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 in two respects. The first, which is straightforward and well-known, and which Buchanan was obviously wrong not to acknowledge, is that there are 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. If employers realize that hiring additional low-skilled workers drives up the wage paid to all the low-skilled workers that they employ, not just the additional ones hired, the wage paid by employers will be less than the value of the marginal product of labor. If employers exercise monopsony power, then divergence between the wage and the marginal product is not a violation, but an implication, of the inverse relationship between quantity demanded and price. If Buchanan had written on his price theory preliminary exam for a Ph. D at Chicago that support for a minimum wage could be rationalized only be denying the inverse relationship between quantity demanded and price, he would have been flunked.
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. Demand is a function of many variables of which price is only one. So the inverse relationship between price and quantity demanded is premised on the assumption that all the other variables affecting demand are held (at least approximately) constant.
Now it’s true that even the law of gravity is subject to a ceteris paribus condition; the law of gravity will not control the movement of objects in a magnetic field. And it would be absurd to call a physicist an advocate for ideological interests just because he recognized that possibility.
Of course, the presence or absence of a magnetic field is a circumstance that can be easily ascertained, thereby enabling a physicist to alter his prediction of the movement of an object according as the the relevant field for predicting the motion of the object under consideration is gravitational or magnetic. But the magnitude and relevance of other factors affecting demand are not so easily taken into account by economists. That’s why applied economists try to focus on markets in which the effects of “other factors” are small or on markets in which “other factors” can easily be identified and measured or treated qualitatively as fixed effects.
But in some markets the factors affecting demand are themselves interrelated so that the ceteris paribus assumption can’t be maintained. Such markets can’t be analyzed in isolation, they can only be analyzed as a system in which all the variables are jointly determined. Economists call the analysis of an isolated market partial-equilibrium analysis. And it is partial-equilibrium analysis that constitutes the core of price theory and microeconomics. The ceteris paribus assumption either has to be maintained by assuming that changes in the variables other than price affecting demand and supply are inconsequential or by identifying other variable whose changes could affect demand and supply and either measuring them quantitatively or at least accounting for them qualitatively.
But 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. The determination of the equilibrium price in a market that encompasses a substantial share of economic activity cannot be isolated from the determination of the equilibrium prices in other markets.
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. Those incentives are in no way comparable to the incentives of businesses to adjust the prices of their products in response to excess supplies of or excess demands for those products.
Buchanan was implicitly applying an inappropriate paradigm of price adjustment in a single market to the analysis of how wages adjust in the real world. 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.
Uneasy Money 
Great post.
My understanding is that Krueger took advantage of a natural experiment. That is, one state would raise its minimum wage and the adjacent state would not. Ergo look at the results.
My own suspicion is that demand for minimum-wage workers is somewhat inelastic. You cannot ask office workers or patrons in the restaurant to clean toilets or wash dishes.
Mike Trout just signed for $430 million to hit baseballs. How much does it cost to sweep up after a ball game?
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*whenever* employers exercise monopsony power? Is this saying that all monopsonist can and do do this, or that monopsonists are theoretically capable of doing this, and that when they exercise monopsony power they are exercising monopsony power?
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Economists: “a bevy of camp-following whores”
Comment on David Glasner on ‘James Buchanan Calling the Kettle Black’
David Glasner cites James Buchanan: “The inverse relationship between quantity demanded and price is the core proposition in economic science, … 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.”
Fact is that economists are since the founding fathers “a bevy of camp-following whores”. It is of utmost importance to distinguish between political and theoretical economics. The main differences are: (i) The goal of political economics is to successfully push an agenda, the goal of theoretical economics is to successfully explain how the actual economy works. (ii) In political economics anything goes; in theoretical economics, the scientific standards of material and formal consistency are observed.
Theoretical economics has to be judged according to the criteria true/false and NOTHING else. The history of political economics from Adam Smith onward can be summarized as an utter scientific failure. Theoretical economics had been hijacked from the very beginning by the agenda pushers of political economics. The different camps of political economics have produced NOTHING of scientific value in the last 200+ years. The four major approaches ― Walrasianism, Keynesianism, Marxianism, Austrianism ― are mutually contradictory, axiomatically false, materially/formally inconsistent and all got the pivotal concept of the subject matter ― profit ― wrong.
One of the most consequential failures is employment theory. From microfounded economics follows an inverse relationship between wage rate and employment. However, microfoundations are methodologically unacceptable. From the correct macrofoundations#1 follows that there is a positive relationship between (average) wage rate a nd employment.#2, #3, #4, #5, #6
False theory leads to false policy guidance. With their defective microfounded employment theory, economists bear for 140+ years the political responsibility for the social devastation of mass unemployment.
David Glasner concludes: “Buchanan was implicitly applying an inappropriate paradigm of price adjustment in a single market to the analysis of how wages adjust in the real world. 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.”
Not quite right. Buchanan was exposing himself and his academic colleagues as incompetent scientists. Contrary to naive common sense, this is not at all a sorry fate. There are always excellent employment opportunities in the political sphere for failed/fake scientists. Lenin called them useful idiots.#7 False theories have great use value in the political Circus Maximus where nobody cares much for scientific validity. Political economics does not work according to the principles of science. Fake scientists like Buchanan are sponsored by billionaires.#8 False theories are NOT eliminated in the peer-review process, just the opposite, they are eventually rewarded with the faux Nobel.
Since Adam Smith/Karl Marx economics claims to be a science. It is NOT. James Buchanan is not an example for an incompetent/corrupt outlier but the proof that economics has never been anything else than brain dead political agenda pushing.#9
Egmont Kakarot-Handtke
#1 From false microfoundations to true macrofoundations
https://axecorg.blogspot.com/2018/02/from-false-microfoundations-to-true.html
#2 More on economists’ sticky brains
https://axecorg.blogspot.com/2018/10/more-on-economists-sticky-brains.html
#3 Full employment through the price mechanism
https://axecorg.blogspot.com/2017/11/full-employment-through-price-mechanism.html
#4 Employment theory as an example of proto-scientific soapbubbling
https://axecorg.blogspot.com/2018/06/employment-theory-as-example-of-proto.html
#5 Full employment, the Phillips Curve, and the end of Gaganomics
https://axecorg.blogspot.com/2018/04/full-employment-phillips-curve-and-end.html
#6 Go! ― test the Profit and Employment Law
https://axecorg.blogspot.com/2018/09/go-test-profit-and-employment-law.html
#7 The economist as standup comedian
https://axecorg.blogspot.com/2016/11/the-economist-as-standup-comedian.html
#8 Lynn Parramore, Meet the Economist Behind the One Percent’s Stealth Takeover of America
https://www.ineteconomics.org/perspectives/blog/meet-the-economist-behind-the-one-percents-stealth-takeover-of-america
#9 For details of the big picture see cross-references Political Economics
http://axecorg.blogspot.com/2015/11/political-economics-cross-references.html
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I have always found the vehemence with which minimum wage laws are opposed strange. Even if it did have the negative effects claimed, it’s still a relatively small policy provision affecting about 2% of the *hourly* workforce.
But as a self-respecting physicist, I do have to bring up this:
https://www.sciencenewsforstudents.org/article/where-rivers-run-uphill
And there’s also the asteroid Bennu, which has mass inside a rotational Roche lobe such that if a rock rolled down a hill in there it would actually go into orbit. Not water, but same basic underlying principle.
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Reblogged this on DAMIJAN blog and commented:
Dobra razlaga, zakaj model ponudbe in povpraševanja ni dober model za trg dela.
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No it’s saying, perhaps not as articulately as it might have been, that there may be circumstances under which employers do exercise monopsony power, and when those circumstances obtain, enforcing a legal minimum wage can simultaneously raise the wage and increase employment, though even under monopsony raising the wage beyond some threshold would reduce employment. It is also saying that acting in this way would be in the self-interest of the monopsonist and the monopsonist would be reducing the profit of his firm by not exercising the monopsony power in his possession.
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Thanks, Benjamin. I think that you are correct about the data underlying Krueger’s study.
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Perhaps the charitable interpretation of Buchanan’s comment, then, is that if there are any tight predictions made in economics, the one at the top of the list is that minimum wages cause job destruction. At the time of Card-Krueger, when it seemed like you could cut up the data any way you wanted and get that result, and that Card-Krueger was an anomaly, this was a reasonable position to take. Doubtlessly, there are ways of re-arranging the assumptions of price theory to generate different results, but it is *not* a desirable feature of a theory that you can re-arrange it so that it can be made consistent with facts. Doing so from the standpoint of someone like, for instance, Popper, is making it unscientific, because you are depriving it of empirical content. Bold, baldly stated theories are good, and that paragraph was written in the context of when it looked like, with the exception of Card-Krueger, a bold, baldly stated prediction that minimum wages cause job destruction holds up just as well as water going downhill.
Are there three good examples of empirical implications of (baseline) economics that appeared just as sturdy as “the minimum wage causes disemployment effects” did when Buchanan wrote that, and are just as sturdy today as they did then?
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I’m not saying that it is indefensible to uphold the proposition the minimum wage causes unemployment, but to say flatly that to deny that proposition is to throw economic theory in the trash is not defensible, because economic theory can itself specify circumstances in which that is not the case, and Stigler himself pointed that out in his classic text on Price Theory. I think that you are misunderstanding Popper’s position, which I was implicitly referring to in my reference to ceteris paribus conditions. The Popperian approach to ceteris paribus conditions is to specify what circumstances give rise to the failure of the ceteris paribus conditions to be satisfied and then see whether the empirical evidence contrary to the theory are accounted for by the identified failure of the ceteris paribus conditions to be satisfied. My further point is to argue that whatever we think of economic theory, it is a misapplication of the theory to apply it to labor markets in which there is a strong a priori proposition that ceteris paribus conditions will rarely be satisfied. You can’t make a theory more scientific than it really is by misapplying it and forgetting the limitation inherent in the theory.
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If Buchanan was being unfair to Card and Krueger (“defamatory” is an absurd stretch), you are being at least as unfair to Buchanan.
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I didn’t accuse him — based on lazy theorizing — of being a “camp-following whore.” I was a student of Buchanan’s as an undergraduate and always held him in the highest regard, but the screed in the Wall Street Journal was beyond the pale.
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Schadenfreude will be someone, 10 years after your demise, dredging up a bit of verbiage from your blog and attributing to you a nonsensical economic proposition.
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Just think how much more you’ll enjoy it if I get the Nobel Prize.
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A right-wing economist ignoring empirical evidence? Who’da thunk.
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