It’s All People

The other day, I discussed the human decision-making element contained in economics (the short version: people, not collectives, make decisions).  At this point, I want to make explicit what has been generally implicit in my posts (or, just taken as given as understood by the reader).

Economics is, as Ludwig von Mises described it, the study of human action.  Economists look at how people act and react in a world of scarcity (that is, not enough resources to satisfy every want or need).  There are other definitions of the science of economics (the study of the allocation of scarce resources is another popular one), but they all generally derive from this since, at the end of the day, we are looking at people.

Why is this important?  Misunderstanding this fact leads to “this time it’s different!” claims.  Things like “labor doesn’t react to demand curves in the same way as machines/commodities because it’s people!”  Or “immigration [free trade of labor] is different from free trade of capital because it’s people who can potentially vote!”  I chose these two examples specifically because they are common tropes on the left and right, respectively, but they both make the same mistake.

This is the point I want to make explicit: Capital (machines, factories, other inputs) and labor inputs (simply called labor) are not people.  They are resources and churn out output.  The sellers and buyers of capital and labor are people.*  As sellers and buyers, they face the same issues, the same incentives.  For example, a man selling a computer no less is insulted if you try to low-ball him then a man selling his labor.  To address the right-wing criticism mentioned in the above paragraph, a laborer is no less likely to vote for protectionist measures to protect his job than a steelmaker. Both are threatened by free trade (the laborer from immigration and the steelmaker from imported steel).  It is incorrect to say that one will vote on the matter but not the other in response to free trade.  To address the left-wing criticism, the fact that buyers and sellers of labor are no different from capital is why minimum wage legislation fails to raise the lowest income workers out of poverty; why they are likely to be replaced by capital when the relative price of labor rises.  Labor is subject to the same demand conditions as anything else.

In economics, we often get lazy and simply refer to these things as ‘labor” and “capital,” rather than sellers of labor and sellers of capital.  Perhaps it doesn’t matter as much within the profession (although I have met and read a fair number of economists who have made arguments similar to that which I discuss above), but it certainly causes great confusion among laymen.  Imprecise language is bound to confuse.  I can only hope that this is just a small contribution toward eliminating that confusion.

PS: I hope, after reading this post, you can now see what I think “study of the allocation of scarce resources” is a necessary, but not sufficient, definition of economics.

*This may sound strange, especially when referred to labor, but it is merely a method of categorization necessary to better think of the issue.  Consider this: a store needs 3 cashiers to operate. it currently employees Jack, Jill, and Chris.  Chris leaves and is replaced by Joy.  The physical sellers of labor has changed, but not the amount of labor.  Just as if I bought a Dell computer to replace an HP, my capital hasn’t changed just the brand-name.

One thought on “It’s All People

  1. Jon wrote: “For example, a man selling a computer no less is insulted if you try to low-ball him then a man selling his labor.”

    Not me.

    If I try to sell you a computer for which you ought to know the rough market price, I might be annoyed that you wasted my time, but I wouldn’t be personally insulted.

    If you try to hire me for far below my labor’s market price given skills and experience then you ARE personally insulting me (whether intentional or not) and I’m gonna be quite pissed.

    I don’t think my views are particularly rare, but I admit I really don’t know.

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