Tuesday, June 08, 2010

Economics and the left

Daniel Klein has a column in today's Wall Street Journal summarizing some recent research he conducted (which I mentioned last month) indicating that the left and basic economics mix like oil and water. This quote pretty much sums it up:
The left has trouble squaring economic thinking with their political psychology, morals and aesthetics.
On matters of economics the political left finds itself with plenty of ideas which simply aren't compatible with observed reality. Consider the questions Klein asked in his survey (possible answers were 1) strongly agree; 2) somewhat agree; 3) somewhat disagree; 4) strongly disagree; 5) are not sure):
  1. Restrictions on housing development make housing less affordable
  2. Mandatory licensing of professional services increases the prices of those services
  3. Overall, the standard of living is higher today than it was 30 years ago
  4. Rent control leads to housing shortages
  5. A company with the largest market share is a monopoly
  6. Third World workers working for American companies overseas are being exploited
  7. Free trade leads to unemployment
  8. Minimum wage laws raise unemployment
I can almost guarantee the logic employed by the left for each one of these items goes something like this (with the real answer in parentheses):

1. Restrictions on housing development have nothing to do with price. Price is simply a product of greed on the part of developers. Some developers are more greedy than others. (Real answer: price is a product of supply, with diminished supply in the face of constant demand resulting in higher prices)

2. Licensing is necessary to protect consumers from unscrupulous and/or incompetent service providers. Price is again a product of greed, not supply. (Mandatory licensing serves as a barrier to entry, reducing supply and competition which in turn drives up prices. Quality, meanwhile, is best assured by competition instead of regulation)

3. Plainly false, as both workers and the environment are exploited by rapacious corporations and wealthy individuals who enrich themselves at the expense of the poor. We live in a world where the rich are getting richer and the poor are getting poorer, a trend only activist government can reverse. (By almost any objective criteria the standard of living has greatly improved over the last 30 years. We live longer and healthier lives, have access to more and better quality material goods while breathing cleaner air and drinking cleaner water)

4. Rent control is necessary to protect consumers from greedy landlords and address high housing costs. (Rent control discourages investment in the housing sector as landlords are unable to earn a return which covers costs and allows for a profit, thus reducing both the quality and quantity of a city's housing stock)

5. Obviously true, as a monopoly is simply a company with a lot of power. (A monopoly is a company which enjoys near 100% market share, typically due to barriers to entry erected by the government such as the prohibition against competing with the US Post Office in the delivery of first class mail. Monopolies in the face of free market entry are exceedingly rare)

6. Workers employed by corporations in the developing world are subject to harsh working conditions and underpaid. To the extent corporations provide us with useful goods at a reasonable cost, they are the result of misery inflicted on workers in developing countries. (Conditions and pay at US companies operating overseas are almost invariably better than alternative employment in those countries, otherwise the company wouldn't be able to find workers. Furthermore, low pay is typically due to low levels of productivity, as a company cannot pay its workers more than the value they produce. Investment by US and other foreign companies, meanwhile, serves as a force for increasing wages paid to workers as companies compete for labor)

7. Free trade simply results in well-paying US jobs being shipped overseas to be performed by exploited non-union labor. (In fact, free trade does not destroy or create jobs, but rather changes their composition, and tends to result in a shift towards higher-paying positions as each country specializes in its comparative advantage. For example, free trade with China may mean that some low wage manufacturing jobs are transferred to China, but the US will also gain jobs in high-end fields such as software and aerospace as Chinese demand for such goods increases)

8. Increases in the minimum wage are simply a transfer of money from greedy employers to their workers. Employers have plenty of money and minimum wage increases do not affect their hiring decisions. (Employers can only pay a worker what they are worth. If a worker only produces $5 of value per hour, and the minimum wage is $7, the worker will not be hired. The young and unskilled, as the most unproductive workers, are effectively priced out of the market by minimum wage laws, as they are prohibited from selling their labor at a price less than the minimum wage mandated by government).

Examining the world from its true state, rather than as one wishes to see it, is the heart of economics and the fast track towards an embrace of right-wing thought.

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