[T]o exempt the labor market for low skilled and unskilled workers from the laws of supply and demand is to fallaciously create a “special case” for that market when in reality that “specialness” cannot be supported by the theoretical or empirical evidence. … In other words, the Law of Demand and the Law of Supply are economic laws that apply universally… The real danger of the Fallacy of the Special Case is that those allegedly special exceptions to economic fundamentals almost always result in legislation that is based primarily on political, and not economic, considerations – minimum wage laws, price gouging laws, ticket scalping laws and rent control laws. Ignoring economics and/or attempting to circumvent market pricing by allowing for some markets or goods to be “special” might make sense politically, but the legislation that follows makes us much worse off economically, makes us all poorer, and lowers our standard of living. Politicians and the general public can be excused for falling for the Fallacy of the Special Case and supporting price controls like the minimum wage that make us worse off, but shouldn’t the economics profession really know better?
[T]o exempt the labor market for low skilled and unskilled workers from the laws of supply and demand is to fallaciously create a “special case” for that market when in reality that “specialness” cannot be supported by the theoretical or empirical evidence. … In other words, the Law of Demand and the Law of Supply are economic laws that apply universally…
The real danger of the Fallacy of the Special Case is that those allegedly special exceptions to economic fundamentals almost always result in legislation that is based primarily on political, and not economic, considerations – minimum wage laws, price gouging laws, ticket scalping laws and rent control laws. Ignoring economics and/or attempting to circumvent market pricing by allowing for some markets or goods to be “special” might make sense politically, but the legislation that follows makes us much worse off economically, makes us all poorer, and lowers our standard of living. Politicians and the general public can be excused for falling for the Fallacy of the Special Case and supporting price controls like the minimum wage that make us worse off, but shouldn’t the economics profession really know better?
“Hristos Doucouliagos and T. D. Stanley (2009) conducted a meta-study of 64 minimum-wage studies published between 1972 and 2007 measuring the impact of minimum wages on teenage employment in the United States. When they graphed every employment estimate contained in these studies (over 1,000 in total), weighting each estimate by its statistical precision, they found that the most precise estimates were heavily clustered at or near zero employment effects (see Figure 1). Doucouliagos and Stanley’s results held through an extensive set of checks, including limiting the analysis to what study authors’ viewed as their best (usually of many) estimates of the employment impacts, controlling for possible correlation of estimates within each study, and controlling for possible correlation of estimates by each author involved in multiple studies. Doucouliagos and Stanley concluded that their results “…corroborate [Card and Krueger’s] overall finding of an insignificant employment effect (both practically and statistically) from minimum-wage raises.””
Somewhere in the basement of the Mises Institute, a dark ritual is being performed in an attempt to make this study spontaneously combust in a ball of flame.
First, understanding the negative consequences of minimum wage laws is not some Austrian-exclusive “belief.” It’s universally accepted Economics 101, as even legendary Keynesians Paul Samuelson, Jim Tobin, and [economist] Paul Krugman will tell you (not to mention non-Austrian Milton Friedman). It is, literally, the basic and immutable law of supply and demand: as prices rise, quantity demanded - ceteris paribus - decreases, which in turn results in excess supply (or a glut). When the supply is labor, we call that glut “unemployment.”
In fact, there are countless studies and analyses we can offer each other. And we know that numbers can be interpreted and manipulated in any number of ways. The economic profession is far from free of ideologues.
Plus, there is the real understanding that the complexities of economies - that is the complexities of varied, independently acting individuals with subjective preferences, goals, and histories making decisions regarding scarce resources - cannot be distilled to one changed variable. And as such, because there is always time between when a minimum wage is proposed and when it takes effect, its impact can be all but hidden as employers take different actions leading up to the new minimum wage than simply waiting for the new wage to take affect and firing everyone then. Furthermore, compensation is not merely pay: workplace comforts, vacation days, overtime hours, and other benefits could be affected without employers resorting to firings. So when Doucouliagos and Stanley note, “we only include those estimates which are elasticities [of employment with respect to the minimum wage] or can be converted to elasticities” as a means to filter the various studies, they are not observing the larger picture. Indeed, the larger picture can be nearly impossible to observe if employers had enough time to adjust their practices before the wage took affect.
And despite all that, the best Doucouliagos and Stanley can offer is “[after adjustments,] little or no evidence of a negative association between minimum wages and employment remains.”
Still, if we cannot settle this matter with empiricism (since the analyzed individuals aren’t fungible, and we’ll both nonetheless offer those studies which confirm our biases), then we must turn to reason.
To that end, the following questions demand answers:
- How can increasing the price on gasoline and cigarettes (through taxation) be publicized as methods to curbing their use, but the same does not hold with regards to the price of labor?
- If people are more willing to purchase things during a sale, why wouldn’t the opposite - less likely to purchase things after price increases - be true?
- If raising the price on something does not affect the quantity demanded, then why not raise it higher?
- How is an arbitrary price set by diktat an improvement over the emergent price from free individuals interacting and making mutually beneficial decisions for themselves?
- Why would any employer hire someone who is not as productive as their wage, and who therefore represents a loss?
- If a 3% “cut” on a budget increase (facilitated on non-consensual funding) is - per state-supportive individuals on the left - difficult to overcome, why are employers expected to adjust to a 24% increase in costs for their lowest-skilled/marginally-productive workers (precluding consensual exchanges)?
- If legislation was passed that required a minimum of $10 when giving money to panhandlers, would said panhandlers be better off?
- If you saw a desperate woman looking for work to keep her children fed - with poor language skills and a lack of education making her an unattractive employee at the minimum wage level - offer to clean houses at below the minimum wage, would you personally threaten her potential employer with violence for making such an agreement? Would you personally intervene and keep her unemployed and unable to provide for her family? And if you wouldn’t do so personally, why would using a surrogate - government - be any different?
- Why have minimum wages historically and throughout the world been supported by racists hoping to keep minorities from employment?
- Why was the last year that the black employment rate was lower than the white unemployment rate also the last year there was no minimum wage law?
- If those businesses that cater to poorer communities tend to hire minimum wage earners to keep prices affordable to the clientele in their area, then who would most be harmed by increasing prices as a result of a minimum wage increase?
- If employers have a monopsony, then why do most people (about 95% of all hourly wage earners) earn more than the minimum wage?
- If employers have a monopsony that in turn pays their workers less than their worth, then why don’t you start your own business that offers these low-skilled workers more? You’d clearly attract the labor and, if your monopsony model is correct, there is more than enough room for profit. And doing so would effectively break the monopsony stronghold. Win-win-win.
- If someone wants to work at a job he or she may not be qualified for but compensates for this by offering a lower wage in order to gain experience, training, and an opportunity to advance, and someone is willing to hire that person, what gives you the right to intervene?
Unfortunately, the only ritual being performed is the sacrifice of the well-being of low-wage workers (teenagers and minorities in particular) at the bloody altar of good intentions.
Still unnoticed by a large part of the population is that we have been living through a period of relative impoverishment. Money has been squandered in welfare spending, bailing out banks or even — as in Europe — of fellow governments. But many people still do not feel the pain.
However, malinvestments have destroyed an immense amount of real wealth. Government spending for welfare programs and military ventures has caused increasing public debts and deficits in the Western world. These debts will never be paid back in real terms.
The welfare-warfare state is the biggest malinvestment today. It does not satisfy the preferences of freely interacting individuals and would be liquidated immediately if it were not continuously propped up by taxpayer money collected under the threat of violence.
Another source of malinvestment has been the business cycle triggered by the credit expansion of the semi-public fractional reserve banking system. After the financial crisis of 2008, malinvestments were only partially liquidated. The investors that had financed the malinvestments such as overextended car producers and mortgage lenders were bailed out by governments; be it directly through capital infusions or indirectly through subsidies and public works. The bursting of the housing bubble caused losses for the banking system, but the banking system did not assume these losses in full because it was bailed out by governments worldwide. Consequently, bad debts were shifted from the private to the public sector, but they did not disappear. In time, new bad debts were created through an increase in public welfare spending such as unemployment benefits and a myriad of “stimulus” programs. Government debt exploded.
In other words, the losses resulting from the malinvestments of the past cycle have been shifted to an important degree onto the balance sheets of governments and their central banks. Neither the original investors, nor bank shareholders, nor bank creditors, nor holders of public debt have assumed these losses. Shifting bad debts around cannot recreate the lost wealth, however, and the debt remains. …
Many people believe they own real wealth that does not exist. Their capital has been squandered by government malinvestments directly and indirectly. Governments have spent resources in welfare programs and have issued promises for public pension schemes; they have bailed out companies by creating artificial markets, through subsidies or capital injections. Government debt has exploded.
Many people believe the paper wealth they own in the form of government bonds, investment funds, insurance policies, bank deposits, and entitlements will provide them with nice sunset years. However, at retirement they will only be able to consume what is produced by the real economy. But the economy’s real production capacity has been severely distorted and reduced by government intervention. The paper wealth is backed to a great extent by hot air. The ongoing transfer of bad debts onto the balance sheets of governments and central banks cannot undo the destruction of wealth. Savers and pensioners will at some point find out that the real value of their wealth is much less than they expected. In which way, exactly, the illusion will be destroyed remains to be seen.
If you offer people something that is too good to be true, you will always find takers. Ask Bernie Madoff. Or ask Barack Obama. He recently proposed an increase in the minimum wage — an idea that suits the natural predilections of many people enough to distract them from the unsentimental and unwelcome logic of economics. …
The proposal [of a minimum wage] rests on the assumption that the government can decree the price of a commodity — in this case, labor — in defiance of the dictates of the market, without ill effects. But that view requires a heroic suspension of disbelief.
When stores want to move slow-selling merchandise, they cut prices. When customers clamor for more of an item than sellers can provide, they raise prices. Lower prices result in higher demand, and higher prices do the opposite.
This is not exotic free-market dogma but elementary economics. Any CEO who proposed to boost sales by jacking up prices would see the company’s stock price plummet in response to this lunacy.
But supporters of a higher minimum wage would have us believe that low-wage workers are magically exempt from these phenomena. They claim companies will employ just as many employees at $10.10 an hour as they do at $7.25.
But they must doubt their own case. Otherwise, they would propose an even higher amount, confident it will be irrelevant to hiring decisions. If a minimum wage of $20 or $30 an hour would cause layoffs, though, why wouldn’t $10.10? At what point on the wage scale does the law of supply and demand take effect?
One correction: “Lower prices result in higher demand, and higher prices do the opposite.” should instead be “higher quantity demanded.” It’s actually a distinction worth noting.
Related: Repeal the Minimum Wage
If the milk of human kindness flows by the quart in your veins, so you should also want to raise the minimum street charity: Take moral grandstanding oblivious of consequences to a new level by requiring anyone who gives money to panhandlers to give a minimum of $10. Beggars may not benefit, but you will admire yourself.
George Will on the minimum wage.
This is actually a brilliant counter.
A little holiday cheer during this spending season.
We are now seeing many of the undesirable effects of the ACA. These are typically being described as “unintended.” However, this adjective is a bit of a misnomer, since these outcomes were entirely predictable, and in fact were predicted by many free-market economists in the debate leading up to the passage of the ACA. Cynics can justifiably speculate that at least some of the proponents of the ACA knew full well the outcome would be untenable, leading the public to embrace even more federal intervention in health care down the road.
The most obvious result is a large spike in premiums for many people, once the mandates on health coverage are fully phased in. The biggest hit will occur in places that right now offer bare-bones catastrophic policies with large deductibles and low caps. For example, according to this CNN article, officials in Florida estimated that the premiums on a “silver” plan would rise anywhere from 7.6 percent to 58.8 percent, while officials in Ohio estimated an average increase of 41 percent.
Now even if the official amount that certain individuals pay for their health insurance goes down, the real question is whether this is more than offset by the increase in taxes necessary to cover all of the new subsidies to poor individuals who cannot afford to meet the individual mandate. Step back and look at the big picture: Under the ACA, suddenly millions of new people are going to be seeking more medical care than they did before. There’s nothing in the new law that will magically create more doctors, hospitals, or MRI machines. Americans in general are going to pay for this, one way or another. Indeed, the huge increase in government responsibility for health spending will provide the justification for government-imposed rationing down the road — as even Paul Krugman acknowledges when he cheekily calls for death panels. (Really, click on the link to see the video if you don’t believe me.)
“But the President Said I Could Keep My Plan …”
Another predictable outcome is that many Americans will not be able to keep their previous plan. Millions of Americans who bought insurance in the individual market (i.e., not via their employer) will find that their plan doesn’t meet the standards of ObamaCare. To keep premiums down, relatively young and healthy, self-employed individuals had “catastrophic” plans with high deductibles. These are no longer legally allowed. According to this Forbes article, as far back as 2010 (sic!) Obama officials were projecting that 93 million Americans had health insurance plans that would be unacceptable under ObamaCare.
Besides rate hikes (and ultimately, government rationing of medical care), another major downside of the ACA is the job losses it will cause. For example, here is an email that a fellow economist sent to Greg Mankiw of Harvard:
With the implementation of the ACA (Affordable Care Act) these institutions are giving notification to their part-time faculty that their individual teaching schedules will now be limited to three sections. At the college this will likely result in the cancellation of 20-25% of the class sections in economics, and I would assume other areas will have a similar result. The students are not fully aware of the situation and many will be surprised that their desire to get a college education is now being impacted by the need to avoid the full implementation of the ACA.[Emphasis added]
Even some labor leaders recognize the devastation ObamaCare would wreak on workers, protesting to the government that it would “destroy the foundation of the 40-hour work week.”
This isn’t rocket science, as they say. If the government has to force employers to provide a benefit to their employees, it means it’s unprofitable; otherwise the employers would have already done it as part of their compensation package in order to attract quality workers. So if this costly, unprofitable employer mandate only applies to firms with 50 or more employees, and even then only applies to those employees who work 30 or more hours, then we shouldn’t be shocked — shocked! — to discover firms not growing past 49 employees, and/or limiting people to 29 hours per week.
… Being an economist has got to be the most depressing job in the world. Because, you go your whole life trying to teach some basic principles, over and over and over you teach these principles: you teach them in the classroom, in newspapers, on television, on the internet—teach ‘em, teach ‘em, teach ‘em. And then, you’re sitting there on your deathbed, and your nurse comes in and says, ‘You know, I really think it would boost the economy if we raised the minimum wage.’ And you just think, what was it all for?
The latest from Matt Wuerker
I try really hard not to be cynical but sometimes I feel like society is just getting dumber.
You see, Nate, that without minimum wages and regulatory stipulations and mandatory benefits, employers would use actual whips on us as motivation, pay us in actual peanuts (hope you’re not allergic!), and might occasionally stab us with actual pitchforks when we underperform. Without the state helping us, we’d be powerless saps - at least according to the ‘progressive’ belief in the monopsony model of employment in which there is effectively no competition for labor.
Of course, if these progressives truly believed in what they profess - that employees are grossly underpaid, including health benefits offered, relative to their productivity - then why don’t they start their own competing businesses? They claim that there is more than enough room for profit while still paying a “proper” wage, and such higher pay would produce an increase in productivity that would prima facie offset that pay. So what’s stopping them? According to their own logic, it would be a boon to employees, a boon to consumers (who would naturally gravitate toward these probably more expensive but more “fair” products), and they could make a few bucks on top of it all. That’s a win-win-win, folks! So show us you mean what you claim to be true, progressives, and put your own money on the line.
A few months ago, I was reading a fascinating paper by Thomas Leonard on “Eugenics and Economics in the Progressive Era.” The paper is full of interesting tidbits, but I was especially struck by the discussion of Progressive Era arguments for the minimum wage.
Most readers of this blog will be familiar with the argument that minimum wage laws create unemployment. And most of us, no doubt, regard this as a powerful argument against the minimum wage.
As Leonard’s paper shows, progressives like Sidney Webb were familiar with this argument. But rather than viewing additional unemployment as a cost of minimum wage laws, they actually regarded it as a positive benefit! After all, you see, the people most likely to be disemployed by a minimum wage were those who were among the least employable anyway – the drunks, the idiots, and the immigrants – especially those who were members of “low-wage races.” And, according to the grand progressive vision, anything we can do to identify such individuals and segregate them from healthy, productive white society was a step in the right direction for the human race.
The only logically consistent and economically sound supporters of a minimum wage are racists, government-protected unions, and large corporations as they have the most to gain relative to the rest of us. Oh, and of course politicians.
Increases in the minimum wage are usually “phased-in.” Instead of raising the minimum wage overnight, the law usually specifies a series of steps [over a number of years]. The Fair Minimum Wage Act of 2007 increased the prior $5.15 minimum wage in three steps:…to $5.85 per hour 60 days after enactment (2007-07-24), to $6.55 per hour 12 months after that (2008-07-24), and finally to $7.25 per hour 12 months after that (2009-07-24)…The initiative is targeted for the November 2014 ballot. If it passed early in 2015, the minimum wage in California will go up to $10 an hour; early in 2016 it would be raised to $12 an hour. In other words, the initiative in a couple of stages would raise the minimum wage of all California workers to $12 an hour.
What’s the point of these byzantine time tables? Why not just immediately impose the minimum wage you actually want? On the surface, the steps seem like an implicit admission that sharply and suddenly raising the minimum wage would have the negative disemployment effects emphasized by its critics. The point of the steps, then, is to turn a dangerously sharp and sudden hike into a harmlessly slow and gradual hike.
On reflection, though, this argument makes very little sense. Giving people more time to adjust to incentives normally leads to larger adjustments, not smaller. If you suddenly raise the gas tax, for example, there is very little effect on gas consumption. But if people expect the gas tax to go up years before the higher tax kicks in, many will buy more fuel-efficient cars, leading to a large behavioral response. Minimum wage hikes should work the same way: Employers’ long-run response should exceed their short-run response. If minimum wage advocates want to minimize the disemployment effect, they should remember the old adage about ripping off a Band-Aid: One sudden pull and you’re done.
On reflection, though, there is another major difference between employers’ response to sharp-and-sudden versus slow-and-gradual minimum wage hikes: visibility.
If the minimum wage unexpectedly jumped to $12 today, the effect on employment, though relatively small, would be blatant. Employers would wake up with a bunch of unprofitable workers on their hands. Over the next month or two, we would blame virtually all low-skilled lay-offs on the minimum wage hike - and we’d probably be right to do so.
If everyone knew the minimum wage was going to be $12 in 2015, however, even a large effect on employment could be virtually invisible. Employers wouldn’t need to lay any workers off. They could get to their new optimum via reduced hiring and attrition. When the law finally kicked in, you might find zero extra layoffs, because employers saw the writing on the wall and quietly downsize their workforce in advance.
If you sincerely cared about workers’ well-being, of course, it wouldn’t make any difference whether the negative side effects of the minimum wage were blatant or subtle. You’d certainly prefer small but blatant job losses to large but subtle job losses.
But what if you’re a ruthless demagogue, pandering to the public’s economic illiteracy in a quest for power? Then you have a clear reason to prefer the subtle to the blatant. If you raise the minimum wage to $12 today and low-skilled unemployment doubles overnight, even the benighted masses might connect the dots. A gradual phase-in is a great insurance policy against a public relations disaster. As long as the minimum wage takes years to kick in, any half-competent demagogue can find dozens of appealing scapegoats for unemployment of low-skilled workers.
Most non-economists never even consider the possibility that the minimum wage could reduce employment. Before I studied economics, I was one of these oblivious non-economists. But if minimum wage activists were as clueless as the typical non-economist, they wouldn’t bother with phase-in. They’d go full speed ahead. The fact that activists’ proposals include phase-in provisions therefore suggests that for all their bluster, they know that negative effects on employment are a serious possibility. If they really cared about low-skilled workers, they’d struggle to figure out the magnitude of the effect. Instead, they cleverly make the disemployment effect of the minimum wage too gradual to detect.
"ruthless demagogue, pandering to the public’s economic illiteracy in a quest for power"
I think I’ve found my new favorite definition of a politician.
Both theory and history indicate that government management of resources leads to waste and even absurdity. People view traffic jams, water shortages, power outages, deforestation, endangered species, and fishing rules as facts of life. But they are not necessary. On the contrary, they are perversities produced by government management. Private markets are not perfect, but competition and private ownership give the best possible framework for an efficient use of scarce resources.
This column is exceptional.
The current system of fractional reserve banking and central banking stands in stark opposition to a market economy monetary regime in which the market participants could decide themselves, without state pressure or coercion, what money they want to use, and in which it would not be possible for anyone to expand the money supply because they simply choose to do so.
The expansion of the money supply, made possible through central banks and fractional reserve banking, is in reality what allows inflation, and thus, declining income in real terms. In The Theory of Money and Credit Ludwig von Mises wrote:
The most important of the causes of a diminution in the value of money of which we have to take account is an increase in the stock of money while the demand for it remains the same, or falls off, or, if it increases, at least increases less than the stock. … A lower subjective valuation of money is then passed on from person to person because those who come into possession of an additional quantity of money are inclined to consent to pay higher prices than before.
When there are price increases caused by an expansion of the money supply, the prices of various goods and services do not rise to the same degree, and do not rise at the same time. Mises explains the effects:
While the process is under way, some people enjoy the benefit of higher prices for the goods or services they sell, while the prices of the things they buy have not yet risen or have not risen to the same extent. On the other hand, there are people who are in the unhappy situation of selling commodities and services whose prices have not yet risen or not in the same degree as the prices of the goods they must buy for their daily consumption.
Indeed, in the case of the price of a worker’s labor (i.e., his or her wages) increasing at a slower rate than the price of bread or rent, we see how this shift in the relationship between income and assets can impoverish many workers and consumers.
An inflationary money supply can cause impoverishment and income inequality in a variety of ways:
1. The Cantillon Effect
The uneven distribution of price inflation is known as the Cantillon effect. Those who receive the newly created money first (primarily the state and the banks, but also some large companies) are the beneficiaries of easy money. They can make purchases with the new money at goods prices that are still unchanged. Those who obtain the newly created money only later, or do not receive any of it, are harmed (wage-earners and salaried employees, retirees). They can only buy goods at prices which have, in the meantime, risen.
2. Asset Price Inflation
Investors with greater assets can better spread their investments and assets and are thus in a position to invest in tangible assets such as stocks, real estate, and precious metals. When the prices of those assets rise due to an expansion of the money supply, the holders of those assets may benefit as their assets gain in value. Those holding assets become more wealthy while people with fewer assets or no assets either profit little or cannot profit at all from the price increases.
3. The Credit Market Amplifies the Effects
The effects of asset price inflation can be amplified by the credit market. Those who have a higher income can carry higher credit in contrast to those with lower income, by acquiring real estate, for example, or other assets. If real estate prices rise due to an expansion of the money supply, they may profit from those price increases and the gap between rich and poor grows even faster.
4. Boom and Bust Cycles Create Unemployment
The direct cause of unemployment is the inflexibility of the labor market, caused by state interference and labor union pressures. An indirect cause of unemployment is the expansion of the paper money supply, which can lead to illusory economic booms that in turn lead to malinvestment. Especially in inflexible labor markets, when these malinvestments become evident in a down economy, it ultimately leads to higher and more lasting unemployment that is often most severely felt among the lowest-income households.
The State Continues to Expand
Once the gap in income distribution and asset distribution has been opened, the supporters and protectors of social justice will more and more speak out, not knowing (or not saying) that it is the state itself with its monopolistic monetary system that is responsible for the conditions described.
It’s a perfidious “business model” in which the state creates social inequality through its monopolistic monetary system, splits society into poor and rich, and makes people dependent on welfare. It then intervenes in a regulatory and distributive manner, in order to justify its existence. The economist Roland Baader observed:
The political caste must prove its right to exist, by doing something. However, because everything it does, it does much worse, it has to constantly carry out reforms, i.e., it has to do something, because it did something already. It would not have to do something, had it not already done something. If only one knew what one could do to stop it from doing things.
The state even exploits the uncertainty in the population about the true reasons for the growing gap in income and asset distribution. For example, The Fourth Poverty and Wealth Report of the German Federal Government states that since 2002, there has been a clear majority among the German people in favor of carrying out measures to reduce differences in income.
The reigning paper money system is at the center of the growing income inequality and expanding poverty rates we find in many countries today. Nevertheless, states continue to grow in power in the name of taming the market system that has supposedly caused the impoverishment actually caused by the state and its allies.
Related: How Government Hurts the Poor
Jason Brennan seems to think Mises considers action to be, by definition, “rational” in the sense of “guided by sound reason.” If he would read Mises more carefully, Jason would realize that Mises means “rational” in the sense of: guided by reason (human thinking regarding causation, relations, means, and ends, etc) at all, whether sound or faulty.
[Mises’ own view:]
“When applied to the means chosen for the attainment of ends, the terms rational and irrational imply a judgment about the expediency and adequacy of the procedure employed. The critic approves or disapproves of the method from the point of view of whether or not it is best suited to attain the end in question. It is a fact that human reason is not infallible and that man very often errs in selecting and applying means. An action unsuited to the end sought falls short of expectation. It is contrary to purpose, but it is rational, i.e., the outcome of a reasonable–although faulty–deliberation and an attempt–although an ineffectual attempt–to attain a definite goal. The doctors who a hundred years ago employed certain methods for the treatment of cancer which our contemporary doctors reject were–from the point of view of present-day pathology–badly instructed and therefore inefficient. But they did not act irrationally; they did their best. It is probable that in a hundred years more doctors will have more efficient methods at hand for the treatment of this disease. They will be more efficient but not more rational than our physicians.”
[Brennan then] gleans from his misinterpretation the conclusion that it is an open question whether markets and “actual human beings in the real world are better described by your a priori theory of human action or by behavioral economics.”
But the very questions virtually everyone of all schools of economic thought ask in economics involve such teleological notions as “prosperity,” “buy,” and “sell.” These notions presuppose that objects under consideration are acting, and therefore under Mises’s definition of the word, rational: using the human mind to guide action, however adeptly or ineptly.
He then scoffs at Austrian apriorists as characteristically the kind that contribute to journals that aren’t approved of by a certain massively state-sponsored and state-privileged establishment university in Washington, D.C., and which are therefore “fake.”
Given the fact that both the George W. Bush and Barack Obama administrations (not to mention Congress) have followed the Keynesian playbook, the sorry results should be enough to discredit Keynesianism, this time for good. Either a theory explains and predicts phenomena or it does not, and it should be clear that Keynesian theory has failed.
Alas, the academic “market test” really does not embrace the actual success or failure of a theory. It seems that many academic economists do not wish to be bothered by what happens in the real world. The vaunted “market test” is not about actual results, but is about what many economists are willing to accept as what they wish to be true and what politicians believe is good for their own electoral purposes.
The assumption that comes with attempting to apply Eugene Fama’s “Perfect Market Hypothesis” to academic economics presupposes that economists are interested only in what actually occurs. Furthermore, the belief presumes that when presented with a set of facts, academic economists will give the same analysis and not be influenced by partisan politics.
Given the interpretations that economists such as Krugman, Alan Blinder, and others have made in the aftermath of the disastrous first week of “ObamaCare,” not to mention their shilling for the Obama administration itself, the latter is clearly untrue. Furthermore, we see there are “gains from trade,” as politicians tend to flock to those economists who can offer the proverbial “quick fix” to whatever ails the economy, as being seen as doing something confers more political benefits than doing the right thing, which is to curb the power, scope, and influence of state power.
Even Krugman admits that the appearance of expertise has fueled the Keynesian bandwagon:
In the 1930s you had a catastrophe, and if you were a public official or even just a layman looking for guidance and understanding, what did you get from institutionalists? Caricaturing, but only slightly, you got long, elliptical explanations that it all had deep historical roots and clearly there was no quick fix. Meanwhile, along came the Keynesians, who were model-oriented, and who basically said “Push this button” — increase G, and all will be well. And the experience of the wartime boom seemed to demonstrate that demand-side expansion did indeed work the way the Keynesians said it did.
In the past five years politicians have been pushing “button G” and all is not well. Yet, in this age of unrestrained government, the Keynesian promise of prosperity springing from massive government spending is attractive to politicians, economists, and public intellectuals. That it only makes things worse is irrelevant and beside the point. If the economy falters, politicians and academic economists blame capitalism, not Keynesianism, and they get away with it.