In any subject, it’s important to understand the fundamentals. It’s equally important to accept that Realworldia is more complex than “fundamentals.” (More)

Ideological Blinders, Part I: “Fundamentals”

This week Morning Feature looks at common, flawed arguments that flow from dogmatic ideologies. Today we explore the over-reliance on “fundamentals,” marked by a refusal to move beyond basic concepts to the complexity of real world cases. Tomorrow we conclude with slippery slopes and other logical fallacies that typify ideological blindness.

“A wage you can live on”

In his State of the Union Address, President Obama proposed raising the minimum wage and indexing it to inflation:

Tonight, let’s declare that in the wealthiest nation on Earth, no one who works full-time should have to live in poverty, and raise the federal minimum wage to $9.00 an hour. This single step would raise the incomes of millions of working families. It could mean the difference between groceries or the food bank; rent or eviction; scraping by or finally getting ahead. For businesses across the country, it would mean customers with more money in their pockets. In fact, working folks shouldn’t have to wait year after year for the minimum wage to go up while CEO pay has never been higher. So here’s an idea that Governor Romney and I actually agreed on last year: let’s tie the minimum wage to the cost of living, so that it finally becomes a wage you can live on.

Although polls show Americans overwhelmingly support raising the minimum wage, Speaker John Boehner quickly rejected the idea, saying a higher minimum wage would “make it harder for small employers to hire people.”

“A fundamental law of economics”

Cato Institute editor James Dorn expressed the core of Boehner’s argument in an op-ed at Forbes:

A fundamental law of economics – the law of demand – states that when the price of anything (including labor) increases, the quantity demanded will decrease, assuming other things affecting demand remain unchanged. In the case of labor, this means as the price of labor (the wage rate) increases, the number of jobs will decrease, other things constant. Moreover, the decrease in employment will be greater in the long run than in the short run, as employers shift to labor-saving methods of production.

Of course, other things seldom stay constant in the real world, so the law of demand is sometimes difficult to test. But just as when the wind blows a leaf upward, the law of gravity remains intact, so too with the law of demand. Public policy should be based on sound economics, not on politically popular myths.

Note Dorn’s rhetorical emphasis on “a fundamental law of economics.” He cites what logicians call a ceteris paribus model – concept that assumes “all other things being equal” – as he admits at the end of that first sentence. At the start of the next paragraph he repeats that “other things seldom stay constant in the real world, so the law of demand is sometimes difficult to test.”

So far, so good.

“Why not increase the federal minimum to $100 an hour?”

But rather than explaining the countervailing effects of minimum wage on demand – and admitting the bulk of the evidence in real world experiments showing that modest minimum wage hikes to not reduce employment – Dorn returns to his “fundamental” rule … and then offers this gem of reductio ad absurdum:

President Obama is practicing zombie economics when he ignores the law of demand and promises to raise the federal minimum wage from $7.25 an hour to $9, so that “no one who works full-time should have to live in poverty.” He believes that “this single step would raise the incomes of millions of working families.” If so, why not increase the federal minimum to $100 an hour and abolish poverty?

No reputable economist disputes that a minimum wage of $100 per hour would trigger an horrific inflationary spiral. But President Obama did not propose a minimum wage of $100 per hour, and data show that a minimum wage of $9 per hour would not have the same effect. Dorn’s $100 per hour example reduces a modest idea to its absurd extreme, hence the Latin name of the fallacy.

“Let markets work”

Fortunately, we need no reductio ad absurdum fallacy to critique Dorn. He goes to the opposite extreme, all on his own:

The United States needs to abolish the minimum wage, not increase it. Workers who are willing to work at free-market wages should have the right to do so, and employers should have the right to hire them. Government should get out of the way and let markets work.

Dorn’s idea would work … in a perfect world where every actor had complete information, zero transaction costs, and equal bargaining power. But we don’t live in that world, as economist Richard Green explained:

There is in economic theory a set of circumstances, however, under which an increase in the minimum wage might raise employment. If an employer has a market largely to itself – if it has monopsony power – then it will both pay its workers less than their productivity warrants and not hire enough workers to be at the most efficient level of employment. Raising the minimum wage would then both increase pay and induce more workers into the labor market, hence increasing employment. If government could nail the minimum wage to the marginal revenue product of the least productive workers, the minimum wage could produce a first-best outcome – one where pay and employment levels were efficient.

For the argument to work, the demand for labor needn’t be perfectly monopsonistic, but rather less than perfectly competitive. The fact that wages and labor productivity seem to have less and less to do with each other is evidence that the demand for labor is not competitive, but it would be nice to have further, detailed evidence of the industrial organization of labor demand.

In plain English, employers in Realworldia compete far less with other employers for low-wage employees than low-wage employees compete with each other for jobs. This is what economists call a monopsonistic market, and it gives employers a bargaining advantage over low-wage workers and applicants for low-wage jobs. Employers can and do pay low-wage workers less than they would earn in Dorn’s idealized market.

Dorn’s op-ed reveals a common ideological pattern of argument. Dogmatic ideologues tend to state a “fundamental” rule, offer an absurd counterexample, and return to their “fundamental” rule, without ever engaging the gritty details of Realworldia. Dorn gets extra chutzpah points for dismissing the evidence “politically popular myths” … because that’s exactly what he’s peddling.

+++++

Happy Friday!