regulation – MarketsWork

The Callous Harm of the Minimum Wage

The minimum wage debate never really goes away, but in an election year with politics on everyone’s brain, the issue bubbles to the top again. In the US, some advocate raising the federal minimum wage from its current level of $7.25 to $17 or more. Economists argue, politicians pander, workers protest, and social media addicts meme. Here are a few thoughts on the issue, which I hope will clarify some things.

The basic logic of the law of demand is that if something becomes more expensive, people will buy less of it. That goes for the labor market also. That means that we could see some unintended consequences if government tries to make labor more expensive. Making labor artificially more costly means employers will find ways to get by with less of it. That may mean using more machines instead of people, in which case the people who are most easily replaced by machines will be let go. The self-service kiosks you see in many fast food restaurants are a good example of this, as they replace the person whose job it is to listen to your order, punch it into a machine, and hand you a receipt. Some of that replacement is going to occur anyway with the advancement of technology, but if you’re concerned about machines replacing people because of the cost savings machines represent, the last thing you would want to do is make people even more expensive with a higher minimum wage.

Harnessing the Common Law for Environmental Justice

Urban air pollution contributes to health risks, especially in low-income neighborhoods. In response, some churches in St. Louis are installing air quality sensors on their property. The churches, working with groups like AirWatch St. Louis and St. Louis’s Washington University, are sharing data in an effort to produce a better-informed advocacy and ultimately motivate legislative change.

Why is air pollution often worse in poorer neighborhoods? There are various reasons. It is tempting to attribute the problem to moral failures like dehumanization and discrimination. But ordinary economic incentives also play a role, and we ignore them at our peril.

Subjective Value and Externalities

One of my lectures at Mises University each summer concerns environmental issues. I make changes every year, but I always mention Murray Rothbard’s essay “Law, Property Rights, and Air Pollution.” In it, Rothbard lays out a libertarian method for handling what mainstream economists usually call externalities—the side effects of production or consumption activity on bystanders. The contrast between Rothbard’s welfare economics and the mainstream is plainly visible. Whereas many mainstream economists try to measure costs and benefits of pollution in order to come up with the most efficient level of pollution, or the appropriate tax to impose on the polluter (a la A.C. Pigou), Rothbard strictly eschews any such effort to measure the immeasurable.

Emissions Taxes and Tradable Permits

The typical presentation of negative externalities involves something like the diagram below, where the costs on bystanders are added to the marginal private costs (MPC) faced by the polluting firm, to come up with a marginal social cost (MSC) that, along with the marginal private benefit (MPB) to the firm from producing its output reveals the ideal level of output. In the presence of these negative externalities, and absent positive externalities that would offset these, the market level of production Q^M is too high, compared to the welfare-maximizing level of production Q*.

Negative externalities and overproduction

As court-made law to settle conflicts over nuisances like pollution has been increasingly regarded as inadequate to deal with externalities, government interventions have typically taken three forms: 1) command-and-control regulation, 2) emissions taxes, or 3) cap-and-trade systems.

Are Market Processes Moral?

Years ago, a religion professor at my college gave a talk to economics seniors on the limitations of economics and the necessity of considering religious principles in determining what we should do. Free-market economics, he said, has difficulty reconciling with the harsh criticism of market activity found in the Bible. There were, of course, other religions he could have considered, but Christianity was most familiar to these students.

One of his key points—that the economic way of thinking is not sufficient to understand the world around us—is valuable. An interdisciplinary approach to learning is indeed vital. However, I believe there are some problems with assertions that free markets and Christianity are incompatible.

The idea of free markets is about minimal intervention of the civil government into the marketplace. It is not about creating morality through markets. Neither is it an argument that people operating in a free market environment do not do bad things. It is true that markets sometimes produce things that should not be produced. For example, pornography, prostitution, and contract murder are provided in markets (and not all of these are universally illegal). And people who produce good things sometimes do so while cheating, lying, and stealing. But no market-oriented economists I know would argue that markets are expected to stamp out all unsavory and destructive behavior. A market structure allows people to accomplish their goals, but is neutral about what those goals should be.