Ignorance of Economics

Both Sides Show It

When you get into an argument about minimum wage, invariably the leftist side talks about a “race to the bottom” in wages where big megacorporations will try to pay slave wages to their employees. Bernie Sanders and people like Robert Reich have very small minds.

On the other hand, some conservatives I know don’t get it either but they don’t get it in different ways.

I read this article and found it lacking in depth of thought too. There is a total misunderstanding of costs, opportunity costs, and other basic Econ 101 concepts that the article says need reworking. I found it at a conservative blog site. I am not too pleased that the tenor of the conservative debate is going this way.

That doesn’t make me a “Never Trumper”. It doesn’t make me unpatriotic. It does make me rational and clear-eyed. I was never a huge supporter of Trump but when I saw what the establishment GOP and Democrats did to him, I certainly became one even though I didn’t really like his personality. He was his own worst enemy and he is too thin-skinned to be a great President.

But, he goes into the arena ready to do battle and I am thankful that he did. He ripped the band-aid off that a lot of conservatives were afraid to rip off. He also uncovered people like Liz Cheney, Mitt Romney, and John McCain who were only playing the conservative card because they wouldn’t have won playing on the other team.

The left is now unmasked. No more hiding. There is little difference between the society they propose to make and other totalitarian societies in our past or present.

We tend to look at and describe economic policies as “bad” or “good” and that clouds what they really are. They are not bad or good. They are either efficient or inefficient. Bad or good implies a value judgment and gets your brain thinking down that path. Efficient or Inefficient is the way to think. This is also called “positive economics”.

Here is an example of the faulty logic used in the article.

The Econ 101 story about the “free labor market” is just as irrelevant in the factory and network sectors of an industrial economy. It may be true that in rural villages of yore, a number of local blacksmiths had to engage in bidding wars and offer decent wages to attract a limited supply of apprentices. But in the United States today, more than half of the private-economy workforce is employed by companies with more than 500 employees—many of these in increasing-returns or network-effects sectors that naturally tend to be oligopolistic or monopolistic.

The bargaining power of most of these workers in haggling over wages or benefits with corporate behemoths and leviathans is effectively nonexistent. Unless workers in these concentrated sectors can pool their labor power and engage in collective bargaining with one firm or all firms in that sector, or mobilize politically to enlist government to mandate minimum wages and benefits, they will be offered wage and benefit levels on a take-it-or-leave-it basis by corporate managers, whose objective is to minimize labor costs while maximizing the share of the profits that go to them and their shareholders.

Is Econ 101 irrelevant? No. The Iron Laws of Econ 101 are never irrelevant and even Karl Marx knew this. Let’s think about factory workers. Does the corporate monolith factory bid for the workers just like the old days of local blacksmiths?

You bet they do.

Workers are free to choose. It’s a competitive market and there is more than one company to work for. They also can choose not to work. There is a massive government safety net in place that puts a price floor on the labor market. Anecdotally, we just had a local metal worker have an employee bring documents for her to sign. They were documents so he could get federal benefits for not working. He quit his job with her and went camping.

Workers have lots of bargaining power. In many factories, they have unionized which brings them different kinds of power than if they weren’t. Union shops have less employment opportunities and wage growth than non-union shops by the way.

I agree with the piece on the level and scope of competition in the United States. I’d encourage anyone to listen to John Cochrane talking with Russ Roberts about it. We have created a climate where regulation prices out a lot of competition.

In another interview on the same topic, Cochrane opines on economic growth. This was in 2016-2017. He says,

"America needs better policy and governance under the rule of law." He also discusses the benefits of lowering and even ending corporate taxes to reduce price inflation and outsourcing jobs overseas. Cochrane points out that the ability to bring people together to get good bills through is what a great politician like Lincoln did; it is hoped that the next president will do this.

For the record, Abraham Lincoln was no economic genius. But, in his defense, the school of Economics wasn’t particularly well developed at that time in human history. Economic policy back then was clumsy at best. Today, there is a pretty clear path to setting policy for growth.

Trump did a lot of good things, but he wasn’t a particularly sharp President when it came to cutting government deficits and putting in place great long-term economic policies. The problem is when you put his policies up against the Democrats, Trump’s look sterling.

I can agree that we don’t want to rely on countries like China to make stuff for us. At the same time, it takes a while to transition away from those kinds of countries once the investments have been made. You don’t set up a factory ecosystem overnight and the costs are pretty high.

When it comes to other forms of business that don’t rely on intense capital investment, our policy at the government level is totally wrong and helps monopolies, oligarchy, and monopsony thrive.

Why is it that we only have a couple of health insurance companies? Do you think that makes health insurance more expensive? Health care is anything but a free market. By the way, the more the government does in health care, the more it gets screwed up. Eventually, it will be so expensive that no one can get it. Hello, socialized medicine.

I would agree that it would be nice to manufacture more things indigenously. But, is that the best use of capital and labor? Starting with Adam Smith and going through reams of economic data since then, division of labor and trading for things you want and need is one of the most powerful things mankind has done to raise standards of living worldwide. Tariffs are not the way to go. At the same time, the regulatory cage that is thrown on potential factory buildouts like a gill net is so thick it deters a lot of indigenous investment in production.

I don’t think our problems in America are with the principles of Economics 101, but more that our government is so heavily involved in every facet of our lives that the principles of Economics 101 cannot work fully. Price ceilings, price floors, tariffs, taxes, and regulations will do that.

The next Congress and the next President need to smash it.