Two ways of thinking about economics
By Scott Sumner
In a paper I wrote back in 2008 I speculated that what I called “economistic” thinking led to classical liberal (i.e. free market) views on economics. By ‘economistic’ I meant thinking that takes economic theory very seriously. The belief that people are strongly affected by incentives, that regulations have lots of unexpected side effects, and that problems occur when you interfere with markets. In contrast, liberals are more likely to think that government programs and regulations can have lots of good effects, with only modest undesirable side effects. (I made similar comparisons earlier this year in an Econ Journal Watch paper.)
Over the years, I’ve seen people complain that Paul Krugman used to believe X in the 1990s, and now he believes Y. His textbook says X, but his recent blog posts say Y. I’ve done that a few times, but I find it increasingly uninteresting. Textbook writers are almost required to overlook certain nuances. New studies occur and people change their minds. So I don’t find it very interesting that Paul Krugman has changed his views on the minimum wage.
However commenter Patrick Sullivan pointed me to something much more interesting. It appears that Krugman has not just changed his mind, he’s changed his mind. I.e., he’s changed the way he thinks. He used to think like a slightly right-of-center economist who takes economic theory very seriously, and now he thinks like a left-of-center economist who is dismissive of much of economic theory. A recent David Henderson post on this topic suggested to me that his new views on the minimum wage do not seem to reflect any new information about its effects, but rather growing doubts as to whether economic theory is useful, whether we should take our models seriously. Here’s Krugman a few days ago:
Some background: Conservatives — with the backing, I have to admit, of many economists — normally argue that the market for labor is like the market for anything else. The law of supply and demand, they say, determines the level of wages, and the invisible hand of the market will punish anyone who tries to defy this law.
Specifically, this view implies that any attempt to push up wages will either fail or have bad consequences. Setting a minimum wage, it’s claimed, will reduce employment and create a labor surplus, the same way attempts to put floors under the prices of agricultural commodities used to lead to butter mountains, wine lakes and so on. Pressuring employers to pay more, or encouraging workers to organize into unions, will have the same effect.
But labor economists have long questioned this view. Soylent Green — I mean, the labor force — is people. And because workers are people, wages are not, in fact, like the price of butter, and how much workers are paid depends as much on social forces and political power as it does on simple supply and demand.
What’s the evidence? First, there is what actually happens when minimum wages are increased. Many states set minimum wages above the federal level, and we can look at what happens when a state raises its minimum while neighboring states do not. Does the wage-hiking state lose a large number of jobs? No — the overwhelming conclusion from studying these natural experiments is that moderate increases in the minimum wage have little or no negative effect on employment.
However back in 1998 things looked very different:
So what are the effects of increasing minimum wages? Any Econ 101 student can tell you the answer: The higher wage reduces the quantity of labor demanded, and hence leads to unemployment. This theoretical prediction has, however, been hard to confirm with actual data. Indeed, much-cited studies by two well-regarded labor economists, David Card and Alan Krueger, find that where there have been more or less controlled experiments, for example when New Jersey raised minimum wages but Pennsylvania did not, the effects of the increase on employment have been negligible or even positive. Exactly what to make of this result is a source of great dispute. Card and Krueger offered some complex theoretical rationales, but most of their colleagues are unconvinced; the centrist view is probably that minimum wages “do,” in fact, reduce employment, but that the effects are small and swamped by other forces.
What is remarkable, however, is how this rather iffy result has been seized upon by some liberals as a rationale for making large minimum wage increases a core component of the liberal agenda–for arguing that living wages “can play an important role in reversing the 25-year decline in wages experienced by most working people in America” (as this book’s back cover has it).
Clearly these advocates very much want to believe that the price of labor–unlike that of gasoline, or Manhattan apartments–can be set based on considerations of justice, not supply and demand, without unpleasant side effects. This will to believe is obvious in this book: The authors not only take the Card-Krueger results as gospel, but advance a number of other arguments that just do not hold up under examination.
Back then the Card-Krueger study was an “iffy result” not an “overwhelming conclusion.” Back then he mocked people who didn’t think the supply and demand model applied to labor markets, people who used fuzzy headed thinking about “justice,” not hard headed thinking about the consequences of interfering with market equilibrium. There is almost a contempt for people who have a “will to believe” that government can wave a magic wand and overrule the cold hard logic of market forces.
It’s worth reading Krugman’s entire 1998 book review. He also uses terms like “wishful thinking” and “silly,” and ends as follows:
In short, what the living wage is really about is not living standards, or even economics, but morality. Its advocates are basically opposed to the idea that wages are a market price–determined by supply and demand, the same as the price of apples or coal. And it is for that reason, rather than the practical details, that the broader political movement of which the demand for a living wage is the leading edge is ultimately doomed to failure: For the amorality of the market economy is part of its essence, and cannot be legislated away.
As Krugman has steadily moved to the left, he hasn’t just changed his mind in the sense of changing his opinions; he’s changed his mind in the sense of changing the way he thinks.
Tyler Cowen has argued that Paul Krugman is the Milton Friedman of the early 21st century, and in many ways that’s true. Among all economists, he is clearly the most influential public intellectual. But an even better comparison might be John Kenneth Galbraith, who was the favorite economist of intellectuals who hated economics.
I’ve noticed that if you explain to intellectuals that a minimum wage will hurt the poor by increasing unemployment, or that rent controls hurt renters by creating shortages, or that unemployment insurance increases unemployment, or that taxes on investment income should be abolished, they’ll give you this look like “I don’t know whether this guy is evil or crazy.” Non-economists strongly resent the implications of much of economic theory, as it punctures holes in all their pet theories. So when a Nobel Prize winner comes along that confirms all their political views, he’s going to be extremely popular among intellectuals. Especially when he’s as brilliant and witty as Paul Krugman.
I don’t want this too sound too negative. Just to be clear, Krugman is 10 times the economist that Galbraith was. I often disagree with him on macroeconomics, but his views are defensible and brilliantly explained. He’s a great writer, and a superb theoretician. Galbraith was a great writer and . . . and that’s about it.
But today Krugman’s appeal to intellectuals is quite similar to the appeal of Galbraith in the 1950s and 1960s—the economist for people who hate economics.