumptions would lead to wild errors in the result. And the resulting model would be so complex that I'm not at all sure it would even be useful for crafting policy.
Then, let's say we had a perfect and simple model that anyone could understand. Everything would be wonderful, right? No, you still have to collect all the relevant data for inputs, run the simulation, and then distribute the results to all of the relevant parties -- all before the economy plays out in real time.
So what actually happens with mathematical models is that people oversimplify, but because it has the aura of formalism they become very confident. There are always so many wild variables like wars or drought that it's easy to later dismiss any deviation from their model as "a special event" (e.g. an earthquake).
And what's the optimization target, by the way? The total number of shoes produced? Using GDP as an optimization target has a lot of known problems and embeds a lot of assumptions itself. And some people simply prefer living under a certain kind of economic system.
So, trying to approach economics from a purely mathematical standpoint is useless, in my opinion.
Yes, that's the problem. In economics, it's difficult to know what all of the relevant variables are and the basic inputs are not well-understood (like the behavior of people).
Even if you did create a perfect model, most of the assumptions would have to be nearly wild guesses, and probably even small errors in the assumptions would lead to wild errors in the result. And the resulting model would be so complex that I'm not at all sure it would even be useful for crafting policy.
Then, let's say we had a perfect and simple model that anyone could understand. Everything would be wonderful, right? No, you still have to collect all the relevant data for inputs, run the simulation, and then distribute the results to all of the relevant parties -- all before the economy plays out in real time.
So what actually happens with mathematical models is that people oversimplify, but because it has the aura of formalism they become very confident. There are always so many wild variables like wars or drought that it's easy to later dismiss any deviation from their model as "a special event" (e.g. an earthquake).
And what's the optimization target, by the way? The total number of shoes produced? Using GDP as an optimization target has a lot of known problems and embeds a lot of assumptions itself. And some people simply prefer living under a certain kind of economic system.
So, trying to approach economics from a purely mathematical standpoint is useless, in my opinion.
Applying mathematical models to human action is interesting, no doubt, but we are a long way off from anything approaching a hard science when it comes to economics. I'm certainly no economist, but economics in general seems to be more of a sociological problem than a mathematical one. I'm happy that there are two sides to the coin. I've delved into Keynes's General Theory a bit, and witness on a daily basis how that approach is fouled by the actions of humans.
Robert Murphy is an austrian economist who was trained by keynsians. He talks about the the difference in approach in this video:
http://www.youtube.com/watch?v=hkDYsRDah3I
Just because you use math dose not mean its more scientific, it just looks more like science. Hayek called this sientism. It does not make sence to use math-models in economics because its a social science, you cant model human behavior the same why you can with atoms.
Hayek worked a log on this kind of stuff you should check it out. For example his nobel price lecture "The Pretence of Knowledge" http://www.nobelprize.org/nobel_prizes/economics/laureates/1...
Hayek worked a log on this kind of stuff you should check it out. For example his nobel price lecture "The Pretence of Knowledge" http://www.nobelprize.org/nobel_prizes/economics/laureates/1...
There seem to be two issues at stake here. The first is whether mathematical models are appropriate and adequate to explain human behaviour. Here I have a lot of sympathy with Austrian arguments, but it's quite clear they overstate the case. Sure, economic models, like meteorological models, are rather looser and more speculative than Newtonian classical mechanics, but there are multimillion dollar industries that have grown up based on mathematical models of human behaviour; denying the obvious predictive power of at least some models of human behaviour seems akin to denying that one can make assumptions about natural selection because actions of lifeforms appear to be indeterminate. It's not like physical sciences are devoid of controversies over models either.
Hayek alluded to the problem of inferring a relationship between inflation and full employment from too small a sample, but Milton Friedman got a Nobel prize for predicting the breakdown of the relationship with an economic model. In the long run, economists might all be wrong about something, but at least most conventional ones they have the intellectual honesty to admit to the possibility theirtheories might be demonstrably false.
The second question is whether Austrian economists have something more compelling to offer than mathematical models. The answer, so far as I can tell, is no. They have A number of interesting ideas, many of which neoclassical authors have tried to develop as models rather than simply assert them as a priori truths. But praxaeology comes across as pure sophistry of the worst kind; Rothbard's "Praxaeology" paper might claim that it's intended to be a set of axioms where A implies B but he then goes on to provide an example which consists of rather elementary and mostly uncontroversial statements most of which simply dont imply each other at all Sample: "that a man acts implies that he will make a difference...action therefore implies that man does not have omniscient knowledge of the future" http://mises.org/rothbard/praxeology.pdf
Obviously, when it comes to more controversial statements it's necessary to stretch the definition of "imply" a little further in order to paint your pet theory as a priori truth. But even while discussing something as indisputably empirically true as human nonomniscience, that sort of woolly argument is enough to make even the most superficial mathematical model a lot more compelling.
In defence of bad application of math, it's less of a dead end than bad application of philosophy
Hayek alluded to the problem of inferring a relationship between inflation and full employment from too small a sample, but Milton Friedman got a Nobel prize for predicting the breakdown of the relationship with an economic model. In the long run, economists might all be wrong about something, but at least most conventional ones they have the intellectual honesty to admit to the possibility theirtheories might be demonstrably false.
The second question is whether Austrian economists have something more compelling to offer than mathematical models. The answer, so far as I can tell, is no. They have A number of interesting ideas, many of which neoclassical authors have tried to develop as models rather than simply assert them as a priori truths. But praxaeology comes across as pure sophistry of the worst kind; Rothbard's "Praxaeology" paper might claim that it's intended to be a set of axioms where A implies B but he then goes on to provide an example which consists of rather elementary and mostly uncontroversial statements most of which simply dont imply each other at all Sample: "that a man acts implies that he will make a difference...action therefore implies that man does not have omniscient knowledge of the future" http://mises.org/rothbard/praxeology.pdf
Obviously, when it comes to more controversial statements it's necessary to stretch the definition of "imply" a little further in order to paint your pet theory as a priori truth. But even while discussing something as indisputably empirically true as human nonomniscience, that sort of woolly argument is enough to make even the most superficial mathematical model a lot more compelling.
In defence of bad application of math, it's less of a dead end than bad application of philosophy
Economics in one word: Scarcity. The rest, is as they say, commentary.
(Full disclosure: Economics and Pol.Sci. major here.)
One Daniel Hausman, introducing Cambridge's Philosophy of Economics [1] anthology edited by him:
To guard yourself against accidentally lending these postulates too much credit, I think the best technique has been described by an economist [2]:
[1] isbn:0521709849
[2] http://edge.org/responses/what-scientific-concept-would-impr...
One Daniel Hausman, introducing Cambridge's Philosophy of Economics [1] anthology edited by him:
> > Premises assumed without evidence, or in spite of it;
> > and conclusions drawn from them so logically, that
> > they must necessarily be erroneous.
> > – Thomas Love Peacock, Crochet Castle
>
> Ever since its eighteenth-century inception, the science
> of economics has been methodologically controversial. Even
> during the first half of the nineteenth century, when
> economics enjoyed great prestige, there were skeptics like
> Peacock. For economics is a peculiar science. Many of its
> premises are platitudes such as "Individuals can rank
> alternatives" or "Individuals choose what they most
> prefer." Other premises are simplifications such as
> "Commodities are infinitely divisible," or "Individuals
> have perfect information." On such platitudes and
> simplifications, such "premises assumed without evidence,
> or in spite of it," economists have erected a
> mathematically sophistical theoretical edifice, whose
> conclusions, although certainly not "necessarily
> erroneous," are nevertheless often off the mark. Yet
> businesses, unions, and governments employ thousands of
> economists and rely on them to estimate the consequences
> of policies. Is economics a science or isn’t it?
To guard yourself against accidentally lending these postulates too much credit, I think the best technique has been described by an economist [2]:
> So in answer to the current question I am proposing that
> we now change the usage of the word Aether, using the old
> spelling, since there is no need for a term that refers to
> something that does not exist. Instead, I suggest we use
> that term to describe the role of any free parameter used
> in a similar way: that is, Aether is the thing that makes
> my theory work. [...]
>
> Aether variables are extremely common in my own field of
> economics. Utility is the thing you must be maximizing in
> order to render your choice rational.
>
> Both risk and risk aversion are concepts that were once
> well defined, but are now in danger of becoming
> Aetherized. Stocks that earn surprisingly high returns are
> labeled as risky, because in the theory, excess returns
> must be accompanied by higher risk. If, inconveniently,
> the traditional measures of risk such as variance or
> covariance with the market are not high, then the
> Aetherists tell us there must be some other risk; we just
> don't know what it is.
[1] isbn:0521709849
[2] http://edge.org/responses/what-scientific-concept-would-impr...
Of course we should all read critically. We already know that. Is there anything in particular that you think Hazlitt got wrong?
From his Minimum Wage chapter [1]:
But he gets everything wrong in his second sentence. There's a word for wages as opposed to prices because of how language evolved: put simply, we intuitively perceived wages as something different from prices and felt the need to give them a name of their own. This has nothing to do with science.
So in fact, when we're confronted with a theory where two concepts turn out to be the same thing, that can mean one of two things:
- IF the theory is sound, and grounded on enough evidence as to demonstrate that our intuitive perception was wrong all along, THEN indeed wages are no more and no less than prices. That would be an "aha" moment worth a prize or something.
- ELSE, if the theory isn't sound enough, or doesn't have enough evidence as to defend the notion that wages are merely prices, THEN we're forced to conclude that the theory is merely construing that, and opt-into that belief at our own discretion.
So far we see no theory, so his argument that the two names have "prevented most people from recognizing that the same principles govern both" wages and prices has no meaning whatsoever. And where is his theory? Nowhere to be seen, he's using some commonsense assumptions about prices [2], but he doesn't establish anything scientific enough to defend the ambitious notion that wages are no more and no less than prices. In fact, whenever he applies those vague notions he has of prices to wages, he's begging the question that this gratuitous cross-application of concepts is sound.
Now, since the whole chapter is based on an assumption which the author fails to defend and the application of that assumption to a number of discrete case studies which don't paint the whole picture of what happens once a minimum wage is established (betraying also the much defensible premise of the entire book that we should look at all the consequences of policies to all groups of people through all time)... then I can only assume that the whole chapter is scientifically worthless, and whatever resonates with me in it has to do with my ideologies and not with evidence or soundness of reason.
[1] http://steshaw.org/economics-in-one-lesson/chap19p1.html
[2] Which might as well not hold against evidence on their own, come to think of it.
EDITED for clarity (as this is a long comment), added a new thought as footnote #2.
> It is unfortunate for clarity of economic thinking that
> the price of labor’s services should have received an
> entirely different name from other prices. This has
> prevented most people from recognizing that the same
> principles govern both.
But he gets everything wrong in his second sentence. There's a word for wages as opposed to prices because of how language evolved: put simply, we intuitively perceived wages as something different from prices and felt the need to give them a name of their own. This has nothing to do with science.
So in fact, when we're confronted with a theory where two concepts turn out to be the same thing, that can mean one of two things:
- IF the theory is sound, and grounded on enough evidence as to demonstrate that our intuitive perception was wrong all along, THEN indeed wages are no more and no less than prices. That would be an "aha" moment worth a prize or something.
- ELSE, if the theory isn't sound enough, or doesn't have enough evidence as to defend the notion that wages are merely prices, THEN we're forced to conclude that the theory is merely construing that, and opt-into that belief at our own discretion.
So far we see no theory, so his argument that the two names have "prevented most people from recognizing that the same principles govern both" wages and prices has no meaning whatsoever. And where is his theory? Nowhere to be seen, he's using some commonsense assumptions about prices [2], but he doesn't establish anything scientific enough to defend the ambitious notion that wages are no more and no less than prices. In fact, whenever he applies those vague notions he has of prices to wages, he's begging the question that this gratuitous cross-application of concepts is sound.
Now, since the whole chapter is based on an assumption which the author fails to defend and the application of that assumption to a number of discrete case studies which don't paint the whole picture of what happens once a minimum wage is established (betraying also the much defensible premise of the entire book that we should look at all the consequences of policies to all groups of people through all time)... then I can only assume that the whole chapter is scientifically worthless, and whatever resonates with me in it has to do with my ideologies and not with evidence or soundness of reason.
[1] http://steshaw.org/economics-in-one-lesson/chap19p1.html
[2] Which might as well not hold against evidence on their own, come to think of it.
EDITED for clarity (as this is a long comment), added a new thought as footnote #2.
I think that the words price, wage, rate, cost, expense, income, sales, purchases, etc may all denote the same thing from different perspectives.
Price is used when are interested mainly in the amount especially with respect to other things. So if a programming firm contracts with a client to do work, the contract may talk in terms of the generic price. But the individual programmers doing the work think in terms of wages. And those wages may be a cost or expense to the firm's owners, who also think in terms of rates, income, and sales while the client considers the programming as a purchase.
The term price in particular emphasizes the fact that there are options as to how to spend money. For example, a auto company can hire workers directly, in which case it pays wages. Or it can outsource, paying another company a rate for the labor, or it can just buy the finished parts. It makes sense to compare the different options as prices.
Certainly wages are considered as prices when it comes to automation decisions. What is price of wages and associated expense versus the price of the robot?
This (treating wages as prices) seems like such a basic concept that the burden is on the person who wants to treat wages as different from prices to explain why wages are or should be different.
Price is used when are interested mainly in the amount especially with respect to other things. So if a programming firm contracts with a client to do work, the contract may talk in terms of the generic price. But the individual programmers doing the work think in terms of wages. And those wages may be a cost or expense to the firm's owners, who also think in terms of rates, income, and sales while the client considers the programming as a purchase.
The term price in particular emphasizes the fact that there are options as to how to spend money. For example, a auto company can hire workers directly, in which case it pays wages. Or it can outsource, paying another company a rate for the labor, or it can just buy the finished parts. It makes sense to compare the different options as prices.
Certainly wages are considered as prices when it comes to automation decisions. What is price of wages and associated expense versus the price of the robot?
This (treating wages as prices) seems like such a basic concept that the burden is on the person who wants to treat wages as different from prices to explain why wages are or should be different.
I must have read this book a hundred times, no kidding. It is a great book, or rather, a great piece of writing. That said, it has nothing to do with economics. It should really be titled 'Hazlitt in One Lesson.' This man, armed with his rhetoric ammunition, is an absolute genius, and fells the members of his community with brutal, ruthless precision. The book goes on the offensive from the get go. From then on, its just hack, chop, thrust, pierce...quite amazing actually. Each time I read it, I feel like I've witnessed a battle of gladiators and in the end Hazlitt holds the lone sword thrust deeply into Keynes' heart.
There have been and will be multitudes who will take on Keynes. Studying at UChicago exposed me to the Lucas critique ( http://en.wikipedia.org/wiki/Lucas_critique ), in which Professor and Nobel laurate Robert Lucas uses the "econometric models aren't policy-invariant" device to bludgeon Keynesian thought. But then, that stuff is fairly deep, mathematical, and ergo, boring. You'd have to know what econometrics is, and what's policy invariant, and how changing the policy midstream will cause the parameters of your underlying econometric model to alter and so on....not exactly the sort of thing that'll charge you up. Hayek's critique of Keynesian thought is again fairly deep and requires thought.
What works for Hazlitt is the general dumbness and idiocy of the reader. The average reader of Hazlitt assumes that a nation is just like his house scaled by a magnitude of a billion, so if he as a householder is able to live within his means and balance his budget, the nation must also do the same, otherwise the economic policies of the nation are bogus and the economists are incompetent frauds. This is the same sort of reader who consumes pop-science. The same reader who thinks multivariable calculus is just high school arithmetic scaled by a million, and that graduate students working on real algebra in their 20s are really solving quadratic equations of the ax^2+bx+c type he solved in his teens, just with bigger numbers! You can't reason with such people. Or maybe you can, but I can't. So whenever I meet people who are taken with Hazlitt, I first check if they like Hazlitt as a sarcastic comic book or whether they actually believe everything they've read. If its the latter, I slowly back away and run for the hills.
One of the threads above says Hazlitt isn't out to educate you, rather he's out to convert you. I think it is neither. Hazlitt is pure comedy gold. He is out to entertain you, but he is so subtle and underplayed most readers interpret his antics literally and walk around chanting "The Broken Window Fallacy" as if it is some mathematical theorem. To actually think "the most important lesson about economics is: One must consider not just what is seen, but also unseen." is incredibly naive, plain silly and quite stupid, to be blunt. If that is all what economics was about, why, we'd all get our doctorates in econ and our Nobel too for that matter.
"One must consider not just what is seen, but also unseen" is just as vacuously empty as "good begets good" or "haste makes waste" or other catchy platitudes. You can spin these things to mean just about whatever you want. To say that's the most important lesson econ has to offer...Ha!
There have been and will be multitudes who will take on Keynes. Studying at UChicago exposed me to the Lucas critique ( http://en.wikipedia.org/wiki/Lucas_critique ), in which Professor and Nobel laurate Robert Lucas uses the "econometric models aren't policy-invariant" device to bludgeon Keynesian thought. But then, that stuff is fairly deep, mathematical, and ergo, boring. You'd have to know what econometrics is, and what's policy invariant, and how changing the policy midstream will cause the parameters of your underlying econometric model to alter and so on....not exactly the sort of thing that'll charge you up. Hayek's critique of Keynesian thought is again fairly deep and requires thought.
What works for Hazlitt is the general dumbness and idiocy of the reader. The average reader of Hazlitt assumes that a nation is just like his house scaled by a magnitude of a billion, so if he as a householder is able to live within his means and balance his budget, the nation must also do the same, otherwise the economic policies of the nation are bogus and the economists are incompetent frauds. This is the same sort of reader who consumes pop-science. The same reader who thinks multivariable calculus is just high school arithmetic scaled by a million, and that graduate students working on real algebra in their 20s are really solving quadratic equations of the ax^2+bx+c type he solved in his teens, just with bigger numbers! You can't reason with such people. Or maybe you can, but I can't. So whenever I meet people who are taken with Hazlitt, I first check if they like Hazlitt as a sarcastic comic book or whether they actually believe everything they've read. If its the latter, I slowly back away and run for the hills.
One of the threads above says Hazlitt isn't out to educate you, rather he's out to convert you. I think it is neither. Hazlitt is pure comedy gold. He is out to entertain you, but he is so subtle and underplayed most readers interpret his antics literally and walk around chanting "The Broken Window Fallacy" as if it is some mathematical theorem. To actually think "the most important lesson about economics is: One must consider not just what is seen, but also unseen." is incredibly naive, plain silly and quite stupid, to be blunt. If that is all what economics was about, why, we'd all get our doctorates in econ and our Nobel too for that matter.
"One must consider not just what is seen, but also unseen" is just as vacuously empty as "good begets good" or "haste makes waste" or other catchy platitudes. You can spin these things to mean just about whatever you want. To say that's the most important lesson econ has to offer...Ha!
Wow! You're very smart. You know multivariate calculus (which is much more complicated than solving quadratic equations) and the Lucas critique. You went to Chicago.
You're much smarter than the average reader of Hazlitt, who is dumb and idiotic, so much beneath you that you can't reason with them, so you prefer to slowly back away and run for the hills.
Hazlitt is an absolute genius but at the same time incredibly naive, plain silly, and quite stupid, to be blunt. His main lesson is also vacuously empty. You read his book a hundred times.
Thanks for the helpful post. I'm convinced. There's no need to get into specifics as to where specifically Hazlitt went awry.
You're much smarter than the average reader of Hazlitt, who is dumb and idiotic, so much beneath you that you can't reason with them, so you prefer to slowly back away and run for the hills.
Hazlitt is an absolute genius but at the same time incredibly naive, plain silly, and quite stupid, to be blunt. His main lesson is also vacuously empty. You read his book a hundred times.
Thanks for the helpful post. I'm convinced. There's no need to get into specifics as to where specifically Hazlitt went awry.
> To actually think "the most important lesson about economics is: One must consider not just what is seen, but also unseen." is incredibly naive, plain silly and quite stupid, to be blunt.
Really? When I read that sentence, I cannot be sure it is false to begin with.
First, the statement isn't completely vacuous. In many domains, we are making measures to see if we are "doing well". Then we forget that "doing well" and "maximizing the measured criteria" aren't the same thing. Sometimes, we even game the system, so the two become wildly different. This is what LessWrong calls a "lost purpose"[1]. Obvious examples are the GDP and the grade system in schools.
Now, imagine for a second that you don't follow that lesson (which, I repeat, often happens). Could you do economics well enough to do more good than harm? Hardly, in my opinion. So maybe that's not the most important lesson, but it's close.
[1]: http://lesswrong.com/lw/le/lost_purposes/
Really? When I read that sentence, I cannot be sure it is false to begin with.
First, the statement isn't completely vacuous. In many domains, we are making measures to see if we are "doing well". Then we forget that "doing well" and "maximizing the measured criteria" aren't the same thing. Sometimes, we even game the system, so the two become wildly different. This is what LessWrong calls a "lost purpose"[1]. Obvious examples are the GDP and the grade system in schools.
Now, imagine for a second that you don't follow that lesson (which, I repeat, often happens). Could you do economics well enough to do more good than harm? Hardly, in my opinion. So maybe that's not the most important lesson, but it's close.
[1]: http://lesswrong.com/lw/le/lost_purposes/
I'm not clear on how if something is claimed to be "most important" that it thus "is all what economics was about". The former seems to deny the latter.
Yet another vacuous critique of Hazlitt.
If anyone here actually wants to hear more scholarly and substantive critiques against Hazlitt and Austrian economics, I would advise against wasting time reading through this Hacker News thread.
There are tons of better critiques to be found online. The one I came across that I found to be excellent was "Why I Am Not an Austrian Economist" by Bryan Caplan (http://econfaculty.gmu.edu/bcaplan/whyaust.htm).
If anyone here actually wants to hear more scholarly and substantive critiques against Hazlitt and Austrian economics, I would advise against wasting time reading through this Hacker News thread.
There are tons of better critiques to be found online. The one I came across that I found to be excellent was "Why I Am Not an Austrian Economist" by Bryan Caplan (http://econfaculty.gmu.edu/bcaplan/whyaust.htm).
Economics in One Lesson taught me "see" economics the way an painter sees a landscape or a programmer sees a program. The painter and programmer see their subjects with more understanding than the layman.
Intuitively, it seems obvious that interference with people's free economic choices hurts the economy. Hazlitt helped me see why. The secret is to imagine what the economy would be like without interference. What the interference displaces.
After laying out the basic approach in the first chapter, Hazlitt spends the rest of the book applying the principle to the various ways politicians tend to interfere with economic freedom. He explains clearly, in basic English anyone can understand, what each kind of interference changes what would otherwise have happened.
So for example, Hazlitt starts with the broken window fallacy: that the ruffian who breaks a shopkeeper's front window is really a public benefactor because he gives employment to the glazier. Hazlitt explains that while the glazier is benefited by the broken window, the overall economy is not, because, had the window not been broken, then shopkeeper would have, not just his window, but a new suit that he would have purchased but for having to pay for the window. In short: When the window is broken, the shopkeeper ends up with a new window and glazier ends up with some money. Had the window not been broken, the shopkeeper still has his window but also has a new suit, and the tailor has some money.
The broken window fallacy is still in use today by economists and politicians who can sometimes be heard explaining that war, natural disasters, and other calamities are good for the economy.
Hazlitt goes on from there to address the minimum wage, price controls, rent control, government subsidies to various industries, etc. For each, Hazlitt helped me see beyond the visible "winner", that such policies are designed to help, to the unseen "losers": the workers who aren't employed and the projects and industries that fail to develop as a result.
As a result of reading the book, I find it much easier to explain why certain government programs are harmful.
Intuitively, it seems obvious that interference with people's free economic choices hurts the economy. Hazlitt helped me see why. The secret is to imagine what the economy would be like without interference. What the interference displaces.
After laying out the basic approach in the first chapter, Hazlitt spends the rest of the book applying the principle to the various ways politicians tend to interfere with economic freedom. He explains clearly, in basic English anyone can understand, what each kind of interference changes what would otherwise have happened.
So for example, Hazlitt starts with the broken window fallacy: that the ruffian who breaks a shopkeeper's front window is really a public benefactor because he gives employment to the glazier. Hazlitt explains that while the glazier is benefited by the broken window, the overall economy is not, because, had the window not been broken, then shopkeeper would have, not just his window, but a new suit that he would have purchased but for having to pay for the window. In short: When the window is broken, the shopkeeper ends up with a new window and glazier ends up with some money. Had the window not been broken, the shopkeeper still has his window but also has a new suit, and the tailor has some money.
The broken window fallacy is still in use today by economists and politicians who can sometimes be heard explaining that war, natural disasters, and other calamities are good for the economy.
Hazlitt goes on from there to address the minimum wage, price controls, rent control, government subsidies to various industries, etc. For each, Hazlitt helped me see beyond the visible "winner", that such policies are designed to help, to the unseen "losers": the workers who aren't employed and the projects and industries that fail to develop as a result.
As a result of reading the book, I find it much easier to explain why certain government programs are harmful.
For those of you how are intressted in austrian economics. The Mises Institute has lots of free stuff (books, audiobooks ....) online.
http://media.mises.org/mp3/audiobooks/ www.mises.org
http://media.mises.org/mp3/audiobooks/ www.mises.org
Business in one lesson:
Anyone who claims to have all the answers wrapped up in one neat lesson, probably doesn't.
Anyone who claims to have all the answers wrapped up in one neat lesson, probably doesn't.
read like an attack piece and/or propaganda. i saw lots of glaring flaws in his economic philosophy/understanding. i sense a recent trend on HN where we're getting more Fox News style low-brow econo-propaganda. I hope it ends.
I read a few (not too much, probably) books on economy both from the left and the right wing economists. An especially interesting turned out to be this one: http://www.amazon.com/Basic-Economics-4th-Ed-Economy/dp/0465... (lots of interesting facts in it, valuable even if you disagree with the point of view). I don't have any strong opinion about which side comes closer to the truth, but so far free market economists seemed to have much better arguments and be more convincing.
The reason many people disagree with certain economic policies and favor others are usually quite obvious: it's less riskier than dealing with the unfavorable policy. Human nature is to try to resist radical changes, such as looking for a better job or taking risks of starting your own company or, in general, investing time or money in your own welfare. Thus, the poor would prefer to stay where they are and let the government do the job of taking them out of poverty slowly, by asking rich to pay more taxes, because it is less riskier than acting on their lives themselves. The rich don't want to be moving their assets elsewhere or invest in enterprises outside their usual boundaries, because it is riskier than actually lobbying for the tax breaks. The real question is not who is currently oppressed or "made" poor, but rather what the intended policies, be it tax breaks for the rich or their abolishment, do to help those oppressed.
My guess is that government getting more tax money will not necessarily put them to work effectively, because by definition government is less effective than businesses. It has no incentives to be so. One might say, that it's still better than rich holding all the money to themselves creating no jobs at all. Maybe, and maybe not. Would the society really benefit if the government took the money from the rich and waste them on creating artificial jobs the country doesn't really need, or, would it be better if the rich kept the money to themselves up until the time they could see the opportunity to spend it effectively, creating the jobs that the economy as a whole really needs?