Tag: Free Market

Let the Facts Decide on Minimum Wage

Basic economic theory has very clear predictions on what should happen to a labor market with a minimum wage. If we assume an upward sloping labor supply curve and a downward sloping labor demand curve, a minimum wage will cause demand for workers to fall while supply increases. The result: an excess supply of workers, also known as unemployment.

The real world is obviously much more complicated than the standard Econ 101 textbook story. Perhaps the most important difference is that there is not just one equilibrium wage. No two jobs are exactly the same. Workers with different skill levels will face different labor markets. Location matters. The list of reasons why the real world doesn’t conform to the simplifying assumptions of economic theory is potentially endless.

However, those caveats do not necessarily invalidate the intuition of basic economics. I don’t think it’s a controversial statement that firms will attempt to substitute away from an input when its cost increases. In this case, that input is low skilled workers. As minimum wage increases, so does the necessary productivity of a worker who wants to be hired. A worker who only produces $10/hr of value for an employer will never be paid $15/hr regardless of the level of the minimum wage. Their choice is not between 10 and 15, but between 10 and 0 (unemployment).

But can we be sure that workers are actually paid based on their productivity? Couldn’t it be that they are simply being exploited, with firms pocketing the additional profits they generate? Under this scenario, an increase in the minimum wage could increase wages without hurting employment.

Here we see the limits of theory. Under some assumptions a minimum wage is good and under others it is bad. The clear next step is to look at the facts. Do minimum wage laws hurt or help low wage workers in the real world? Luckily, due to recent experiments with a $15/hr minimum wage in some cities, we have plenty of data to work with.

Supporters of minimum wage laws will be happy to find out that cutting edge research shows we have nothing to worry about (here’s the link to the full study). The increase in Seattle minimum wage to $13 (15 is being phased in over time) hasn’t had severe disemployment effects. There was a minimal decrease in employment, but overall, “results show that wages in food services did increase — indicating the policy achieved its goal.” So take that Econ 101. Minimum wage is great. Case closed.

Well, not quite. Because this morning, just 6 days after the study above came out, we have a new study looking at the exact same natural experiment (although with a different data set). The results are not so nice. They find that “the minimum wage ordinance lowered low-wage employees’ earnings by an average of $125 per month in 2016.”

Now what? Theory gives us conflicting results and so does data. How can an unbiased observer make a decision about the truth? Well, to be sure of the results of the studies above, they would need to sift through around 100 pages of dense statistical analysis. But of course, anybody untrained in statistics would first have to take a few classes to have any idea what they were talking about. And even with that training, they’d need to take a close look at the datasets used, weigh the pros and cons of each methodology, decide whether the results can generalize to other places, etc. Maybe after about two years of hard work they’d be able to have a qualified opinion on the two studies (never mind the dozens of other studies that have been done on the topic).

What is actually more likely to happen? Everyone who supported the minimum wage will cite the first study and look for flaws in the second (I would bet anything that Arin Dube – one of the biggest minimum wage scholars to support an increase – is scouring it right now looking for something to criticize). Everyone against minimum wage will do the opposite. Both will pretend they are letting the facts decide.

One of These Things is Not Like the Other Government vs Corporations

Facebook: “We are a nation of immigrants, and we all benefit when the best and brightest from around the world can live, work and contribute here. I hope we find the courage and compassion to bring people together and make this world a better place for everyone.”

Google: $4 million in donations to immigration causes

Airbnb:

Starbucks: Plans to hire 10,000 refugees

Lyft and Uber: After some controversy about eliminating surge pricing around JFK, Uber now plans to spend $3 million on affected drivers. Lyft will donate $1 million to the ACLU

Apple: “Apple is open. Open to everyone, no matter where they come from, which language they speak, who they love or how they worship. Our employees represent the finest talent in the world, and our team hails from every corner of the globe.”

Government:

Thank goodness we have a benevolent government to keep these evil corporations in check.

Why I’m a Libertarian

In a previous post I noted that libertarian ideas seem to be frequently misunderstood, that libertarians are sometimes labeled selfish, materialistic, and uncaring. In this post I hope to show that a libertarian worldview can come from a more virtuous principle: humility. Note that the title of this post is not “why you should be a libertarian.” I doubt it will convince anybody that is not already highly sympathetic to libertarian ideas, but I hope it can show that that (at least some) libertarians have good intentions. That I may be wrong, but I’m not evil.

A widely cited joke about Ayn Rand’s famous novel Atlas Shrugged goes something like this (I believe the original source was John Rogers here):

“There are two novels that can change a bookish fourteen-year old’s life: The Lord of the Rings and Atlas Shrugged. One is a childish fantasy that often engenders a lifelong obsession with its unbelievable heroes, leading to an emotionally stunted, socially crippled adulthood, unable to deal with the real world. The other, of course, involves orcs.”

It’s a good joke, but I worry that many outside of libertarian circles take its message a bit too seriously. Libertarians live in a fantasy world where everyone shares our ideals and we never think about real issues, about real people. And it is perhaps unfortunate that Rand’s view, one which believes in an objectively correct morality, that aims to tell you that there is a right way to live and she knows it, has been associated so closely with libertarian thought more broadly.

I’m a libertarian because I don’t believe there’s a correct way to live.

Family is the most important part of my life. Others might place a higher weight on different relationships, with their friends, their students, their coworkers. Some may find their strongest bond comes from a higher being, so they let religion or spirituality take precedence over earthly concerns. Another priority could be helping those they don’t know, simply because they are less fortunate or in need of help. Devotion to their jobs, to their hobbies, to the pursuit of knowledge, to any other activity that they find fulfilling – each can also drive a person’s behavior. And of course, pure material pleasures occupy a place on everybody’s scale of value. All of these considerations play a part in deciding the actions that lead to a life worth living.

I’m a libertarian because I don’t want to tell you what’s most important.

A Harvard educated liberal from Massachusetts wants to convince you to support abortion because a woman has a right to her own body. An evangelical Christian from Texas says that killing a fetus is no different than killing a child. Neither can be proven right or wrong. Each wants to impose their values on the other. Drugs are immoral. Alcohol is immoral. Gay marriage is immoral. I disagree and I’ll try to convince anyone that believes otherwise to join my side. But I’ll respect your right to believe what you want as long as you recognize mine.

A person’s moral worth is determined by how much they produce for society. No, it’s determined by what percentage of their wealth they give to charity. Or maybe it’s how much they do for their family. How devout they are in their prayers. Everyone lives by a different code. How comfortable are you in saying that your code is the right one?

I’m a libertarian because you have as much right to your values as I have to mine.

In the 2012 Republican primary debates, the moderators asked Ron Paul if a libertarian society would let a person without insurance die (for the record, he said no). It seems like an easy question – of course we can’t let them die. Let’s ask a harder question. A cancer patient has six months to live. They can extend their life for an additional 5 years, but the procedure costs $5 million in addition to a significant amount of time from doctors who could be working on helping others. They don’t have insurance. Should they be allowed to die? What if they can only extend their life 6 months? 1 day? Where do we draw the line? And who draws it?

Global warming is real. It’s almost certainly caused by humans. It could very well cause catastrophic changes in the future. Our use of fossil fuels could be the source of substantial problems for future generations. But if we stopped using fossil fuels now, we definitely cause substantial problems for the current generation. How can we determine which is worse? How do we weigh the life of an individual against the lives of their descendants?

I’m a libertarian because everything is a tradeoff and I can’t value the costs and benefits.

We all want equality of opportunity. It’s a nice slogan. What does it mean? Some say it means education should be free for everyone – that it’s a basic human right. How much? What kind? Who pays? Some people excel in a standard classroom setup. They love to learn, they can sit down with a book and study. Others can’t. And that’s ok. To think that we can create equality of opportunity by placing everybody in the exact same environment may be pure in its intention, but it’s incredibly dangerous in its execution. We weren’t all created equal and that’s a great thing. Our differences are not something to be squashed out, but embraced.

I’m a libertarian because everybody has different strengths and weaknesses, because everybody has different needs.

Markets always fail. The conditions of perfect competition laid out in a standard economics textbook never hold in reality. Every firm has some monopoly power. Every good causes some externality. Collective action problems, public goods, asymmetric information – all pervasive issues that throw a wrench into the workings of a perfectly competitive economy. Couldn’t a government fix some of these problems? Doesn’t a planner have the ability to take a big picture approach and do what’s best for society instead of what’s best for each individual? It’s possible, but where does the knowledge come from? Where do we set the prices for the monopolist? How high is the optimal tax to prevent the externality? Can we design a mechanism to improve upon the free market outcome? Even in an economic model where everybody has identical preferences and production technologies are fixed the answers are not always clear. In the real world – good luck.

Someone made you king of the world. You want to make it better. So you call in teams of experts, the best from every field. You build supercomputers capable of running an unimaginable number of calculations every second. A coordinated, planned society led by the brightest minds available – how could the chaotic workings of the free market stand any chance? But soon you realize that even the simplest questions – like how much toilet paper to produce – turn out to be nearly impossible to answer. So you give up on your unified plan and try to just fix a few obvious problems. And yet each leak sealed opens up several more – the experts and their fancy computers do their best to predict people’s behavior, but there is simply too much left unknown. Without an overarching plan the ad hoc solutions continue to multiply and the end result is a convoluted, bureaucratic mess.

I’m a libertarian because knowledge is dispersed and I can’t think of a better way of collecting it than through the market process.

Liberty is not magic. It’s not a solution to any of the problems I’ve touched on above. But that’s exactly the point. When the questions facing society are this challenging it would be incredibly arrogant to assume that any one mind or group of minds could divine an appropriate solution. A society of liberty sidesteps these questions entirely. It allows individuals – with their unique perspectives and values, with their knowledge of their own specific time and place – to attempt to find solutions for their own much smaller problems. Most of these attempts fail, but a free market rewards those that work, letting the best rise to the top, creating a better world for all.

Maybe I’m wrong. Maybe individuals making decisions for themselves results in outcomes that are worse for everybody. Maybe governments are better at weighing the total costs and benefits to society than individuals acting on their own. Maybe a coordinated plan can figure out better answers to the questions facing our society than the spontaneous order of a free market. Maybe. And I’m happy to have those debates. But never say that I haven’t thought about these issues. Never say that I’m not worried about poverty, or the environment, or the thousands of other important problems that affect this world every day. Never question my intentions.

And never say that I’m a libertarian because I don’t care.

I’m a libertarian because I don’t know.

 

Free Will, Morality, and Libertarianism How can you be held responsible for something that wasn't your fault?

An astute reader sees an apparent contradiction between my last post and my post on free will, asking “how can a libertarian reconcile no real choice with the importance of being free to choose?”

It’s a great question. If free will doesn’t exist, if every single action is pre-determined, can we even have a consistent concept of morality? I made a distinction between actions made freely and those forced by the state, but isn’t that distinction meaningless in a deterministic world? When all actions are at some level outside an individual’s control, is there any difference between the direct coercion of government and more indirect factors influencing the decision (like genetics, education, religion, etc.) that are also completely removed from the realm of free choice? The answers to these questions are far from obvious and I certainly don’t pretend to have a perfect response, but I hope this post will clarify the way I think about the issue. My ideas here are heavily influenced by (who else) Hayek’s discussion of similar topics in chapter 5 of The Constitution of Liberty.

First, it is important to understand my earlier defense of determinism. The key point is that every action can be traced to a chain of previous events. Going back far enough in each person’s chain, some link will be the result of an event that is outside of their direct control. And if I know all of the links in this causal chain, if I know everything that has ever influenced an individual, I can predict with absolute certainty their next move. Their “choice” was determined long before they are required to make it.

If we accept this argument, then at the moment of a decision nothing can be done. There is no way that a given individual would have made any decision different than the one they made. We could replay the same history a million times and get the same result in every single trial.

But here’s the problem. Go back to the example I gave in the last post. A person is trying to decide whether to give money to the poor (let’s call him Bob). Note that I will consider giving to the poor to be a good thing. If for some reason you disagree with that assessment, replace “giving to the poor” with any action you consider moral and the argument should still go through.

Now assume Bob exists in two universes (A and B). In each universe, Bob has had almost the exact same experience. He has the same parents, the same teachers, read all the same books. As a result, in each universe he has developed a system of values which teaches him to care for his fellow human beings. Now introduce one difference between the two universes. Universe A has a government which forces Bob to give to the poor through taxation. In Universe B, Bob is free to do as he pleases. Of course, we know  that Bob is not really free to choose. If he chooses to give to the poor, it is only because he grew up in a society that taught him that that was the right thing to do, and only because of his upbringing that he has any desire to do the right thing at all. Universe B Bob doesn’t choose to give to the poor any more than Universe A Bob does. Both only give due to the influence of others. How can we say one is more moral?

Consider George. George also exists in both universes, but he has had a different experience than Bob. Where Bob was taught to live a life of compassion, George only cares about his own material well being. Help the poor? How does that help George? In Universe A, George still has to give to the poor. The government forces him to give against his wishes. And it makes him angry. He works hard to earn his money, why should he give to those who don’t? He sees Bob gives to the poor as well, but he believes it is only because the government forces him to do so.

In Universe B, George doesn’t give to the poor. His values tell him that you get exactly what you deserve in life and he acts on those values. There is no government to force him to do otherwise. And yet he sees Bob give to the poor anyway. Maybe he just dismisses Bob as too stupid to realize that his money won’t help them, that the poor need to help themselves. But maybe Bob’s actions give him pause. Maybe they form a new link in George’s causal chain. Maybe he questions his decision, and even though he could never have changed his choice at that moment, he might think about the situation differently next time. Maybe his system of values begins to change.

Phrased in this way, we begin to see a real distinction between the decision to give in each universe. It is true that in both universes Bob would have given to the poor. Our reason for calling Bob’s actions moral cannot be that he himself could have made another choice at the moment of his decision – without free will, he really couldn’t have. But we can compare Bob’s choices to those of another individual. If we replace Bob with George in Universe A, the result is the same – both give to the poor, and we can’t judge morality because nobody could have acted differently. In Universe B, however, Bob and George are allowed to act differently in the same situation. Their decision tree has two branches. Neither will choose any branch other than the one already pre-determined by their life experiences, but the existence of the branches matters because somebody else could have.

So now we can give an answer to the original question. If nobody can truly make choices of their own volition, why does choice matter for morality?

Because if a choice is available, even if each individual will always make the same choice, another might have acted differently.

But even if you buy the argument above, a question still remains. We might agree that Bob made a moral decision in the example above even though it wasn’t truly his choice, but does that mean that George is responsible for his actions? Can we blame George for not giving to the poor? After all, it’s not his fault that he didn’t have Bob’s life. Here I defer to Hayek:

Strictly speaking, it is nonsense to say, as is so often said, that “it is not a man’s fault that he is as he is,” for the aim of assigning responsibility is to make him different from what he is or might be. If we say that a person is responsible for the consequences of an action, this is not a statement of fact or an assertion about causation. The statement would, of course, not be justifiable if nothing he “might” have done or omitted could have altered the result. But when we use words like “might” or “could” in this connection, we do not mean that at the moment of his decision something in him acted otherwise than was the necessary effect of causal laws in the given circumstances. Rather, the statement that a person is responsible for what he does aims at making his actions different from what they would be if he did not believe it to be true.

We assign responsibility to a man, not in order to say that as he was he might have acted differently, but in order to make him different.The Constitution of Liberty, p. 137-138

What do we want from our society? Do we want to move from Universe B to Universe A, from a world where people are free to make their own value judgements to one where they are not given any choice, where we claim to know what is best for them? Or do we want to convert people from Georges to Bobs, to convince them to buy into the system, convince them that the ideals we aim for are ones worth striving to achieve? In my view, a free society gives us the best chance of achieving the latter goal. Only a free society allows us a choice, and even if our choice is set long before we make it, knowing that other individuals could have made another choice remains important.