David Glasner: James Buchanan Calling the Kettle Black: Weekend Reading

San Francisco from Abovee Berkeley

IIR, back in 1986 I was one of two two people at the MIT economics Wednesday faculty lunch willing to say that I thought the award of the Nobel Prize to James Buchanan was not a travesty and a mistake. I would now like to withdraw that opinion.

Buchanan was a hedgehog. Hedgehogs are wise in one big thing and very stupid otherwise. They may be intellectually useful for a community, or they may be tremendously destructive—it depends. But they are not wise. And they should not be given prizes that lead outsiders to think that they are wise:

David Glasner: James Buchanan Calling the Kettle Black: “In the wake of the tragic death of Alan Krueger, attention has been drawn to an implicitly defamatory statement by James Buchanan about those who, like Krueger, dared question the orthodox position taken by most economists that minimum-wage laws increase unemployment among low-wage, low-skilled workers whose productivity, at the margin, is less than the minimum wage that employers are required to pay employees. Here is Buchanan’s statement…

…The inverse relationship between quantity demanded and price is the core proposition in economic science, which embodies the presupposition that human choice behavior is sufficiently relational to allow predictions to be made. Just as no physicist would claim that “water runs uphill,” no self-respecting economist would claim that increases in the minimum wage increase employment. Such a claim, if seriously advanced, becomes equivalent to a denial that there is even minimal scientific content in economics, and that, in consequence, economists can do nothing but write as advocates for ideological interests. Fortunately, only a handful of economists are willing to throw over the teachings of two centuries; we have not yet become a bevy of camp-following whores.

Wholly apart from its odious metaphorical characterization of those he was criticizing, Buchanan’s assertion was substantively problematic….

Buchanan was obviously wrong not to acknowledge… obvious circumstances in which a minimum-wage law could simultaneously raise wages and reduce unemployment without contradicting the inverse relationship between quantity demanded and price. Such circumstances obtain whenever employers exercise monopsony power in the market for unskilled labor….

The second problem with Buchanan’s position is less straightforward and less well-known, but more important, than the first. The inverse relationship by which Buchanan set such great store is valid only if qualified by a ceteris paribus condition…. Labor markets, except at a granular level, when the focus is on an isolated region or a specialized occupation, cannot be modeled usefully with the standard partial-equilibrium techniques of price theory, because income effects and interactions between related markets cannot appropriately be excluded from the partial-equilibrium analysis of supply and demand in a broadly defined market for labor…. Moreover, the idea that the equilibration of any labor market can be understood within a partial-equiilbrium framework in which the wage responds to excess demands for, or excess supplies of, labor just as the price of a standardized commodity adjusts to excess demands for, or excess supplies of, that commodity, reflects a gross misunderstanding of the incentives of employers and workers in reaching wage bargains for the differentiated services provided by individual workers….

The truth is we don’t have a good understanding of how wages adjust, and so we don’t have a good understanding of the effects of minimum wages. But in arrogantly and insultingly dismissing Krueger’s empirical research on the effects of minimum wage laws, Buchanan was unwittingly exposing not Krueger’s ideological advocacy but his own.


#weekendreading 

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