Tim Worstall Channels Bastiat

The sign of a good economist is the ability to see the unseen, to recognize the untraceable consequences of an action.  In that sense, Tim Worstall is a good economist.  This is a segment from his latest post on Forbes.com:

We have yet another entry into the crowded field of studies concerning the minimum wage in the restaurant industry. It says there isn’t that much effect either way and therefore all the usual suspects are all over it. The problem with the paper though is that it doesn’t actually make sense by its own internal logic. This error is actually right there in the introduction in fact. They manage to believe two entirely opposing things about that minimum wage. Firstly that it has no employment effects and secondly that it raises productivity. These cannot both be true: because a change in productivity has employment effects.

It’s just not possible for both of those things to be true, that employment hasn’t been affected but that productivity has risen. Because productivity is the amount of labour you’re using to do something.

Tim is absolutely right.  Productivity is the amount of labor (or capital, or other resources) you’re using to do something.  If something comes along that increases productivity, then it must have an effect on the amount of a resource needed even if that doesn’t show up in the overall figures!  An increase in productivity necessarily means a decrease in the amount of resources needed.

Unfortunately, this lesson is lost among many, including some economists.  They do not see it in their outcomes, so therefore they ignore it entirely.  This is the danger of relying solely on precise mathematical models and eschewing economic logic, as the authors of the study Worstall cites do (this also shows the danger of relying on journalists to report and interpret the data; Worstall shows us that the journalistic response to this study is to misinterpret the findings).  But, as Frederic Bastiat taught us so many years ago, these unseen effects are very real.