Model Behavior

Over the last few days, I’ve read a number of objections to economic models (most written by non-economists, but a few by economists). These objections follow some pattern of “models are too static.  The ceteris is never paribus!  Therefore, your objection to Policy X on the basis of Model Y is invalid!  Such and such could occur!”

While true the ceteris is never paribus (in other words, not all other conditions are held the same), that objection doesn’t address the point of economic models.  Certainly anything is possible.  It’s possible that, following a minimum wage hike, there is no negative impact on low-skilled labor. It’s possible that protectionism could lift domestic well-being.  But economic models aren’t designed to capture all that’s possible.  They’re meant to indicate what is probable.  When a price floor (like minimum wage) is enacted, it is possible it has no negative effect, but it is probable it will.

To this end, models provide the good economist with insight into proposed policy solutions.  It’s difficult to predict with absolute certainty the outcome of a given policy given the Hayekian knowledge problem, but being able to make general predictions based upon probable outcomes allows us to advise against bad solutions to problems.

How Government Protects Businesses from Competition

Over at Carpe Diem, Mark Perry quotes Milton Friedman on government licenses for medicine.  Milton makes good points (the case is much broader in his book than the snipped quoted), but I want to talk on another issue regarding licenses: they’re barriers to entry.

Licenses are sold to the public as consumer protection measures.  In theory, they prevent people from bad doctors, hairdressers, casket manufacturers, taxi drivers, etc.  But licenses also have a flip side where they can actually result in the entrenchment of the very bad people they are supposed to protect from.

Markets work most efficiently when there is competition.  Competition forces firms to check their processes to ensure their methods are the most efficient and that they can best induce buyers to purchase from them.  However, when there are barriers to entry, it effectively reduces competition, which in turn reduces the need for a firm to operate efficiently.  There will always be some kind of barrier, but government licenses act as an artificial barrier.  By requiring would-be operators to pass certain classes (funded by the would-be operator, of course), spend time filling out applications, and/or other onerous regulations, the government is effectively reducing competition faced by the current operators.  In short, government protects the entrenched (which may or may not be operating inefficiently or poorly) from any kind of competition that would force them to change.

In essence, regulation acts to help create monopolies (which the government then deems itself competent enough to dismantle through anti-trust legislation).  Given the thought process outlined above, I’d argue that government could greatly reduce/eliminate the need for anti-trust if it simply reduced unneeded regulation.

No, You Move

“Doesn’t matter what the press says. Doesn’t matter what the politicians or the mobs say. Doesn’t matter if the whole country decides that something wrong is something right.

This nation was founded on one principle above all else: The requirement that we stand up for what we believe, no matter the odds or the consequences. When the mob and the press and the whole world tell you to move, your job is to plant yourself like a tree beside the river of truth, and tell the whole world — “No, YOU move.”

The above quote is by Captain America in the Civil War story arc.  A version of it is used in the movie Captain America: Civil War (although it is not credited to him).

Captain America is one of my heroes.  Yes, I know he’s fictional, but so what?  He stands up for what he believes in and symbolizes the idea of America.  So, why am I writing about him in an economics blog?  Because this post is going to focus more on the second part of the Force4Good mission statement: morality.

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Welfare, Corporate Subsides, and Minimum Wage

About a year ago, many were up in arms about the need to raise minimum wage because food stamps (and other welfare benefits) were essentially subsidies to big business to let them pay lower wages. Frankly, this is a ridiculous statement , but for the sake of argument, let’s grant it.

Even if food stamps et al were essentially subsidies for big business and it allowed them to pay lower wages, it is still not an argument for minimum wage.  In fact, minimum wage would still harm low-skilled workers.

Let’s discuss how a subsidy works.  Subsidies are designed to incentivize buyers of a good/service to consume more than they otherwise would by reducing the price paid (see here for a visual representation).  It keeps up supply by paying suppliers a higher-than-normal price.  But what would happen if the subsidy were to partially disappear (or if the cost were to be increased, say by a minimum wage)?  We would see a shift in the demand curve back toward the original supply line, resulting in a reduction in quantity demanded!

So, even if we grant the assertion that social welfare is a subsidy to big business, minimum wage still doesn’t make sense.