Saturday, 15 November 2014

How to Circumvent the Minimum Wage (Maybe)

Would it make a difference if the government were to command employers to pay nothing or more to their employees, as compared to a situation when the government did not order anyone about? The former might be annoying; akin to someone telling you over lunch not to stick your fork in the eye and turn (and threatening punishment if you do anyway), but aside from the nuisance of useless advice, maybe there would be no effect?

Perhaps somebody were prepared to pay for the "privilege" of working for someone else. Then the government's command would destroy a valuable opportunity. But the fact that a person is willing to pay to work somewhere indicates to me that it is really the "employer" who provides the service. Thus, the roles are reversed: employer is now employee and employee is employer, as "the present now will later be past, for the times they are a-changin'". Problem solved.

Which leads me to wonder, why do not prospective employees who would like to be working for the minimum wage but cannot because their work is not valuable enough simply hire their employers? The employers would do some sinecure such as guarding a wristwatch. This is easily done, since they might just carry it around, looking at it occasionally, say when wondering what time it is. The wage would be the minimum one and the wage paid to the previously unemployed fellow would be the minimum wage plus what little money his labour is worth. He is paid on net an amount less than the minimum wage.

A concrete example: suppose the minimum wage is $5.00. The worker's labour is valued at $3.50, so he hires his boss at the minimum wage to carry a watch around. The boss hires the worker at a wage of $8.50 to do some proper work. On net, the boss pays the worker $3.50 and it is all legal (and perfectly morally acceptable - if not why not?).

I am ignorant, but I hope to better myself by asking questions. So, is there a law against this or what is the reason these relationships do not exist? Maybe there are fixed costs to hiring someone, or maybe the additional income to the employer working for the minimum wage would be taxed fairly steeply, but then the otherwise unemployed could settle for less instead. If the transaction costs are too great, why not outsource the matching process to a third party that hires the employers on behalf of the workers, paying them the minimum wage ($5.00), and hires the workers on behalf of the employers, paying them $8.50. Such a middle-man could charge $5.01 and $8.51, respectively, for its services.

As far as I can tell, the data on who makes minimum wages show no wristwatch-carrying employers, so I am pretty sure this way of circumventing minimum wage legislation is not legion. But if even I can think of ways to get around idiotic price floors, then others should have developed much more sophisticated techniques. Maybe this is part of the reason why researchers ever and anon fail to find disemployment effects of increases in the minimum wage.

Thursday, 13 November 2014

The Problem with Deserts

Many parents are sometimes heard to tell their children how great they are and how they are worthy of the world. If there are many such children, and if their parents are correct in their estimation, the total quantity of things that are deserved is surely greater than the total quantity of things that exist.


On the other hand, some people like to speculate on how many things we do have root causes in stuff others have done before, which in turn have root causes in still more distant deeds, and so on. On this view, perhaps nobody really deserves anything? If so, there is too much stuff to go round in this world.


How do desert-based theories of distribution deal with this issue? Surely it would be a remarkable coincidence if at any instance the quantity of stuff in the world exactly equalled the quantity of stuff that was deserved by its inhabitants. Ill-gotten things may (should?) be burnt, and if people do not get what they deserve it seems that adherents of desert-based theories should be really anxious to figure out how to get stuff to those who ought to have more.


If one thinks desert is morally important, it seems that one should do all one can to get it aligned with outcomes. One should support policies of constant fine-tuning and privately do what one can to accomplish the same agenda. If one deserves a lot, this may involve stealing from those who deserve less. Of course, one must also find out just what a just desert is.


One way out of some of these problems for desert-based theories of distribution is to argue that what one deserves is a fraction of total stuff. But then one's moral worth would be raised as that of everyone else falls, even if one doesn't do anything. So if one happened to live among Hinckleys, Dillingers and Sons of Sam rather than among saints and angels, one should get more of all the stuff there is. Surely that cannot be.


Another way out of the problem, of course, is to abandon theories of just deserts. Given the problems with it, this would probably be for the best.

Wednesday, 12 November 2014

Gordon Tullock on the Economics of Slavery

Gordon Tullock was a phenomenally precise and well-articulated economist. Since his untimely passing I have spent a few idle hours perusing some of his lesser-known works. A review of two books entitles 'The Economics of Slavery' is a true gem and showcases his excellent grasp of history. Tullock offers commentary on the phenomenon known as manumission, which should strike any slave-based society as the slaves themselves are apt to know better how to take care of themselves and how to work productively than are the slaveholders. Thus, slaves should rent themselves and work where their talents are used best, paying some fraction of their wages to the slaveholder and keeping the rest. Eventually, they might be able to buy themselves. Why was this not common practice?


Quoth Tullock (p. 11):
"The basic reason for the failure of this type of “sale” of the slave to himself in the guise of manumission to develop in the ante-bellum South would appear to be the stringent and steadily growing legal restrictions on manumission. There was also considerable social pressure against manumission, and in the last years before the Civil War a reaction to abolitionist propaganda developed into strong arguments that slavery was somehow a superior form of civilization. The explanation for these developments is fairly simple. The individual slaveholder would have been better off if he could have made a deal with his slaves to sell them their freedom, Large numbers of free negroes, however, would have endangered the “property rights” of the slaveholders in those that were still fully or partially owned. Thus the slaveholders had a motive collectively to favor laws against manumission in spite of the fact that each one would have benefitedfrom permission to manumit his own slave if he were the only one given such permission. The long run outcome of this tension between the individual and collective interests of the slave owners cannot now be known. From 1806 when importation of slaves was forbidden to 1860 was only 54 years, or considerably less than the threescore years and ten which the Bible gives as a normal life span. In economic terms this was not long enough to bring the system even near to full equilibrium. If we add on the numerous sociological factors, adjustment would have been even more delayed. Thus the possibility that slavery would have eliminated itself remains an open one."

 As they say, "read the whole thing". In fact, why not read all of his things.

Saturday, 8 November 2014

Carl Sagan at 80

Tomorrow, on the 9th of November, Carl Sagan would have celebrated his birthday were he still alive. This year would have marked the 80th anniversary of his birth. 80 is not the ripe old age it used to be anymore, so it is really sad that a rare disease took him away about 18 years ago.


He and I would have disagreed on many social policies (but not all of them; I am also in favour of the legalization of drugs as well as of cutting the amount of money spent on the military). In his otherwise truly wonderful book Cosmos, he states his opinion that a nation is more advanced the higher the fraction of its GDP is spent on public libraries. Upon the realization that the government could tax to the maximum and spend all the proceeds on public libraries, this seems like a pretty bizarre view (although it has the advantage of radically downsizing the many wasteful government programmes!).


But disagreement is no reason to hold another person in any less high regard. Besides, Carl Sagan had many - one might say "billions and billions", which, unlike popular belief, was not an expression he was in the habit of using - other terrific qualities, many of which he used to convey science and the scientific method to those of us not working in Departments of Astrophysics. Certainly a part of my appreciation of our astonishing universe I owe Carl Sagan. One of my favourite remembrances from Cosmos the TV series is when he discusses the people of "Flatland", where everything extends forwards and backwards, left and right, but not up and down; where everything is absolutely flat.


Imagine the things the Flatlanders would see were one to pick them up away from their quotidian plane. I find it a wonderful depiction of both what it might be like to experience an additional dimension and of how one might observe a two-dimensional world without them looking back. The people of Flatland ought to be a lot more self-conscious - and perhaps we too, in case of watchers from higher dimensions that we cannot perceive!


Carl Sagan had a great knack for finding the right words for just about anything he wished to say. One might even say that much of his work is poetic, although one must take care not to let this imply that it lacks other qualities. He had this knack because he really knew his subject; for so many others, possessing less engaging personalities and less varied vocabularies and all-round educations, his phrasings would have made them seem like they were aiming too high: But for Sagan they were apposite. His use of similes is impressive in its ability to inspire - who can forget that "we live on the shores of the cosmic ocean"?


Another thing which contributed to his ability to inspire is his genuine sense of wonder at the world around us. I reckon this, coupled with a keen perception of its structure and mechanics, probably made his sole attempt at fiction, the book Contact (dealing with signals being received from the skies), such a great achievement. The fiction here plays second fiddle to the facts, but where the facts are unknown, the fiction, centring on what might be possible, fills in to convey what I suppose must be some of his passion for science. A romantic view, surely, but a real one nonetheless.


The best way of celebrating the life of Carl Sagan on this 80th anniversary of his birth would be to, say, gather some evidence to inform an idea or learn something one did not know before; celebrate the triumph of the physical world, our vicinity of which is the product of stars which burnt out thousand of millions of years ago, by finding out still more about it. I am one of those people supposed to be dedicated to science and the discovery of Truth (and I guess I really am), so for me, finding any specific way of celebrating his life is not so easy. Maybe I will have to settle for (re-)reading one of his books. At any rate, Carl Sagan's was a life well lived. He continues to be missed.

Wednesday, 5 November 2014

Gordon Tullock

Today I was reached by the incredibly sad news that Gordon Tullock passed away on Monday, 3rd November, at age 92. These past few years have seen the demise of many of my great heroes, among whom Alchian, Becker, Coase, and now Tullock, stand out. What a dismal endeavour to go through the list in any detail. I never got to meet him, but the stories I hear all tell of an amazing character. Case in point: visited by what may have been the Governor of Virginia (if I recall the story correctly), then GMU Professor Tullock, always forthright, said to him: "So you're from the government? Very good. Then maybe you can do something about the leak in my ceiling". Actually these were also among the last words spoken between them.

Gordon Tullock is of course best known for his work on Public Choice and he was the founding editor of the eponymous journal, but his interests and articles showcase an astonishing breadth and depth of thought. He even had a publication in the Journal of Theoretical Biology. He wrote extensively on history and it is a great understatement to say that he was very well read. One article of his is 'An Economic Theory of Military Tactics', joint work with Geoffrey Brennan, in which they analyse the general's problem of getting the soldiers not to run away from battle. I have blogged about that article before, and several times about the late legend.

Tullock had a few paradoxes to his name. One, a wee note called 'The Purchase of Politicians' in the Western Economic Journal (now Economic Inquiry), says that political favours are bought for much less money than they reward, a phenomenon known as the Tullock Paradox which as far as I can tell lacks a satisfactory explanation. A better-known paradox of his is, of course, that of revolution: The individual faces great risk from participating in a protest against a tyrant, who might order the firing squads on the protestors, and the benefit he receives from doing so are hardly greater than what he would have got if he hadn't taken part in the protests.

With Tullock's passing, the world also loses a refreshing observation on the lack of necessity of formal training to be educated. Tullock never obtained a PhD in Economics even though he was surely among the two or three greatest economists to have been alive for over 40 years of Nobel Prize announcements and never received one - and a far greater recipient than many a Laureate. Tullock held a JD from the University of Chicago and only took one economics course for that degree. His works are rigorous without the formulae, which he would refer to as "ornamental mathematics". It is a tremendous loss to economic science that his example is no longer among us.

Of the tributes which I have seen, I particularly like the one by Professor David Friedman. Mine cannot compete, but I humbly add it to the pile, along with a piece of evidence as to how much Gordon Tullock has influenced my own thinking: I still do not know how yesterday's American election turned out. That will change soon enough with the number of interactions I have with others, but if it were not for them, I probably would not find out until I accidentally saw the headline on the news or maybe encountered it as part of some data crunching for a project.

We have lost a great economist and a remarkable character.


Thursday, 30 October 2014

Is Fighting Our Only Recourse?

Milton Friedman and many others have expressed the belief that if all the facts are known, the economist's recommendation (for particular policy or other course of action) is beyond dispute by other economists. I believe Friedman made this statement in a footnote in his highly influential essay on Positive Economics from 1953, and I know he has made similar statements on other occasions. It expresses the Popperian view that empirical observation has the power to reject any scientific theory and Friedman also used this idea to criticize, for instance, the Austrian fixation (most prominently defended by Ludwig von Mises) that economics is an à priori science and that economic facts are reachable only through logic and not through observation.

If neither Austrian (or other disbeliever in the power of observation) party to an intellectual dispute abandons his logic in favour of that of the other fellow, Friedman says that they can only fight (he used this word a number of times). By contrast, if people who believe in the power of observation argue with one another, one can say to the other: "tell me which phenomena you expect not to observe if you are right and I will do likewise". Certainly the latter scenario is more appealing.

I am a great fan of Milton Friedman and he is one of my very favourite economists ever. On this issue, I am sceptical that he was right, however. Now I do not believe he actually meant a proper fight (as in fist fight or other nasty business) in case of disagreement. That belief would have been absurd, since metaphysical questions are not resolved by observation and philosophers engaged in metaphysics do not - to the best of my knowledge - normally engage in fights. Rather, what Friedman must have meant was a "fight" as in an unproductive dispute in which one cannot really gain any ground.

But I do not believe this is really true. Take the issue of free will, for instance. This is a metaphysical issue and believers such as myself can only offer very far-fetched scenarios in which empirical observation would inform the issue, but thinking about it can advance the argument and has done so in the past. I believe it was C. S. Lewis who made the argument that determinism (lack of free will) implies skepticism (and must therefore be false), since if I have no free will, any views I hold are mere products of chemicals interacting in my brain, which epistemically offer no support for my belief in anything. Certainly the case for free will would be weaker today were it not from this contribution, due entirely to logic.

Now Milton Friedman would have been right to argue that this has not settled the argument on free will, but I think it is fair to say that the fact that we can at least advance the debate through means of pure logic does indicate that empirical observation is not absolutely required, though it does of course help a great deal. One could also, of course, ask what empirical evidence there is to support the view that theories falsifiable on grounds of observation are better than are theories which are not falsifiable on empirical grounds. In other words, what observation would reject the idea that observation is epistemically sound basis for rejecting ideas?

The idea that there are moral facts is another reason to be sceptical of the idea that disagreements vanish as empirical facts become known. For instance, if it were made quite clear that immigration restrictions are absolutely required to maximize (let's say global) welfare, I still would not be a fan of them because I believe they infringe upon moral rights. Alternatively, if it were made quite clear to me that I should sentence an innocent Negro to death because otherwise the bigoted people of some town will rebel and cause death and destruction, I still would not kill the Negro. I take moral rights seriously because I believe there are moral facts, of which moral rights form an integral part. Can I prove this? No, but I can offer reasons to think that there are moral facts out there which depend on things other than well-being. If moral facts are facts of the same epistemic status as empirical facts, then maybe they ought to take precedence as guides for action?

I don't want to sound like I reject the power of observation. I absolutely do not. My point in this blog post is merely to defend facts not readily observed empirically, and to highlight the possibility of using logic to advance one's understanding of them.

Tuesday, 21 October 2014

What Is Equality of Opportunity?

I have asked before what reasons there are to be worried about economic inequality, highlighting some plausible candidates and rejecting them all. Now Fed Chair Janet Yellen disappoints by lamenting growing inequality while apparently offering no shred of argument for why it would be a deplorable thing. Consider in which society you would rather live if societies consisted of five groups with income levels as follows:
 
Group 1: £1,000 in Society A; £1,000 in Society B;
 
Group 2: £1,100 in Society A; £2,000 in Society B;
 
Group 3: £1,250 in Society A; £3,000 in Society B;
 
Group 4: £1,350 in Society A; £4,500 in Society B;
 
Group 5: £1,400 in Society A; £8,000 in Society B.
 
Purchasing power is the same for every pound across societies. Inequality is palpably greater in society B, but who would not want to live there? I believe this sufficiently proves that inequality is a non-issue to sensible individuals (except to Yellen, Stiglitz, Krugman, Piketty, and other sensible individuals, whose repeated 'warnings' that it is a scourge of our times I cannot fathom). If high incomes were earned by crooks, that would be a problem with crime, not inequality; if low incomes were "too" low, that would be a problem with poverty, not inequality. I am bound to record my impression that a great deal of the concern with inequality is really a begrudging of high incomes going to top talent.


Professor Yellen says:
"It is no secret that the past few decades of widening inequality can be summed up as significant income and wealth gains for those at the very top and stagnant living standards for the majority. I think it is appropriate to ask whether this trend is compatible with values rooted in our nation's history, among them the high value Americans have traditionally placed on equality of opportunity."
If those at the top are not getting richer at the expense of those not at the top, I fail to see the problem. To her credit, Professor Yellen continues by discussing the issue of change at "the top"; the fact that members of, say, the "one per cent"  come and go and are apt not to be the same every year. She is dissatisfied with the rate of change between generations, however, and highlights the now famous 'Great Gatsby Curve', the finding that:
"...among advanced economies, greater income inequality is associated with diminished intergenerational mobility. In such circumstances, society faces difficult questions of how best to fairly and justly promote equal opportunity."
Forget for the moment the fact that "society" cannot "face" any questions, easy or difficult (only individuals can do that), and ask what intergenerational turnover would be compatible with equality of opportunity.


If one in ten (or a hundred, or whatever) children from the bottom percentile of families climbed to the top percentile over the course of a lifetime, would that be evidence in favour of, or against, equality of opportunity? Suppose turnover were complete, so that every child would be in every percentile at some stage of his life. Would that, on the other hand, be evidence in favour of, or against, equality of opportunity?


As far as I know, the common measure of equality of opportunity is the intergenerational elasticity of income, obtained, for instance, by looking at covariation between the natural logarithm of an individual's permanent income and that of his parent(s). If the correlation is zero, there is no statistically consistent relationship between incomes at different generations of the same family. Negative values mean higher (lower) family earnings depress (increase) those of offspring, and positive values mean that family and offspring earnings move in the same direction.


I submit the proposition that this is a pretty bad measure of intergenerational mobility. Why? Because it looks at average outcomes rather than choice sets. Who cares if rich (poor) families remain rich (poor) generation after generation as long as everyone has the opportunity to do things differently than did mum and dad? The fact that some fraction of family income influences adult income says something about the choices made by individuals as the grow up, but we cannot really say anything about what choices were available during that selfsame time.


Everything intergenerational is also a two-way street. There is what the children do and then there is what the parents do. If wealthy parents buy annuities for their children, that will influence the intergenerational elasticity of income in a positive direction. If parents run a business that is passed on to their children, that does the same thing. A zero elasticity of income between generations would indicate to me that something is blocking parents from doing what they want. A high intergenerational elasticity of income would suggest to me that mobility is possible but does not happen as often as it would if the measure were lower. It is, of course, possible that even an elasticity of one is "just" in the sense that it violates nobody's rights. I find it very difficult to say at which point between zero and "high" one might find the "ideal".


Alan B. Krueger, who coined the term 'the Great Gatsby Curve' (incidentally an odd name, given that Jay Gatsby was initially but a poor bootlegger in F. Scott Fitzgerald's great novel, though I suppose Professor Krueger's term is not too bad if one thinks of some of the novel's other characters), said in a concomitant talk that "equality of opportunity should be a nonpartisan issue", but if one gets to define equality of opportunity as always rising with intergenerational mobility, one has in fact made rather a partisan definition. There is probably too much focus on intergenerational mobility. Perhaps it would be better if one simply noted that the progress at the top has not come at the expense of those at the bottom and contented oneself with the justice of a procedure that violates nobody's rights.


PS. This was my 100th blog post. As Groucho Marx Said, "Time flies like an arrow. Fruit flies like a banana".