Good reading on the minimum wage

Here’s the best thing I’ve read about the minimum wage in a long time, from Don Boudreaux at Cafe Hayek.

Don has been working this lump of clay to articulate his case against the minimum wage for a long-time and I think it’s finally taken shape into something that is compelling. I especially like:

Flaws galore infect Steven Pearlstein’s case for raising the minimum wage (“Big strides could come from a small bump in pay,” Jan. 5) – that is, his case for government intervention to strip low-skilled workers of the most valuable of the few bargaining chips they have when competing for employment, namely, their ability to offer to work for hourly pay below that of other, more qualified workers who are paid the government-stipulated minimum.

I also like his explanation for why the minimum wage studies that folks like Pearlstein use to support their opinions are flawed.

It would be like empirically studying today the effects of a recent rise in the minimum-allowed price of strawberries if strawberries had long ago been made unnecessarily pricey by minimum-strawberry-price legislation.  Consumers would long ago have switched their diets away from strawberries; chefs would long ago have begun concocting fewer desserts and recipes with strawberries and more with other fruits and berries.  Other ingredients would have become staple substitutes for strawberries in consumers’ diets and in chefs’ dishes and recipes.  Farmers, in turn, would have – despite the formal, legislated higher list price for strawberries – either totally abandoned or significantly abandoned strawberry production.

Read the whole thing.

The competition to see who can best cooperate with consumers

That’s a great way to view competition between businesses.

Credit David Henderson’s post on EconLog, where he is justifiably annoyed at the use of battle terms in a Wall Street Journal article to describe competition between two airlines for consumers flying to and from Seattle. Henderson thinks the author, and many like her, neglect the benefits to consumers when framing business competition as a battle.

Also, credit a commenter on his post, Julien Couvreur, for pointing to and summarizing a Don Boudreaux post about the same thing. Couvreur writes:

…economists tend to talk a lot about competition, but it is competition for cooperation (who can cooperate best with consumers). This is hardly war.


Important Words

Don Boudreaux posts an important Quotation of the Day from Deirdre McCloskey (see Don’s post for full cite):

Unlike stealing or taxing or highhandedly appropriating, exchange is a positive – not a zero- or negative-sum game.  If Sir Botany must tempt the peasants with offers of educational services or consultation on interior decorating in order to get the barley, both he and the peasants are better off.  If he just grabs it, only he is better off and they are worse off.  If I buy low and sell high, I am doing both of the people with whom I deal a favor.  That’s three favors done – to the seller, the buyer, and me in the middle and no one hurt except by envy’s sting.  The seller and buyer didn’t have to enter the deal, and by their willingness they show they are made better off.  One can say it stronger.  Only such deals are just.

I was exposed to the idea of that voluntary trade is a win-win much too late in life. This is the foundation upon which we can credit our superb standard of living, but we all too often are taught to despise rather than celebrate it. We should despise, or at the very least, be more cautious of the unjust transactions.

Socially wasteful?

As a long-time debate aficionado, it seems to become rarer and rarer that I come across a debate that I haven’t heard yet and makes me think. I came across such a debate between Steve Landsburg and Don Boudreaux about socially wasteful spending.

It goes something like this:

Company A has a product that produces value for society, let’s say $100. Company B faces a decision to make a competing product that is slightly better and would add marginally to the overall value for society, let’s say $10. So, Company B’s product would produce value of $110.

Company B faces an incentive to invest more than the marginal improvement in societal value, $10 in this case, because it can also attract Company A’s customers.

So, maybe Company B invests $50 to produce $10 more in value for society, because it can attract the some or all of the $100 of value already served by Company A’s product.

On net, society is worse off because a $50 investment has been made to produce $10 of value, for a net loss of $40. Landsburg says the $50 is socially wasteful spending, though he admits that the simple example doesn’t capture all the complexities of the real world, like the possibility that the $50 investment accidentally produces more than $50 of value.

But, I think his main point is that this incentive to make socially wasteful investments is, perhaps, one weakness in the normal feedbacks of capitalism.

I’m having a hard time fitting the real world onto the simple example, where there is uncertainty, risk, prudence, competition, different value propositions for different people and such.

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Minimum wage links

Don Boudreaux has had several great posts about the minimum wage lately, but a couple are exceptional. In this one, he does a great job of giving illustrative analogies to make the economics easier to understand. In this one he writes a letter to the New York Times to dispute the left’s favorite Nobel-laureate, Paul Krugman.

In this one, Greg Mankiw, also responding to Krugman, points to research that found a link between jobs and the minimum wage. Mankiw also points to a great post from Steve Landsburg, that introduces some interesting and different points. Steve edits that post here.

Mankiw also disagrees with the President about research on minimum wage.

Of course, there’s one single point that most of these economist, except Don Boudreaux, misses: What business is it of your’s?

Kings by committee

From Don Boudreaux’s Sunday’s Quotation of the Day

…page 123 of the 1981 Liberty Fund edition of Herbert Spencer’s important 1884 tract, The Man Versus the State:

“The great political superstition of the past was the divine right of kings.  The great political superstition of the present is the divine right of parliaments.”

Neither do I

Don Boudreaux, of Cafe Hayek, explains why he doesn’t care about income inequality. I agree. At the end his post, Boudreaux adds a great comment from Steve Horwitz.

I also agree with a couple of comments to the post that say that concern for income inequality isn’t necessarily “envy elevated to public policy,” as Boudreaux claims at one point.

While I think envy plays a role for some of those concerned with the income-inequality-shiny-object, I think others are motivated by what they view as unfair processes for achieving wealth, which is also a concern of Boudreaux’s.

It’s just that Boudreaux and these folks have different views on what constitute unfair processes. Which, I believe, should take the discussion to the next stage: What are those unfair processes and why are they unfair?

Boudreaux and libertarians generally see wealth acquired through market activities as fair and wealth acquired by scratching the back of a politician as unfair.  But, others tend to see it the other way around.

But, those who see it the other way around don’t explain the processes they deem as unfair. They assume income inequality is proof that the processes were unfair.

Here’s something else I’ve noticed. Ask them about the wealth Steve Jobs earned before his death or that of their favorite movie stars and you’ll hear why these particular wealthy people deserve it. It’s because they produced something these folks personally value.

Ask them about the wealth of an oil or pharmaceutical company CEO and you’ll get a sneer.

Their idea of “unfair processes” generally is their own arbitrary assessment of whether the person deserves the wealth or not.