Friday, December 29, 2017

9-5 Economists

A very long time, I had a colleague and friend who I concluded was only an economist in working hours. Having come across another example more recently, I thought it would be worth explaining the concept.

Suppose there is some issue on which economics implies a straightforward conclusion, but an implication short of a proof. Minimum wage laws provide a simple example. The conclusion that raising the minimum wage will reduce the employment of those currently receiving a minimum wage is a straightforward implication of the assumption that demand curves, in this case for a particular sort of labor, slope down. It is however possible, with sufficient ingenuity, to construct a model of the labor market (every employer of such labor is a monopsonist holding down employment in his tiny niche in order to hold down the wage he must pay) or the market for goods and services produced by low paid labor (customers for those goods and services much prefer to buy if they know the workers are all being paid at least $15/hour and there is no easy way for producers who pay that much to prove it to customers) which yields the opposite conclusion. 

The response of a real economist will either be "raising the minimum wage almost certainly reduces employment for low skilled workers" or (less likely but not impossible–I am thinking of a real example) "one of those odd models might possibly be right, I will look for a natural experiment by which I can test it."

The response of someone who is only an economist in working hours is to believe whatever he would believe if he was not an economist. If that requires him to believe that raising the minimum wage will not reduce employment for low skilled workers and someone points out the inconsistency with economics, he will justify himself on the grounds that the economic argument is not actually a proof, so its conclusion could be false.

For an example on the other side of the political fence, consider a conservative economist who wants to support trade restrictions.

In either of these cases, there may still be a way for a real economist to support the  conclusion he wants. In the case of the minimum wage, his argument  might be that the loss of employment to some is more than balanced by higher wages to others, so that the total earnings of low skilled workers go up instead of down. If that is his argument he will want to look for evidence on the relevant elasticities, may support his point by observing that losing a ten dollar an hour job increases leisure by an hour for every ten dollars lost, and will be bothered by the possibility that losing a ten dollar an hour job removes the first step leading to a fifteen or twenty dollar an hour job.

In the trade case, the argument might be that although free trade produces net benefits for Americans the gains go to richer people than the losses, so a gain in value measured in dollars leads to a loss in value measured in utility. If he is a real economist he will want to make some effort to find out if the claim is true, to estimate the income distribution of gains and losses and their relative size. Alternatively, if he is both a real economist and a cynic, he may agree in private that the economic effects of trade restrictions are negative but support them as a way of getting the rust belt votes needed to elect politicians who will do other things whose effects are positive and larger.

In either case, the simple test is whether an economist's views tend to diverge from those of his ideological allies when the ideology clashes with the economics.  If they do he is a real economist. If they do not, he is only an economist in working hours.

P.S. (added later) John Cochrane points at an example of something worse than a 9-5 economist, an economist who engages in public demagoguery that relies on the economic ignorance of his listeners and has the gall to do it while citing his professional qualifications as an economist.


At 9:31 PM, December 29, 2017, Blogger Peter Gerdes said...

In principle I agree with you. The problem is that this kind of judgement is very difficult in practice.

First, people rarely come out and state their partisan motivated belief in a way which perfectly maps on to the economic concepts. They don't say 'There will be more jobs for low-skilled workers if we raise the minimum wage.' They say, raising the minimum wage will help the less fortunate which not only leaves open the claim you regard as defendable (the gains to those who keep jobs outweighs the loss of jobs) but is sufficiently vague to allow all sorts of evasions, e.g., ohh, I meant it will help those whose lifetime expected earnings are low and I think it will primarily be part-time jobs for teens which will be cut.

Unfortunately, the same inclinations that cause people to adopt feel good partisan positions tend to go along with a reluctance to spell out claims about how or why a particular policy will be helpful in the kind of detail that would let one usefully evaluate it. After all, the very reason partisan intuitions aren't as reliable as careful economic thought is that they don't break things down into carefully analyzed claims.

Second, sometimes weird cases do happen so it's not enough to find out someone supports the ingenious solution in one case. You need to find out they are going to great lengths to jury rig the answer in a variety of cases to justify this kind of criticism making it difficult to employ except against someone prolific or you know well.

This doesn't mean anything you said is wrong but it makes it frustrating to deal with in public policy discussions. Even when one is sure from the overall collection of views someone has that they are letting their partisanship drive their beliefs its almost impossible to successfully make that case to others.

At 10:50 AM, December 30, 2017, Blogger Rob Szarka said...

I don't think any real economist would claim that free trade leads to "a loss in value measured in utility", unless I'm misunderstanding what you mean. You can view "total surplus" as a measure that sums utility by imposing a particular metric for interpersonal utility comparisons (and, of course, it leads to the opposite conclusion), but I'm not aware of any alternative metric that is generally accepted. I do hear people appealing to the idea of "diminishing marginal utility of income" and then more or less blindly making the leap to the conclusion that a dollar is "worth more" to a poor person than to a rich one, but this seems to me more a case of wrongly assuming that interpersonal utility comparisons are valid than a well-reasoned argument.

At 12:30 PM, December 30, 2017, OpenID whswhs said...

What I've seen more than once is the claim that an empirical study has shown that minimum wage increases don't result in unemployment. That seems like an overgeneralization from the study I've read about: It had an increase by a modest percentage, which doesn't show anything about a big increase like the currently proposed $15 an hour minimum wage, and it had a time span of less than a year, which may not be long enough for the full effects to show up. But if you base all your economic opinions on statistical evidence rather than theoretical analysis you might think that study outweighs theoretical arguments about demand curves.

At 2:31 PM, December 30, 2017, Blogger David Friedman said...


I discussed the issue of interpersonal comparison in an old blog post:

We have lots of evidence of declining MUI for individuals, as well as an obvious theoretical reason to think it likely. We routinely engage in interpersonal comparisons in contexts such as deciding among alternatives affecting people we care about, most obviously our children. Do you really have any doubt as to whether a pin prick does or does not impose a larger disutility on one person than being tortured to death does on another? If not you believe in interpersonal comparisons.

The theoretical case for declining MUI with wealth across individuals is more ambiguous than the case for a single individual. To see why, consider two different models for income differences. In one, individuals have the same abilities and opportunities and differ only in their utility function for income. In the other, they have the same utility function for income and differ in their abilities and opportunities. The first model implies that individuals with higher incomes have higher MU(I) at those incomes, the second implies the opposite.

Neither model is perfectly accurate, but I think the first is much farther from reality than the second.

At 2:34 PM, December 30, 2017, Blogger David Friedman said...


The study you mention is the same one I was thinking about in my second alternative for what a real economist might do–and I believe the authors offered a theoretical explanation along the first of the two lines I sketched in the post. I agree that the evidence they offer is weak--but it is evidence. My criticism is not of them but of all the people who jumped from "here is one study providing weak evidence that an increase in the minimum wage does not decrease employment opportunities" to "hence there is no reason to think it does."

At 8:12 PM, December 30, 2017, Blogger Brian Slesinsky said...

I'm not an economist, but it seems strange to say that one *must* accept a theoretical conclusion that doesn't agree well with experimental evidence. And it's my vague understanding that many studies of minimum wage have been done, with mixed and confusing results? Perhaps someone can summarize what's been done so far?

I remain uncertain, and interested in seeing the results of the natural experiment under way.

At 10:29 PM, December 30, 2017, Blogger Rob Szarka said...

Yes, of course we make judgments about interpersonal utility comparisons all the time. But it's one thing for Rob Szarka, Aspiring Philanthropist to base his decisions on seat-of-the-pants guesses about such things and quite another for Rob Szarka, Economist to claim to have special knowledge about whether your pleasure from an additional dollar is 90% as large as mine or just 80%. I think it's safe to say that any attempt to do so in policy analysis would end up (if not start) as a way to smuggle in normative assumptions dressed up as "science". The way the concept of surplus is abused is already bad enough.

At 3:35 PM, December 31, 2017, Blogger Eric Rasmusen said...

Why don't you think interpersonal utility comparisons are valid? Pretty much everyone acts as if they are in their personal decisions.

At 6:07 PM, December 31, 2017, OpenID whswhs said...

DF: I would agree that their study, by itself, is not open to the objections I was raising; it's the people who go on to generalize it whom I am criticizing. So I don't think we actually disagree.

At 12:58 AM, January 03, 2018, Anonymous Anonymous said...

Remember hearing about this exact concept on an interview you did on C-SPAN ~20 years ago, although couldn't find any writing on it :)

At 9:07 AM, January 04, 2018, Blogger TheVidra said...

A bit of a side note: nationalist rhetoric coupled with a protectionist policy might be used to stimulate industry, at the expense of the consumer (and the economy) in preparation for a large war. Maybe those in the know have some information we don't.
Back to the subject matter here: it's tough to create an experiment to test these theories, because there are so many factors affecting utility (it's not just the GDP increase, it could be potential votes from Rust Belt areas)... crude approximations can be tested, but I think economists who try to test theories in real life have a similar conceit to those who think they have enough information to centrally plan an economy.

At 3:04 PM, January 04, 2018, Anonymous Scott H. said...

I had been thinking this same thing! How fortunate that we have such dedicated scientists with regards to demand theory, and how oddly fortunate for them that they get to redistribute while they experiment.

I'm waiting for Trump to decide that we need more testing of Newton's laws of gravity with respect to nuclear missles over Pyongyang. How can we be sure they will fall like other objects if we've never tested them over that part of the Earth? Thank goodness for the scientific method!

At 8:26 AM, January 06, 2018, Blogger John C. Webb said...

An American Football analogy: There must be irrefutable empirical evidence to overturn a praxeological ruling on the field.

At 9:57 AM, January 09, 2018, Blogger Ann James said...

Equating a widely accepted theory or a popular school of thought in economics with economics itself is erroneous. So if the seemingly contradictory beliefs that an economist holds privately show up in his/her work, he/she would be a real economist.

At 12:25 AM, January 11, 2018, Blogger gurugeorge said...

Don't a lot of these arguments depend on what counts as utility or value?

For example, it might be worth it to some people to pay something to government so that you don't have destitute people littering the streets, or it might be worth paying a little extra to "buy American."

At 7:40 AM, February 11, 2018, Blogger Geech said...


"it seems strange to say that one *must* accept a theoretical conclusion that doesn't agree well with experimental evidence"

I'm late to the party on this, but I wanted to respond because no one else has. It's important to remember that in mainstream economics there is no such thing as a "minimum wage theory" which is distinct and separate. There is only price theory, and its application to the low-wage labor market with a price floor in place. Price theory has a huge amount of empirical and even laboratory evidence which cannot reasonably be overturned by a some murky empirical results around the minimum wage.

The reasonable assumption going in is that the trade-offs predicting by the dominant and well-supported theory do exist, not agnosticism.


Post a Comment

<< Home