Mistaking Cause for Effect

This meme has made its way around Facebook the last couple of days:

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The speaker confuses cause and effect. He makes a simple mistake, as Scott Sumner puts it: reasoning from a price change.

You see, Mr. Hanahuer looks at high wages, sees low unemployment and (incorrectly) concludes that the high wages cause low unemployment. In actuality, it is the other way around: low unemployment cause high wages. When a good/service is relatively scarce (in this case, labor), it means the price (wages) for the good will rise. Likewise, if demand is high, so will be prices.

John Maynard Keynes noted this. It’s one of the reasons he suggests recessions can take a while to recover from and government is necessary: wages are “sticky” he says, which prevents them from falling during a recession to allow for the now glut of workers. Since wages are too high, businesses don’t hire, perpetuating the problem. That is why Keynes calls for government spending and hiring: to stimulate demand that is too low for prices.

I guess there is a second lesson here too: not all businessmen understand economics.

5 thoughts on “Mistaking Cause for Effect

  1. I’d say that your last line should be “most businessmen don’t understand economics.” First, I think the vast majority of business owners don’t give economics much thought nor should they. Most small local businesses only need to know the basic principle of keeping expenses lower then income. Second, as small businesses become larger and have more competition outside their local area they turn into mercantilists supporting policies that limit their competitors.

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  2. These people amaze me (smart people like this guy who can’t/won’t see these very basic and easily understandable tenets of economics). And it’s soooo frustrating, especially as they are so bloody self-righteous about it all.

    Of course they can’t really examine the arguments against the MW and other such govt meddling, as the cognitive dissonance would tear their minds apart. And their social lives would be a ruin, no doubt, as they’ve all loudly proclaimed their position and so now can’t go back. I know people like this (family no less) Aaaarrgh.

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  3. It’s probably a GOOD thing that more successful business people don’t understand economics, or our host, Jon, might not have a job. 🙂

    It isn’t really necessary that an entrepreneur have any particular skills, only the vision to offer people something they value. All other skills can be hired.

    There’s no more reason to listen to someone like Hanabuer on the subject of min wage than there is to seek wisdom from Kobe Bryant or Tom Cruise.

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    • No, but of course he’s a useful propaganda tool for the MW supporters. And many will take his opinion as an informed one and as being against his interests and thus more trustworthy. Mostly just confirmation bias of course. But that’s what makes the world go round, right?

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      • No, but of course he’s a useful propaganda tool…

        You’re right. At least Bryant and Cruise have enough integrity to refrain from publicly offering their opinions on things they know very little about.

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