Economics after 2008

What to make of Robert Skildelsky's call for reform of the economics curriculum?

Skidelsky is correct to note that the economics profession needs reform. By the summer 2009 various economists and journalists such as Paul Krugman, the editors of Economist magazine and Paul de Grauwe were both noting the limitations of standard economic models and calling for modifying the analysis so as to allow for more reality. Indeed I was cautiously optimistic that the 2008 meltdown and its aftermath would foster a major reevaluation and reorienting of modern economics. It seems, however, that many are learning all the wrong lessons.

Most would-be reformers quickly turned to behavioral economics as a way to incorporate more reality into economic analysis. Unfortunately, this amounts to little more than asserting that emotions impact human behavior and transforms economic science into something more resembling applied psychology. While no one should doubt the importance of emotions on the actions of people, it is not clear that such recognition fundamentally alters sound economic analysis. This was noticed decades ago by Ludwig von Mises:

Many champions of the instinct school are convinced that they have proved that action is not determined by reason, but stems from the profound depths of innate forces, impulses, instincts, and dispositions which are not open to any rational elucidation. They are certain they have succeeded in exposing the shallowness of rationaIisrn and disparage economics as "a tissue of false conc1usions drawn from false psychological assumptions."

Yet rationalism, praxeology, and economics do not deal with the ultimate springs and goals of action, but with the means applied for the attainment of an end sought. However unfathomable the depths may be from which an impulse or instinct emerges, the means which man chooses for its satisfaction are determined by a rational consideration of expense and success.

He who acts under an emotional impulse also acts. What distinguishes an emotional action from other actions is the valuation of input and output. Emotions disarrange valuations. Inflamed with passion man sees the goal as more desirable and the price he has to pay for it as less burdensome than he would in cool deliberation. Men have never doubted that even in the state of emotion means and ends are pondered and that it is possible to influence the outcome of this deliberation by rendering more costly the yielding to the passionatc impulse (Human Action, pp. 15-16).

Sound economic analysis already recognized that our emotions affect our behavior, however, the fact remains that all of our action is purposeful behavior. Economics is an implication of that fact that people act with purpose, regardless of the proximate source of that purpose. Sound economics is not dependent upon why people act as they do, only that they act.

There are further issues with Skidelsky's assertions, but they are matters for another day.

Good Inflation?

Dunstan Prial in his report, "Good Inflation, Bad Inflation: The Fed's Dilemma" talks about the spot between the inflationary rock and recessionary hard place the FED has put itself in. Prial rightly explains why Americans are concerned about price inflation. Prices for necessities are significantly higher now than they were only a year ago. According to the Bureau of Labor Statistics, prices of foodstuffs have risen by 17% since February.

Prices of  housing, electricity, airline travel, and gasoline also were noticeably higher.

Prial also rightly reports that the FED desires positive inflation of about 2%. That is, it desires that prices increase at that rate every year, which means it desires that the purchasing power of the dollar falls every year. 

Unfortunately, Prial also seems to embrace the false notion that inflation is a sign of economic growth.

[Inflation] means the economy is humming along nicely, creating jobs, lifting wages and increasing consumers’ ability to spend. All of which generates demand for goods and spurs economic growth.

I recently have noted that inflation does not cause economic expansion, nor is it a sign of economic expansion. If the economy really is more productive and we experience economic growth, the supply of goods would increase and overall prices would fall. If overall prices increase, that would be the result of an increased supply of or decreased demand for money, or some combination of both. We the FED has done its part by increasing the money supply by $4 trillion since January of 2009.

The bottom line is that there is no "good inflation." The only kind of inflation there is raises overall prices, shrinks the purchasing power of the dollar and leads to capital malinvestment that results in recession.

Freiling on a Little Known Exemption from the Minimum Wage

One of my former students, Nick Freiling, has a revealing piece at Mises.org today about the minimum wage. He shows how even those mandating the wage floor demonstrate they know a minimum wage above the market wage reduces employment opportunities. Freiling reminds us that the 1938 Fair Labor Standards Act, the law that put the national minimum wage in place, exempted and continues to exempt employees who are disabled. 

In light of that exemption, Freiling raises a very good question:

When Congress passed the 14(c) exemption along with minimum wage in 1938, they did so, as quoted above, “to prevent curtailment of opportunities for employment” of people with disabilities. The authors of the bill understood that minimum wage leads to unemployment for those “whose earning or productive capacity is impaired.” So in order to avoid the negative publicity associated with putting people with disabilities out of work, they exempted such people from minimum wage.

But this begs a question. If people with disabilities are exempt from minimum wage because their earning capacity is impaired and finding employment might otherwise be impossible, why don’t people without disabilities whose earning capacity is equally low also qualify for an exemption?

Why Seattle's Minimum Wage Hike Might Not Cost Jobs

Catherine Rampell has a naive and one can only say ignorant  blog post celebrating Seattle, Washington's bold $15 an hour "minimum wage experiment." Ms. Rampell treats the move as a positivist experiment "whose effects on workers, businesses and the local economy are unknowable. Anyone who claims otherwise is either lying or misguided." Here she surely overstates her case.

Though one cannot say with quantitative specificity the precise reduction in employment and production and increases in selling prices that such a wage hike will produce, one can know for certain that if the wage is truly above the market wage, there will fewer people hired than there would be without the law. That this has been demonstrated by both economic theory and history has been made clear by an outstanding study by Richard K. Vedder and Lowell E. Gallaway. They further document that not only does increasing the minimum wage above the market wage reduce employment, it also contributes to poverty rather than reducing it because it keeps the lowest skilled workers out of the labor market. By the way, if firms could easily get buy with fewer workers, why are they not doing this already?

It remains true, however, that job losses from such a drastic mandatory wage increase might not be as numerous as we might thing. This is because there are ways to adjust compensation to workers . What is often forgotten in debates over the minimum wage is that compensation for labor takes more forms than monetary wages. Depending on the employer, compensation could include vacation, health insurance, discounted meals, free drinks or any number of additional perks.

As an indicator for what might happen in Seattle, some have looked at the early fall-out of the SeaTac minimum wage that increased to $15 an hour for some hotels and restaurants at the beginning of the year. One hotel restaurant has closed, and work that used to be done by minimum wage employees is now being done by salaried managers. Some parking lots are adding surcharges on parking spaces near the airport. Some firms are hoping to offset increased labor costs with a reduction in advertising.

Assunta Ng writing for the Northwest Asian Weekly reports that a hotel workers she interviewed were surprised that their employers for whom they worked reduced various benefits to offset the increased mandatory wage. They are earning a higher hourly monetary wage, however, they lost their 401k, health insurance, a paid holiday, vacation time, free food, free parking, and the ability to work overtime. Restaurant workers bring in smaller tips. The bottom line is what the minimum wage giveth, the minimum wage taketh away.

Jewell on Christianity and Social Justice

My friend Jason Jewell, Professor and Chair of the Humanities Department at Faulkner University in Montgomery, Alabama has contributed to a new book on Social Justice from a variety of viewpoints. As Jewell reports, the book is "definitive proof (in case you were in doubt) that there is absolutely no consensus of any kind on social or political issues among people professing Christianity." It seems that anyone interested in Christianity and how it informs the concept of social justice could profit from this book.

Liesure Time for Mothers Is an Economic Good

A recent story on Bloomberg News reports that increasing numbers of women in Canada are deciding to stay home with children instead of continuing to supply labor in the marketplace. According to the author Greg Quinn, the downside to this trend is that such decisions "cuts growth."

The choices of people such as Recoskie may spell trouble for Canada and other economies with aging workforces, which have been supported in recent decades by women who broke social barriers to join the labor market. The long-term economic growth trend in Canada will slow because female participation in the workforce has probably crested, says Organization for Economic Cooperation and Development economist Peter Jarrett.

What this analysis fails to recognize is that leisure time spent raising children is an economic good. If women voluntarily make this choice, they demonstrate that they value this more highly than their employment opportunities. We ought not give into the temptation that all of human welfare is encapsulated in GDP. Even if such decisions do result in fewer commodities and services being supplied in the market place, paying higher prices to ration these goods is the only peaceful way to harmonize conflicting interests. 

Economic Freedom in the Early American Tradition

Three days ago I had the honor of delivering the Founders Lecture in Pittsburgh sponsored by the Center for Vision and Values. My topic was "Economic Freedom and the Early American Republic." I gave the audience a whirlwind tour of the variety of economic ideas that were current in the minds of the founders. I highlighted the distinction between the mercantilism of James Steuart and the political economy of Adam Smith. I also cited the ethics of property affirmed by Samuel Willard and John Witherspoon, the economic analysis of American Pelatiah Webster and the importance of the early French Liberal school. Stay tuned for a video link to the lecutre.

Is Capital a Blessing or Curse?

“Capital is opposed to labor, and the rich get richer while the poor get poorer” is a phrase heard all too often.

It’s often repeated by those who misunderstand the true economic relationship between capital formation and the productivity and real income of workers.

• I have previously written about how our understanding of the causes of economic progress can assist human flourishing and our fulfilling the cultural mandate.
• I later explained the nature and beneficial consequences of division of labor and how voluntary exchange is necessary for the division of labor to thrive.

Something often forgotten, however, is that a highly developed division of labor would be impossible without capital formation—another engine of economic development.

What is Capital, and Why Does It Matter?

Capital goods are produced means of production: tools, machines, buildings, and intermediary goods.

What we call capital is merely the sum of the monetary value of all a firm’s assets that are dedicated to that firm’s productive operations minus the sum of the monetary value of all of a firm’s liabilities. These assets may consist of land, physical plant, tools, machinery, goods-in-process, receivables, cash, etc.

Therefore, capital formation should be no more suspect than any other economic activity. Fulfilling the cultural mandate in our fallen world without either starving to death or killing one another requires productive labor. Sustaining a growing population requires increases in productivity.

This is why capital is a blessing.

Read the rest here

Improved Economic Growth Should Not Cause Increased Prices

Yet another misconception about the relationship between economic progress and overall prices is illustrated from this article from January by Bloomberg News' Jeanna Smialek and Victoria Stilwell claiming that "Improved U. S. Growth Lifts Inflation." The authors claim that the economy is gaining speed, as indicated by fewer jobless claims, increased manufacturing activity, and increases in spending on consumption, housing, and investment. In reality, however, we cannot point to economic growth as a cause of price inflation. If the economy is truly experiencing expansion, it is becoming more productive, so that we are producing more goods. If the supply of goods is increasing relative to demand, prices would be falling, not rising. If overall prices are rising, this is due to increase overall spending due to increases in the money supply.