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Walter Williams
Walter E. Williams
15 Oct 2014
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Embarrassing Economists

Comment

So as to give some perspective, I'm going to ask readers for their guesses about human behavior before explaining my embarrassment by some of my fellow economists.

Suppose the prices of ladies jewelry rose by 100 percent. What would you predict would happen to sales? What about a 25 or 50 percent price increase? I'm going to guess that the average person would predict that sales would fall.

Would you make the same prediction about auto sales if cars' prices rose by 100 percent or 25 or 50 percent? Suppose that you're the CEO of General Motors and your sales manager tells you the company could increase auto sales by advertising a 100 percent or 50 percent price increase. I'm guessing that you'd fire the sales manager for both lunacy and incompetency.

Let's try one more. What would you predict would happen to housing sales if prices rose by 50 percent? I'm guessing you'd predict a decline in sales. You say, "OK, Williams, you're really trying our patience with these obvious questions. What's your point?"

It turns out that there's a law in economics known as the first fundamental law of demand, to which there are no known real-world exceptions. The law states that the higher the price of something the less people will take of it and vice versa. Another way of stating this very simple law is: There exists a price whereby people can be induced to take more of something, and there exists a price whereby people will take less of something.

Some people suggest that if the price of something is raised, buyers will take more or the same amount. That's silly because there'd be no limit to the price that sellers would charge. For example, if a grocer knew he would sell more — or the same amount of — milk at $8 a gallon than at $4 a gallon, why in the world would he sell it at $4? Then the question becomes: Why would he sell it at $8 if people would buy the same amount at a higher price?

There are economists, most notably Nobel Prize-winning economist Paul Krugman, who suggest that the law of demand applies to everything except labor prices (wages) of low-skilled workers.

Krugman says that paying fast-food workers $15 an hour wouldn't cause big companies such as McDonald's to cut jobs. In other words, Krugman argues that raising the minimum wage doesn't change employer behavior.

Before we address Krugman's fallacious argument, think about this: One of Galileo's laws says the influence of gravity on a falling body in a vacuum is to cause it to accelerate at a rate of 32 feet per second per second. That applies to a falling rock, steel ball or feather. What would you think of the reasoning capacity of a Nobel Prize-winning physicist who'd argue that because human beings are not rocks, steel balls or feathers, Galileo's law of falling bodies doesn't apply to them?

Krugman says that most minimum-wage workers are employed in what he calls non-tradable industries — industries that can't move to China. He says that there are few mechanization opportunities where minimum-wage workers are employed — for example, fast-food restaurants, hotels, etc. That being the case, he contends, seeing as there aren't good substitutes for minimum-wage workers, they won't suffer unemployment from increases in the minimum wage. In other words, the law of demand doesn't apply to them.

Let's look at some of the history of some of Krugman's non-tradable industries. During the 1940s and '50s, there were very few self-serve gasoline stations. There were also theater ushers to show patrons to their seats. In 1900, 41 percent of the U.S. labor force was employed in agriculture. Now most gas stations are self-serve. Theater ushers disappeared. And only 2 percent of today's labor force works in agricultural jobs. There are many other examples of buyers of labor services seeking and ultimately finding substitutes when labor prices rise. It's economic malpractice for economists to suggest that they don't.

Walter E. Williams is a professor of economics at George Mason University. To find out more about Walter E. Williams and read features by other Creators Syndicate writers and cartoonists, visit the Creators Syndicate Web page at www.creators.com.

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Comments

9 Comments | Post Comment
So if we raise minimum wages we can expect that hotels are going to start offering rooms with dirty sheets? Giant body blow driers in the bathrooms instead of towels? That hotels are going buy beds that change their own sheets? How much more automated do you think a fast food restaurant can become? And you say you studied economics?
Comment: #1
Posted by: Mark
Mon Oct 20, 2014 11:48 PM
Sir;... If your article were an intelligence test, any one that would believe it for a moment would fail. Do you really think it is possible to rationally compare the laws of physics with the observations and conclusions of a soft science like economics? Simply consider how much of psychology is involved in advertizing, or how much fear plays a part in hoarding. If people labor for their dreams, they also labor for their needs, and if needs can be denied, then people can be made to labor in vain until they die.
If your economy demands the buying of labor beneath its value, bemeath the value it takes to reproduce that life, or make it productive in the economic sense then it is a death economy. And we have seen with the closing of the commons in England during their Industrial Revolution that poor people produced in the country went to die in the cities in vast numbers, with never more than enough to keep body and soul in the same location. Is this all you want for Americans. Is this your theory, that if it is good for the economy it does not matter how many fall into a poverty too deep to escape?.
It is a false choice given only be capitalism, of whether we should pay the underpaid more, or work the over paid harder while laying off others. Why is the choice never presented as lower profits against higher profit when high profits mean an absolute injury to people, and no corresponding good to society. Where is the virtue of poverty and why do the rich not give up their wealth if poverty is so great?. There are certainly a great number of idiots justifying poverty for others such as they would never suffer themselves. Well; we have to do what is good for the economy, and poverty is the lookout of the poor. No moral restraint, no restraint of any sort on the exploitation of people.
Why is it ok to worry about a handful jobless and not worry about vast numbers wallowing in a sump of want and despair. It hurts to be poor. it is worse to be poor and see all the rest of the world looking rich and looking down on you. And no one has the power to ask for more wages because the famous law of supply and demand say there are too many workers and not enough jobs. Okay; time to ask since we haven't in 60 years. Isn't it time for a shorter work day and more money for each? if we are democracy we can make some laws of our own. We may never break any laws of physics, but these nonsense laws of economy are meant to be trashed. A handful with all the goods making everyone else work like dogs for chicken feed and competing against slaves in other lands working for the sweat off their brows is nothing but a rigged game we can 't win unless we make the rules. Let's make the rules instead of having a tiny fraction making rules that we can't win.
Consider now, that if ancient peoples had not governed their economies, they would not have survived. We are not surviving because we refuse to govern that which left ungoverned, rules us. We the people have the right and the obligation to make the laws under which we will operate. Our lives are not abstractions, and the abstractions this Mr. Williams deals with do not reflect human needs or human conditions. If we do not act to save our fellows from injustice we will never have a nation, and the days of this society are numbered.
Thanks...Sweeney
Comment: #2
Posted by: James A, Sweeney
Tue Oct 21, 2014 12:44 AM
Re: Mark;... Mr. Williams may say he studied economics, but no one who has ever read economics believes him. Clearly he has no degree in morality, and no understanding of the basic issues involved in ethics, and yet he forever washes his butt in that sacred fountain like he owns the place. That guy needs a clown degree. If he drove as bad as he reasons, they would yank his licence. He really needs to hang it up and quit trying to teach what he does not know.
Thanks...Sweeney
Comment: #3
Posted by: James A, Sweeney
Tue Oct 21, 2014 12:51 AM
Re: James A, Sweeney
You should ask him nicely to get out of your fountain.
Comment: #4
Posted by: Jerry Litzler
Tue Oct 21, 2014 7:37 AM
When a product costs more to produce, the producer raises the cost to the public. If the minimum wage goes to $15.00, the hamburger is not going to taste any better, BUT it is going to get a lot more expensive. The jobs about which we are talking are ENTRY LEVEL jobs, not careers. Those who make them a career due to an utter lack of ambition deserve what they get, and it admittedly ain't much. Dr. Williams has explained this before. If you do not accept his argument from this article, then see if you can fathom the one above. It ain't brain surgery; just common business sense.
Comment: #5
Posted by: bdcorvette
Tue Oct 21, 2014 11:42 AM
Restaurants can be fully automated. Chamber maids prices may rise and if it is true they cannot be replaced then hotels will have to raise the price of the rooms and people at the margin will elect not to stay there. Business will fall off and that hotel will not need so many chamber maids. There you go - fewer people working at higher wages and some not working at all.
Comment: #6
Posted by: Steven Brooks
Tue Oct 21, 2014 12:01 PM
Re: Mark
No Mark, they will just tack the added cost onto your room rental.
They will also let the less efficient maids go & give extra hours to more efficient. They can, & often have, stop washing their own sheets & contract it out bulk contractors who can wash more sheets with less workers.
Either way, they will either find a way to lower cost, or pass it on. They will not just accept a lower profit margin just because you think it would be "fair".
Comment: #7
Posted by: TechnocraT
Tue Oct 21, 2014 12:30 PM
Re: James A, Sweeney
James, are you enjoying the Kool-Aid?
Minimum wage is intended to be an entry level position. If people do not try and better themselves to improve their position, they will earn what their labors are worth.
My high school did not prepare me for anything better than entry level (30+ years ago) and I do not think they have improved in that time. Rather than that I took advantage of training opportunities that were available to any one willing to work for them, and developed a better skill set. as my skills increased, so did my income. No one owes you a living. You have to earn it. You don't like minimum wage? take some training so you can get more. If you don't have the gumption to do that, don't expect me to pay more for what I consume to pay you more.
Comment: #8
Posted by: TechnocraT
Tue Oct 21, 2014 12:41 PM
In reply to all that suggest morality has a role here you obviously not only miss the point you also have never taken a basic economics class.
Yes, i foresee a day when the Maid has a Robot assist and instead of two maids that cost X per year the robot is a one time expense and forsake the other maid. Also it would be quite easy to arrange auto delivery to a drive through fast food restaurant. If you don't believe me look at some of the complexities of modern machinery on ALL they do...ever studied what some of these harvesters do or a die making machine.....the engineers design them and the elevator operators go away.
If you raise the cost to produce a product the price goes up and the owner of the business looks for ways to reduce costs. And since employees require unemployment insurance, compensation insurance, donations to 401K's or other government mandated stuff besides their pay the first cut on the chopping block is the employee.
Without profit there can be no jobs and all of our complaints about business and the rich and having a moral obligation mean nothing when you cant get a job because your job was "mechanized" because there just aint enough money or business to support all that moral obligation....
If you have no interest or motivation to improve yourself...then dont blame it on the employer....look in the mirror...all the moral pronouncements in the world cant change economic realities...a duh...supply and demand...ever heard of it?
Comment: #9
Posted by: Breck
Tue Oct 21, 2014 12:48 PM
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