Wednesday, March 11, 2015

Jeff Madrick vs The Invisible Hand

Thanks to Donald J. Boudreaux, I learned of Jeff Madrick's article... Why Economists Cling to Discredited Ideas.

Why, for example, do so many economists oppose increases in the minimum wage?

Wages have two very important functions...

1. Compensate
2. Communicate

These two things are impossible to separate.  So when liberals change the compensation they change what's communicated.  A minimum wage communicates that the demand for unskilled labor is higher than it truly is.  As a result, people end up with the wrong answers to the fundamentally important question... "should I stay or should I go?"

Should I stay in school... or should I go get a job?
Should I stay in Mexico... or should I go to America?

When people stay when they should have gone... or go when they should have stayed... the logical result is the inefficient allocation of labor.

If we eliminated minimum wages... then wages would more accurately communicate the supply/demand for labor in any given area.  Workers would move to areas with higher wages and manufacturers would move to areas with lower wages.

But in a recession, worried people ignore these market signals.

Recessions wouldn't occur if liberals understood the point of value signals.

Individual behavior does not aggregate to general efficiency.

How can it when liberals use the government to spread misinformation?

Moreover, widespread assertions that free-market reforms led to enormous reductions in global poverty foundered on a hard fact: Most of the reduction occurred in China, and to a lesser degree in India—countries that did not adopt the Washington Consensus.

Deng Xiaoping decreased the visible hand's sphere of influence.  Please see...

First, nations need space to develop their own industries and institutions. This might require subsidies and other supports that violate trade agreements.

A couple fundamentally basic premises...

1. People like to trade
2. Public goods, ie a bridge, can facilitate trade

The point of governments is to make it easier for people to trade with each other.  In other words, the point of governments is to facilitate communication.

Mainstream economics has no strong theory of government, except that it is a corrector of market failures (which are presumed to be rare).

Public choice is an extremely strong theory of government... but it's painfully true that it's not mainstream.

The nation needs a positive theory of government, which recognizes how valuable social policies and public investment have been, and how much more of them we need.

In the absence of a pubmar... how can we possibly know just how beneficial any government intervention has been?  How can we ensure that government intervention does not violate Quiggin's Implied Rule of Economics?

Please see...

But the nation won’t grow without more government.

China didn't grow as a result of more government... it grew as a result of less government.  Until we create a market in the public sector... it's safer to err on the side of less government.

The dominance of bad mainstream thinking, which leads to resistance to public investment, has been especially damaging because it undermines the foundation of future prosperity.

Progress depends on difference.

From these assumptions, however, it logically follows that an economy is almost always self-adjusting—and the politically conservative assumption that government interference is almost always bad becomes axiomatic.

It will continue to be axiomatic until we ensure that the government doesn't violate Quiggin's Implied Rule of Economics.

By its very nature, a firm belief in the invisible hand means a faith in laissez-faire policies: reduced taxes and regulation.

Less taxes and regulation means more invisible hand.  More invisible hand means more difference.  More difference means more progress.

The less government, the better.

Yup, until we create a market in the public sector.

The dominating policy ideas of the invisible hand have failed.

Nope, any real failure stems directly from liberals failing to understand the importance of value signals.

Neglect of public investment in infrastructure, clean energy, and education, a consequence of Say’s Law–type thinking, has undermined the nation’s foundation.

The government, by diminishing difference, has undermined the nation's foundation.

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