Tom Woods had a podcast out recently in which he gave the Austrian explanation of the effect of maximum hours legislation:
Let’s take maximum hours legislation because that seems harmless enough. We don’t want people working too long so we will have maximum hours legislation. Who could possibly be against that? Well, I want to think through the logic of this here. Think about you yourself today. Think about you and the number of hours that you work. Now, you, no matter how much you work . . . could be working more. . . you could get a second job, a third job, you could work an extra two hours a week as a tutor, whatever. . .
Why aren’t you doing it? Because you value the leisure. Because you’ve gotten to a point and society and the economy have gotten to a point where we are physically productive enough that we can produce enough goods that you would be physically satisfied, after, say a 40 or 50 hour week. . .
What if we said a 40 hour week was inhuman, it’s just too much? . . . And we impose on you, a limit. We have a law saying, you can’t work more than 30 hours a week.
Woods goes on to say that because you’ve already balanced your preference for work vs. leisure, the law clearly makes you worse off. If you now are forced to work 30 hours, sure, you’ll have more time for leisure, but you won’t be able to get as much money and buy as many goods as you did before. And you’ve already shown (through your allocation of time before the enactment of the law) that you value the extra income you receive over extra time for leisure.
The problem with this argument is that there are all sorts of situations in which someone might value their work/leisure balance after the law higher than their balance before it. For example, it is entirely possible that you did not limit yourself to working 30 hours prior to the law because in those circumstances, you could not find any 30 hour jobs in your local area and would have to commute between two jobs (which you highly dislike). Or perhaps the 30 hour jobs you could find didn’t pay enough. After the law is enacted, though, you might actually be happier with your new configuration because the situation has now changed. Since every employer is now forced to hire each employee for a maximum of 30 hours/week, the number of job opportunities goes up and you’re able to stick with your old job or find a new single job that pays well in your area.
It’s important to clarify what this means for Austrian economics. Woods’s argument makes complete sense within the Austrian framework. It is true that if we keep everything constant, a person’s action shows he prefers that action over his alternatives. However, when applying this argument to reality and making policy prescriptions, we have to take care not to go too far and make our claims too strong. Preferences or (in this case) situations might change over time, and therefore the actual effect may differ from the one Austrians have theoretically.
The number of other examples where this can happen is probably very large. I do not think Austrians can make policy prescriptions without adding certain empirical claims as well. However, what’s particularly pernicious about my example is that the situational effect is present within the law. It would be more accurate to say the law benefits you than to say the law would have harmed you, if not for the situational change – because the situational change is itself one of the law’s effects!