"Same policies work everywhere"

Back in the day, a concatenation of circumstances led to me being alone in a room with a well-known economist who was then advising governments around the world. I thought I'd start the conversation with the anodyne remark "it must be a fascinating challenge to give policy advice in so many different places."

"No", he replied. "The same policies work everywhere."

I was surprised by this. One of us is wrong here, I thought, and if it's me, at least nobody is getting hurt.

I was reminded of this by this Venn diagram, reproduced by Tim.

The diagram's force rests upon the belief that the same policies work everywhere - that a price rise has the same effect in all markets.

But this is precisely what advocates of higher minimum wages question. One argument for them is that a higher price of labour won't reduce demand - because employers have monopsony power, or because higher wages will be offset by lower turnover.

This highlights two different ways of thinking about policy, pointed out by Edmund Burke, as discussed (pdf) by Jesse Norman.

On the one hand, he said (par 12 here), there is "the nakedness and solitude of metaphysical abstraction". The Venn diagram depends for its power upon this way of thinking - that the abstractions of Econ 101 work everywhere.

Burke, however, rejected this:

Circumstances (which with some gentlemen pass for nothing) give in reality to every political principle its distinguishing colour and discriminating  effect. The circumstances are what render every civil and political scheme beneficial or noxious to mankind.

From this perspective, Krugman and other advocates of minimum wages are making a reasonable point. The circumstances of labour markets are not the same as those of carbon markets, so political schemes that are beneficial in the one can be noxious in the other.

Now, I don't say this to defend minimum wages. I think a much better way to help the low-paid would be to strengthen their bargaining power via policies such as expansionary macro policies, a serious jobs guarantee, a basic income and stronger trades unions. Instead, I do so to point out that if you wish to argue against minimum wages you must counter the monopsony-style arguments.

Snarking about inconsistency might be good enough for Oxford Union-style debating knockabout. But it's not serious economics. And- given the Burkean dichotomy - nor is it good philosophy.

Comments

[Matt Moore]

Tim Worstall also notes that the right has it's problems with people who believe a carbon tax would be ineffective...

But no matter. The deeper argument this diagram represents is that, if we ex ante accept that demand curves in general are downward-sloping, the burden of proof is on those who contest that it is in fact upwards-sloping in certain markets.

No one has to my mind yet demonstrated that in either carbon or low-skilled labour markets such a situation obtains. Thus to hold differing views on the two markets suggests that one's priors regarding the two markets were originally different - i.e. one was biased

[Blissex]

«The deeper argument this diagram represents is that, if we ex ante accept that demand curves in general are downward-sloping, the burden of proof is on those who contest that it is in fact upwards-sloping in certain markets.»

This statement is both basically true and at variance with sensible economics theory, because it is based on assuming that the demand curves and the supply curves don't change when income levels change.

If the Laffer curve is true then minimum wage increases pay for themselves and more! Because if minimum wages increases more people can afford more stuff and therefore increased demand also drives increased demand for services and goods in which one of the major inputs if minimum wage work, and therefore the profits of minimum wage companies will surge, and drive higher employment in minimum wage jobs. With a mechanism very similar to that of the Laffer curve. To me the people who argue that there is massive supply effect to lower taxes such that they pay for themselves but not a massive demand effect to higher wages such that they pay for themselves seem to be intellectually inconsistent.

But whether increasing the minimum wages impacts "employment" depends on how one defines "employment". For example a higher minimum wage might lead to fewer hours worked per employee, but each being paid more, to the gain of the employee, in part in free time, in part in higher take home pay.

Higher minimum wages can also result in a reduction in welfare benefits paid for by a reduction in profits in businesses dependent on minimum wage work, which may overall leads to more employment at higher wages, because the net effect may be a lowering of taxes on better paid jobs and a lowering of profitability on lower paid jobs.

The effects for changes in the minimum wage that are not outrageously large are usually much of wash, but usually significantly beneficial to *most* workers and somewhat increasing prices for consumes of minimum wage goods and services and reducing profits for minimum wages business as prices go up but not as much to compensate for the increased wages.

As ChrisD and Burke say, the magnitude of the competing effects depends on circumstances, because the curves *obviously* shift too.

[Stevenclarkesblog.wordpress.com]

Is this why you say thinking about mechanisms are important. For example, demand curves generally slope downwards and supply curves upwards.

But economists know of some situations where different mechanisms - like income and substitution effects - work in the same direction, and in others work against each other.

Hence exceptions like Giffen goods and backward bending labour supply curves.

[Oakchair]

@Matt Moore
"No one has to my mind yet demonstrated that in either carbon or low-skilled labour markets such a situation obtains."
In America different states all across the country have implemented minimum wage increases through the decades. Studies find that localities where minimum wages went up performed better then those that didn't go up; these studies compared similar areas of one state to another. For example a coal mining town on the Ohio border vrs. a coal mining town on the West Virginia border etc.

[rogerh]

Suppose one becomes a 'big shot', wouldn't it make sense to stick to what got you there. In argumentation any wavering over this or that circumstance can be used against you - so stick to what keeps the clients calling.

[Neil]

@Matt Moore: An excellent point, thank you. I would add that if one proposes a view that runs counter to one of the basic principles of economics, the burden of proof lies so firmly with you that your evidence to the contrary has to be utterly overwhelming; fiddling about with talk of possible monopsony power (which relies on some VERY shaky assumptions), or pointing to noisy empirical data showing inconclusive effects is simply not going to cut it.

This is one of those "small truth, big error" situations that Chris is so fond of talking about; Krugman has identified a set of effects that may run counter to the ordinary law of demand (small truth), but owing to his personal political biases, he chooses to over-emphasise them to a degree where he claims they actually override the law of demand (big error).

It's a common failing of trained economists: they tend to confuse "it's not as simple as that" with "that's not true".

[Blissex]

«if one proposes a view that runs counter to one of the basic principles of economics,»

If you refer here to the "laws of demand and supply", as commonly taught with curves in textbooks, they are both "basic principles of economics" and usually false, because their applicability is based on extremely narrow and unrealistic "ceteris paribus" assumptions.

That is, they are certainly Laws of "Economics", that is the vulgar neoclassical propaganda that is forcefed the the gullible public, but largely the fruits of fantasy.

[Matt Moore]

@ Oakchair

I'm not saying that there are no studies that show that. But there are at least as many showing the opposite. (And the results of the study you refer to are very sensitive to the chosen start and end points of the data series)

More honest studies would admit that we simply can't measure these effects accurately.

And therefore, we should stick with our prior - that demand slopes down.