Do Free Markets End Discrimination?

Spoiler: no.

Writing at FEE.org, Dr Steve Horwitz has an excellent article on the gender pay gap (word of advice, always read Horwitz).  This part in particular stands out:

You’ll notice that I said “the clear majority” of the gender wage gap is explained by factors other than discrimination, but not all of it. The consensus of the economic studies is that there is still about 3 to 5 percentage points of the 20 percent, or roughly 15 to 25% of the gap, that cannot be accounted for by economic differences and that might well be due to discrimination.

So it is not a myth that there might be discrimination in labor markets. Even the economic studies that show that most of the gap is explained by other factors do not say that all of the gap can be accounted for by such things. Although the economic studies don’t test directly for discrimination, the fact that other kinds of studies suggest that it exists in labor markets is consistent with the existence of an economically unexplained portion of the gap.

The most accurate summary is something like the following:  “It’s a myth that women get paid only 80% of what men do when they have the same skills and experience and are doing the same work, but it’s also a myth to claim that economics shows there is no gender discrimination in labor markets because studies show that economic factors cannot explain all of the gender wage gap.”

The nuance of this argument stands in stark contrast to the graphic below, originally published by “Anarchyball” on their Facebook page:

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I know Anarchyball is a Facebook activist group, and thus aren’t a standard of academic integrity but rather going for pithiness, but the error they make is still important.  Note that they list the “wage gap” as part of the set of “economic impossibilities.”  But, as Steve Horwitz notes, not all of the gap is explained by economic factors.  It is possible (maybe even probable) that the unexplained portion is partly due to discrimination.

There is nothing about the free market that suggests discrimination is economically impossible.  Price theory teaches us that free markets make discrimination more costly, but nothing says that a person may not participate in discrimination (even if s/he is profit-maximizing!).  That person may feel their discrimination brings them more benefit then the cost thereof.

Discrimination is more costly, yes, but it is not impossible (just like an Jaguar is more expensive than a Honda, but people still buy both).

Today’s Quote of the Day…

…is from my GMU professor Robin Hanson, as quoted in Quora:

Quora: What is the most important little known economic fact or idea?

Hanson: Honestly, supply and demand. It is the part of economics with which more people have a passing familiarity, yet where even so a deeper fuller understanding would bring big gains. Someone who deeply understands just supply and demand understands a great deal.

For example, understanding all of the many ways in which the real world deviates from a supply and demand world can give one a deep understanding of the likely places to expect both market failures and useful innovations.

JMM: Exactly.

The Case Against Renewable Energy, as Presented By Bernie Sanders

On his Facebook, Sen. Bernie Sanders uploaded the following graphic*:

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The Senator is trying to spin this as an argument for renewable energy, but in doing so he confuses costs and benefits.  Ironically, he makes an extremely strong case against renewables:

Looking at this chart, we see approximately the same number of jobs in coal and nuclear.  Renewables have a considerably higher number of jobs.  But their output are quite different.  According to the EIA, coal produces approximately 16% of our energy consumption (or about 15.6 quadrillion BTU).  Nuclear power is ~9% (or ~8.8 quadrillion BTU).  Renewables are ~10% (or 9.8 quadrillion BTU).

What does this mean for resource efficiency?  Quite a lot.  The average worker in coal produces 2.1e^11 BTU.  The average nuclear worker produces 1.1e^11 BTU.  The average renewable worker produces 1.8e^10 BTU.  That means the average coal worker is 1033.92% more efficient than the average renewable worker!   We’d need to put in approximately 10x the number of labor resources into renewables as coal to get the exact same results!  That’s highly inefficient and quite against the idea of resource conservation.  On environmentalist grounds, I oppose renewables at this date and time.

But, the point the Senator is making, is that the jobs themselves are desirable.  But he confuses costs and benefits.  Jobs are a means not an ends.  Our lives are improved by finding ways to reduce the amount of labor in them, not increase it.  In short, the Senator has things exactly bass ackwards.

*Note: I have not independently verified these figures.

A Tale of Two Roads

Commenting on this blog post at Carpe Diem, commentator (and friend of the blog) Walt Greenway says:

If people trade and not countries, should we condone theft from the Chinese people [in the form of subsidies on exported goods] just because we get a good deal in the U.S.?

Here is my response:

There are two issues here:

1) The question before us is whether or not trade with China (who subsidizes their stuff) harms us, Americans. That is an emphatic “no.”

2) As an economist, I advocate free trade for all. Were the Chinese government (or were I a Chinese citizen) to ask me what the best course to take would be, I’d argue for liberalizing trade. But I am not a consultant for the Chinese government nor a Chinese citizen. I am an American. I can only affect US barriers, not Chinese barriers. Therefore, I will content myself with reducing half of the trade barriers if I cannot reduce them all.

Allow me to elaborate in the manner of Frederic Bastiat:

There are two countries: Libertas and Protectistan.  The two build a road between one another; a road which overcomes barriers like mountains and deserts, allowing the two to trade with each other more cheaply.  For many years, both countries prosper from the trade.  One year, in a fit of madness, both erect artificial barriers (checkpoints, potholes, erroneous signs, anything to slow the flow and raise the price) along their halves of the road to keep the other from “flooding” their market.  As time moves along, the citizens of Libertas get frustrated they’re no longer once prospering the way they once did.  They hold a meeting.

One man gets up and says: “Our issues began when we erected barriers on the road to Protectistan.  First we paid for the road and then we paid for the obstructions!  That is absurd.  If we remove our barriers, we can improve our lot by making cheaper the goods we can get from Protectistan.  Let us do this post haste!”

Another man (this one from the government) stands up and says: “Do not listen to that crazy person.  We can only reduce our barriers if Protectistan lowers theirs! We have sent diplomats to Protectistan to negotiate the removal of barriers and they refused.”

The first man gets up again: “Sir, we have no control over what Protectistan does, but we do have control over what Libertas does.  Let us uphold our end and remove our barriers.  Perhaps, one day, they will see the folly of their ways, but why should we be punished just because they don’t want to remove barriers?”

The government man replies: “Do not listen to this dreamer, this theorist.  We can only prosper if our barriers are kept in balance.  Why, if we removed our barriers, all would be lost!  It would be more difficult to go than come, to export than import.  Our ruin would follow just as quickly as it has followed the cities at the mouths of the Mississippi, the Thames, the Amazon, the Yellow River, for it is easier to go downstream than upstream.”

A lady in the back responds: “The cities at the mouths are wealthier than the cities on the tributaries.”

The government man cries: “That is impossible!”

The same voice: “But it is a fact.”

The government man: “Then they have prospered against the rules!

The government man finished his oration by appealing to all manner of things: nationalism, patriotism, etc.  He spoke of murderous competition, of loss of pride.  The assembly, so moved, voted to keep the barriers in place, agreeing that it is only by paying and not receiving can profit be achieved.

Theory vs Practice

I always find it interesting that protectionists call us free-traders the fantacists, the theorists, the academic scribblers (etc), and cast themselves as the realists. They claim they are the ones who represent what people want, that we are just too deep in our cloistered academic world to understand that.

That may be true, but it’s strange. If they were really correct, that the supposed costs of mercantilism are really benefits, the supposed benefits are really costs, that people understand this and we do not…

If all that were true, why the need for tariffs? Why the need for government at all? Wouldn’t people just naturally buy domestic and never foreign?

In practice, no one is a mercantilist.  If we take their position to its logical conclusion, we can see this: no one, even the most hard-core mercantilist, abstains from trade.  Indeed, they personally act as though they agree with the free-market principle that it is better to buy what is more expensive for one to produce.  No mercantilist grows his own food, sews his own clothes, brews his own beer, etc.  He gladly trades for those items.  And yet, paradoxically, he argues that, in theory (but not in practice!) these actions harm people.

It seems to me that we are the realists and the mercantilists are the theorists given they need to force reality to coincide with their theory.

Reality vs Perception

Over at the Liberty Law Blog, Prof. John McGinnis has an excellent piece on legislating.  He writes (emphasis added):

A Nebraska Senator has introduced a bill to require photo identification for voting, not because voting fraud is an actual problem, but because Nebraskans perceive there to be such fraud, whether it exists or not.

If voting is a fundamental right protected by the Constitution, legislation should burden its exercise only to address actual harms, not some people’s impressions of reality.  Thus, the legality of these laws should turn on the question of actual voter fraud and the utility of voter identification in curbing it.

I agree with the good professor, and think this rule should apply not to just legal matters, but economic matters as well.  An argument I’ve heard more and more in recent months in favor of protectionism from people who are nominally free market is that, with our current trade policy, it creates the perception of unfairness; it creates the perception of China “stealing jobs”, of a “hollowing out of the manufacturing base,” of “economic stagnation.”  It doesn’t matter that the data say otherwise, but the perception is there and that’s why Trump won.  Therefore, they conclude, we need some trade barriers to keep the protectionists at bay.

This argument is very similar to the one McGinnis addresses: there is this perception, so therefore we should pass legislation to combat the perception, even if it infringes on people’s rights.  For the same reasons McGinnis rejects the argument in the link, I do so here: legislation that burdens the free exercise of a right should only address an actual harm, not a perceived harm.  Given that free exchange is a fundamental human right, the infringement of such requires the burden of proof to be on those calling for tariffs; they must demonstrate actual unique and substantial harm, not just the perception of it and demonstrate the usefulness of their proposed actions in addressing the harm.*

In short, the perception of harm is not enough to justify the infringement of the right to trade.

*Notice I said “actual unique and substantial harm,” instead of just “harm.”  The reason for this, which will be addressed in a forthcoming blog post, is because any action whatsoever can conceivably harm anyone, but that alone is not grounds for outlawing it.

A Tale of Trade

A farmer in rural Iowa says to his wife, “My love: I will take our corn to market, and from the proceeds I will buy our daughter a dress!”  So, he loads up his truck with his corn (which was grown with the sweat of his brow) and takes it to Iowa City.  He enters the market and a Frenchman says:

“Sir!  How fine it is to see you!  I have just what you are looking for.  I have this collection of fine dresses from Paris.  If you give me your corn, I can sell you four dresses for your lovely daughter.”

A Bostonian then approaches the farmer and says: “I will give you two dresses for your corn.”

The farmer considers both offers and decides to deal with the Frenchman.

“Wait!” says the custom officer.  “Do not buy those four dresses from Europe.  My orders are to keep you from buying French goods.  Rather, for the same price, you can buy these two dresses from Boston.  You, and our nation, will be better for it.  Surely you can see America will be worse if you get the four dresses rather than the two.”

“Two dresses for the same price as the four?  How will such a deal make me wealthier?”

“Oh, I can’t answer that question!” says the customs official.  “But it is a fact;  for all our secretaries and department heads and legislators and journalists agree that the more a nation receives for its goods, the poorer it becomes.”

And so the farmer deals with the Bostonian, but he (and everyone else) is left wondering why a person is ruined receiving four dresses instead of two.

(With special thanks to Frederic Bastiat for inspiring this modern retelling of his Tale of the Winemaker)