Friday, December 17, 2004

Myths and fallacies?

After reading (and thoroughly disagreeing with) Don Boudreaux's post comparing statism and creationism, I decided to check out some of his other posts under his "Myths and Fallacies" category. Ironically, it seems to me that some of these posts, intended to debunk other people's fallacies, contain a fair number of fallacies themselves.

Today, he writes that he finds it strange that our culture celebrates self-interest if its consequences only apply to yourself (exercise, eating healthily), but looks down on self-interest if its consequences apply to others (the profit motive, which helps business run smoothly and provide useful goods and services).

This seems to me to get it exactly backwards. Yes, the profit motive benefits others - sometimes. But sometimes it harms others. I'm not talking about the simplistic idea that the free market is a zero-sum game, so if you win, I must lose. Really, self-interest can actively harm others. For example, carelessness in maintenance (which saved on operation costs) led to Bhopal, the worst industrial disaster in the history of the world. In contrast, self-interest that concerns only yourself may not benefit anyone else, but it also won't harm anyone else. (I don't think it really counts as "harm" to say that by being slimmer and healthier, you'd harm others by out-competing them in the dating game.)

Boudreaux also ignores the role that intent plays in forming moral judgments. A self-interested company doesn't intend to help anyone by providing useful goods and services (after all, that's the beauty of self-organizing markets). This is therefore not morally good in the same way that an act of charity is morally good (an act of charity that actually does some good, that is). In contrast, the intent to be careless in factory maintenance is an aggravating factor in our moral condemnation of Union Carbide's selfishness in Bhopal. (Negligent homicide, anyone?)

Meanwhile, here Boudreaux ignores what is for me the most salient part of the letter he was responding to. The letter complains that the minimum wage has remained constant since 1997 while CEO compensation has skyrocketed. Boudreaux responds that the minimum wage is a government-imposed floor on wages and distorts the market mechanism for setting wages. But he misses the key similarity in the contrast between the minimum wage and CEO compensation: CEO compensation actually has no relation to job performance. CEO salaries have skyrocketed not because demand is so high for the tiny supply of qualified individuals, but because CEO salaries are set by the CEO's friends in an opaque, corrupt process that distorts the free market of salaries. So both minimum wages and corporate governance distort the free market. The injustice, then, is that one anti-market mechanism has been used to rase the salaries of the fantastically rich, while another anti-market mechanism has not been used for 7 years to raise the salaries of the desperately poor. A classic libertarian fallacy - overlooking the coercive power of private parties and only seeing the coercion of the state.

Finally, this. Boudreaux provides examples of poor people who became rich (mostly from the late 1800's) as evidence against the assertion that the rich get richer and the poor get poorer. For an economist, Boudreaux seems strangely willing to ignore any sort of statistical evidence and rely purely on anecdotes. To address his point directly: yes, it's true that under capitalism, poor people can get rich. This is good. But that doesn't refute the idea that overall, the wealth gap is growing. Moreover, it's extremely bizarre to cite historical examples of successful entrepeneurs to counter the claim that it's currently getting harder for poor people to become rich.

A friend of mine told me that due to the changing structure of the American economy, it really is getting harder to "climb up the income ladder." Once upon a time, blue-collar workers in factories could rise up the ladder by becoming the floor foreman, then moving into management, and so on. But those manufacturing jobs are disappearing from the economy, being replaced with service jobs. Service jobs, unlike manufacturing jobs, are relatively sharply divided into unskilled labor (retail, food service) and skilled labor (software engineer, scientist, professor). The education gap between the two means it's actually very hard to transition from unskilled to skilled. Thus poor people really are stuck being poor. Now I'm not an economist so I don't know if this is an accurate description of the American labor economy. But it seems that if Boudreaux wants to say that the wealth gap isn't growing, he should address claims like these rather than using anecdotal evidence.

By the way, Steve Jobs coming from a modest background is very different than Steve Jobs coming from a poor background. He had the education and skills to start a successful computer company. Would he have done if he were a sweatshop laborer?

25 Comments:

Anonymous Anonymous said...

I am not sure you have thought through your (or prof Bordeaux's) arguments very clearly. You provide, as an example of 'active self-interest' the tragedy in Bhopal. However, it was clearly not in the self-interest of Union Carbide for this to occur, due to loss of life, and loss of business (due to plant shutdown, workers lost, and future customers lost). Also, to be an 'active self-interest' the accident would be the intended consequence, clearly not the case. As an example of an inactive (or non-intended) harm caused by individual self-interest, consider the vast number of anorexic and bulemic men and women, who do so due to the value placed on appearance.

You then go on to assess that for an action to be valuable then the intent should be to do good. I beleive that businesses exist to provide some good (product) or service (in exchange for capital). For example, Union Carbide makes pesticides which, suprisingly enough kill pests. These pests can destroy crops leading to starvation I doubt you would call starvation a common good. Thus the intent of Union Carbide is good. The other intent they have is to make money. This in, and of itself is not harmful (unless you hold that they intend to take this money without providing goods or sevices). (Also, an unintended consequence of this action is to provide jobs, which leads to all sorts of other good and possible bad things.) Unfortunatley in this case, a poor action was taken under the auspices of increasing profit (one of the intended consequences) and tragedy insued. Perhaps you would like to instead argue that society would welcome business seeking profit, so long as they only seek 'safe' profit (but I doubt you would fall for that slippery slope).

Finally you discuss the disparity of wages from CEO's to, my wording, plebes. You hit the nail on the head when you say that reason CEO's make so much is that there is a limited supply of them. It is also true that the low end worker makes little as they are in high supply. The cure for this is education, which should balance out the supply. If you would like to talk about educational opportunities (as you seem to do in your last statement regarding Steve Jobs) that would be more suited for a diffent topic. (Unless you are holding the position that businesses actively profit seeking are taking away from the educational opportunities available to the poor?)

12/18/2004 12:26:00 AM  
Anonymous Anonymous said...

Min. wage is the worst public policy idea that I have ever encountered. The idea that the worker is too stupid to negotiate his or her wage is repugnant. The idea that people cannot join unions, or in some way that government should mandate participation in a union type benefit like min. wage is silly, because it removes choice. I cannot take seriously someone that sees themselves as smarter than a PhD. in economics and at the same time misses the insight inherent in the idea of a price floor. Next time that you eat a tomato just think, you see it in the store 3 for a $1, this is the result of workers getting paid 30 cents a bucket for what they pick. If you up this to say $3.00 a bucket are you now willing to pay for that additional cost in your tomato price? The money has to come from some where. When you don't cough up that money for the next marginal tomato, that implies very little to the market, but when the prices for tomato sauce at dominos, and papa john's triple, you are going to see them buy tomatoes from other countries. As a result we will be left with many migrant workers stranded in the states, they will be without work, because of your mandatory minimum wage (all the real min. wage jobs are occupied). This means that taxes will have to be raised to support them. We will take money from those that are legally working (reducing their pay) which has the same effect of lowering their formally raised wage. Plus now we have less output because others are not employed. On top of this the government (chockablock full of corruption) is in charge of much more money, so you have expanded social security and welfare programs that find ways to inefficiently waste the money.

This is just a quick story to show where the fallacy leads you. Please be more careful.

12/18/2004 06:40:00 AM  
Blogger Andrew said...

Hm, Blogger comments are not so good because everyone is anonymous. I may switch to Haloscan comments soon if this keeps happening.

Well, to the first Anonymous:

I'm afraid you may have misunderstood my argument, but as the good Prof. Boudreaux said, if someone misunderstands you, it's your own fault for not being clear enough. So let me try again. I certainly did not mean to say that Union Carbide intended to cause the accident or that the accident was in its self-interest. Rather, I meant that its self-interest led to a certain calculated amount of carelessness, and this carelessness led to tragedy. If a person did that, we would call it "reckless endangerment of human life."

Most businesses do this. The genius of market economics is that businesses don't have to intend to serve the community - they merely intend to make money, and serving the community is just a convenient way to do that. But because the primary motive is to make money, and serving the community merely a means to that end, if a business can make more money in a way that doesn't serve the community, it will do so. For example, not installing filters in smokestacks so they pollute all over the place and cause respiratory disease. Eventually the government catches on and imposes fines for factories without smokestack filters, but even then the company will only obey the rule is they judge that the risk of fine is greater than the cost of the filter. (Obviously the solution is to make it 100% in the company's self-interest to install the filter, through some ingenious incentive-based mechanism. But you see my point that self-interest needs to be in the proper context to produce good results.)

So I'm not sure that I would argue that we should endorse some forms of profit-seeking, and not others. Rather, I was just arguing against the active celebration of other-involved self-interest that Boudreaux was advocating.

On CEO's, you seem to have missed my point entirely. The reason CEO's make so much is not only because there is a limited supply of them. The point I was trying to make is that there is also a fair amount of corporate corruption and cronyism that goes into artificially raising their salaries beyond what the market demands. Otherwise, how would you explain the fact that CEO salaries have shot up astronomically over the last decade while the supply of qualified executives cannot possibly have decreased, or the demand for them increased, so quickly?

Okay, to the second Anonymous:

Please note that I didn't actually advocate a minimum wage anywhere. It's not clear to me whose post you are responding to. Where did I even say that I'm smarter than Prof. Boudreaux? I also did not "miss the insight inherent in the idea of a price floor." I merely said that it's not fair to distort the market to favor CEO's, but then to use "Free markets!!" as a reason not to help poor people.

By the way, although I generally follow the economic logic of arguing against a minimum wage, I'm not sure I follow your tomato example. The negative consequences seem to hinge on the idea that the jobs for migrant workers would disappear relatively suddenly (thus they are stranded in the U.S. and have to be supported by taxpayer welfare). But if the minimum wage is raised very slightly and gradually (say, 50 cents per hour, per year), you wouldn't see a sudden drop in jobs. A gradual decline in employment prospects would allow migrant workers to return home, or get re-trained for a new job, without the massive disruption to the economy that you depict.

Also, on unions: unions also remove choice by enforcing collective bargaining on their members. Are you arguing that the anti-market mechanisms of labor unions are not as bad as the anti-market mechanisms of a government-imposed minimum wage?

Okay, that said, I do actually favor the minimum wage. Economic efficiency is not the only value in the world (though it is a big one - after all, it leads to prosperity and greater satisfaction of human wants). But this gets into a much bigger debate about the relative values of liberty and equality, which I will have to leave to post about at another time.

One final note: according to certain other people with Ph.D.'s in economics, it appears that raising the minimum wage does not, in fact, significantly reduce the number of jobs available.

12/18/2004 10:09:00 AM  
Anonymous Anonymous said...

I don't want to sign up for an account just to post, sorry

At the point where you say that you favor a min. wage, you reject the idea of migrant workers that make less than a min. wage.

As far as labor unions, as long as it is voluntary association of bargaining, I don't see how unions are anti-market, in fact they seem to be a strategy to work within a market since they are a spontaneous reaction to a perceived market failure. The government fiating a min. wage is stupid because it does not involve choice. It is unequal. I know that there are people trying to make the argument that min wage doesn't reduce the number of jobs, but these rely on tricks. If your theory does not match up with reality; your theory is not worth much. For example, if I made the min. wage $100 tomorrow, unemployment would increase, at least until prices could adjust. Smaller changes have smaller effects, but it is clear that this effect will be in place, it is the law of demand, an economic law, if the price of labor increases, less labor will be demanded. Furthermore it hurts people in rural areas, if the going rate for burger flipping is $7 in New York City and $4 dollars in Arab, Alabama; then it is clear that a $5 min. wage has no effect on New York, and hurts the employer, the employee, and the community in Alabama.

Finally when you suggest that someone is guilty of spreading fallacies, in their major discipline, that is the same as asserting that you are smarter than they are. Normally you would defer to someone’s PhD in a subject and assume that they have studied the issue a bit more intensely than a casual observer. You claim that it contains fallacies and is not clear. I do not find the arguments unclear, so I do have to disagree that it is the author's fault when you don't understand. It is the author's responsibility to make the audience understand, but this by no means extends to the limit of every audience member, if these ideas are read by someone with no more than a casual interest in economics than I can certainly see why it is misleading.

I congratulate you for carrying out this discussion; I do suggest that you collect a little more information before taking on a Doctorate in a field. I don’t go into a hospital and argue with a surgeon, because I read a Boy Scout field manual on tourniquets.

12/18/2004 03:29:00 PM  
Blogger Andrew said...

Okay, first of all, I was not saying that Prof. Boudreaux wasn't being clear. I said that I wasn't being clear. I was trying to apologize for being unclear (and thus making you misunderstand my argument), and saying that I would try to explain what I meant again. Yes, I believe Prof. Boudreaux's posts had some fallacies, but I actually thought he was very clear.

Second, I was not arguing with Prof. Boudreaux on technical points of economics. If you go back to my original post, you will see that my first argument was about the morality of self-interest, specifically about a conflict between consequentialist and Kantian ethics. Boudreaux does not have a Ph.D. in moral philosophy. My second argument was about CEO salaries - Boudreaux did not even mention whether or not he thought that CEO salaries are set by a transparent market mechanism, so I was not directly contradicting him there, merely pointing out something he didn't talk about. My third argument was about his use of anecdotal evidence to support a broad theory about the nature of the American economy. You don't have to have a Ph.D. in economics to see that that's a flawed method for argument. To use your analogy of the surgeon: you would be perfectly justified to argue with a surgeon about matters tangentially related to surgery, such as medical ethics, as long as you didn't say something like "no, I think you should cut the aorta, not the vena cava."

On the minimum wage: I would like to see you directly refute the claim that mild increases in the minimum wage do not cause significant increases in unemployment. Specifically, you claim that "if your theory does not match up with reality, your theory is not worth much" - yet the book that I linked to explicitly uses an empirical analysis of employment:

A distinctive feature of Card and Krueger's research is the use of empirical methods borrowed from the natural sciences, including comparisons between the "treatment" and "control" groups formed when the minimum wage rises for some workers but not for others. In addition, the authors critically reexamine the previous literature on the minimum wage and find that it, too, lacks support for the claim that a higher minimum wage cuts jobs. Finally, the effects of the minimum wage on family earnings, poverty outcomes, and the stock market valuation of low-wage employers are documented.

Is that a trick? If so, please explain how - I'm not being sarcastic, I really am curious. You say that "smaller changes have smaller effects, but it is clear that this effect will be in place, it is the law of demand" - how's that for theory without empirical evidence? Show me some empirical evidence, and then we'll deal. By the way, I do know enough economics to know about elasticity in demand. If demand for labor is highly inelastic over a short range, it might actually be true that a small increase in minimum wage wouldn't significantly affect unemployment. (But here, I must as always defer to the facts. Maybe you're right. But I'd like to see you refute Card and Krueger.)

Finally, you do raise a good point about regional inequality in wages. That's why it's a good thing that the federal minimum wage is not so high, while several state minimum wages are higher.

12/18/2004 04:57:00 PM  
Anonymous Anonymous said...

Good deal, I think we are on the same page at this point. The econometrics is very complicated. It is hard to provide causation for anything. I find it difficult to believe that any thing "borrowed from the natural sciences" would make a clear case when examining policy effects on the natural economy. Economics has always been dependant on the methodology, which will continue to drive what makes sense. In the end elasticity and fancy econometrics do not erase the idea that interference in the market distorts things, and often the people that are nominally the beneficiaries suffer from the manipulation. Someone that is willing to work for a lower wage, does so because they don't have better options. We should allow them to supply labor at a price which a market determines. It will never make sense to me that if two people agree on an hours worth of work for a certain price, that the government has any natural right to become involved.

12/19/2004 01:06:00 AM  
Blogger Andrew said...

I'm not sure we're on the same page but at least we may agree to disagree. You are right that elasticity and fancy econometrics do not erase the distortions in the market caused by interference, but they do describe the intensity of the distortion: and it may be the case, as Card and Krueger argue, that small, gradual increases in the minimum wage only cause minimal distortions in employment - in which case, it's not such bad policy after all. It is still a matter of empirical fact, and we ought not to dismiss their findings out of hand just because they "don't make sense."

Also, we should distinguish between the moral case against a minimum wage (the government has no natural right to interfere with contractual relations between two consenting adults) and the empirical case against a minimum wage (that it harms poor people). (Although the latter argument assumes another moral argument that we shouldn't harm poor people, it is subject to empirical testing in a way that the former argument is not.) I suspect that even if it were empirically false that a minimum wage of $6/hr would harm poor people, you would still oppose the minimum wage on moral grounds - in which case, we could have a more productive debate about the proper role of government.

12/20/2004 12:00:00 PM  
Anonymous Anonymous said...

In this case I find it to be a matter of finding evidence that agrees with your moral conviction. I have studied the min. wage argument, and I find none of the evidence that it does anything but harm compelling. Most of the time it is dependant on a big fallacy, and is created just to sooth the bleeding heart mentality that says we should support min. wage. I can give you two factual emperical examples of the harms generated by min. wage. Illegal immigrants (who wouldn't be illegal if we stopped this nominal min. wage game) and welfare (again people that receive money from the state have no incentive to work for the same or a lesser about than the government dole). You can call these moral concerns, but I call them theoretical, however often (especially in this case) theoretical trumps empirical (when empirical is nothing but statistical games).

12/20/2004 08:54:00 PM  
Blogger Andrew said...

It's pretty clear that we're not going to resolve our debate; but I am at least curious what you mean about illegal immigrants and welfare. Isn't it the case that a high minimum wage would actually encourage people to get off welfare, because then they would earn more money by working than they would on welfare? And, if you could elaborate on your point about illegal immigrants - in what way is the illegality of illegal immigrants connected to the minimum wage? Or do you mean that we would have less immigration if we didn't have a minimum wage?

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