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Krugman Calls for Increasing the Minimum Wage. Here’s Why He’s Wrong.

Krugman states:

And the evidence is overwhelmingly positive: hiking the minimum wage has little or no adverse effect on employment, while significantly increasing workers’ earnings.

It’s important to understand how good this evidence is. Normally, economic analysis is handicapped by the absence of controlled experiments. For example, we can look at what happened to the U.S. economy after the Obama stimulus went into effect, but we can’t observe an alternative universe in which there was no stimulus, and compare the results.

When it comes to the minimum wage, however, we have a number of cases in which a state raised its own minimum wage while a neighboring state did not. If there were anything to the notion that minimum wage increases have big negative effects on employment, that result should show up in state-to-state comparisons. It doesn’t.

So a minimum-wage increase would help low-paid workers, with few adverse side effects. And we’re talking about a lot of people. Early this year the Economic Policy Institute estimated that an increase in the national minimum wage to $10.10 from its current $7.25 would benefit 30 million workers.

He’s wrong and here’s why:

1) State vs. state cross-sections are still not controlled experiments, by a long shot. There are about a trillion kazillion million (if you were doubtful of my trustworthiness, how do you feel now?) ways one state is different from another. And yes, many of these ways will be relevant for the question at hand (whether the minimum wage affects unemployment maliciously or not).

2) Even if they were close enough to controlled experiments, there is no reason to assume that a historical fact, that a raise in the minimum wage had little or no effect on unemployment in one time period, should carry over to another time period. Human beings are not inanimate objects like the subjects of the physical sciences. Human beings have the ability to choose, and these choices can change over time. Economics deal with human beings, and as such, cannot use historical findings to create some sort of law set in stone. History by definition, has to do with specific dates and times and specific people and specific choices. They are not universals. We say “on April 12, 1950, Jimmy went to the store!” The date and the name and the action all can change as time goes on. The same applies to historical claim regarding the effect of an increase in the minimum wage.

3) Even if we let #1 and #2 slide, it is STILL a wrong statement. We cannot assume that the effect of one increase in the minimum wage, from some amount to $7.25, carries over to another amount, $7.25 to $10.10.

The empirical method applied to economics sucks, plain and simple. There are too many weaknesses with it. Economics is not a natural science, it is a social science. We can’t even point to the success of empiricism like scientists can in the natural sciences. Astronomers can point to correct predictions of objects such as comets, e.g. if we look in the sky at this time, we’ll see the comet right here. All that economists, meanwhile, have to point to, is blatant failures, from terrible predictions about what would happen to the economy (this is right before the Great Depression), to an inability to stop the financial crisis, to this piece of work (this one’s the funniest by the way).

The correct method of economics is not empiricism but praxeology. The social sciences can only lay claims to laws that do not have to deal with particular choices of humans, but the universal characteristics of all human action.


Just anticipating a possible response. Some might say “oh but there could be reasons to assume that something that occurred in history would happen again.” I’m not saying this is impossible, but I’m saying it’s bad reasoning for a science dealing with human action, particularly when other methods are available.

Secondly if you’re wondering “how do you think the minimum wage affects unemployment?,” see here.

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Even in a Violent Exchange, You Prefer What You Receive over What You Give Up

From this post, we see how we derive the fact that a person who engages in an exchange must value what he is receiving over what he is giving up.

Note that I am doing this from the point of view of one actor, but it applies to both. It’s interesting that, even with violent exchange, this analysis could be used to say that the individual being coerced also values what he is receiving over what he is giving up.

For example:

If Thievery Tom points a gun at Innocent Irene and demands that she give up a banana for his orange, she too is engaging in an exchange. Although violent, she is still purposefully acting, and (assuming she goes through with it) she thus prefers the state where she gives up the banana for the orange over the state where she retains the banana and he retains the orange. In other words, she prefers the orange to the banana.

I’m not sure if this can constitute a meaningful objection to the distinction between voluntary and involuntary action, but it’s something to think about.

My only response to this at the moment is that there’s a very real sense in which doesn’t value what she is receiving over what she is giving up. I don’t remember Rothbard responding to this sort of objection in Man, Economy, and State, and have not read enough Mises to say whether he responds to it or not.

The way it is solved likely revolves heavily around the introduction of voluntary action vs. involuntary action in the logical argument. As I come across this again in Mises or Rothbard, I’ll think about it.

One more thought: if someone responds, “well, of course she now has a new preference scale because of the introduction of a coercive individual,” I could say “well, anytime someone comes along and even offers an exchange, the other individual’s preference scale might change because of the introduction of the voluntary individual.”

And again, I’m not saying this is a meaningful objection nor am I saying that it can’t be easily “solved.” Just something I am thinking about at the moment.

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Exchange is a Purposeful Action

1) All purposeful action involves a preference of one state over another.

2) Exchange is a purposeful action.

3) Therefore, exchange involves a preference of one state over another.


Premise #1: The state preferred is that which occurs with the successful action. The state being rejected is that which would have occurred had the action not been taken.

Premise #2: Exchange is purposeful, it has a goal in mind: to receive something by giving up something else.

Conclusion: This necessarily follows from #1 and #2: because exchange is a purposeful action, it involves a preference of one state over another. The state preferred is that with what is gained and lost in the exchange. The state being rejected is that where what is gained and lost in the exchange is not, respectively, gained and lost. The more common way of saying this is that he who engages in an exchange values what he is receiving over what he is giving up.

Spelling Out Logical Arguments in Praxeology

I’m doing this mainly for my own benefit. Spelling out the logic will help me understand the arguments more fully and make my own decision whether the stated conclusions do in fact necessarily follow from the premises. Hopefully, it will help others do the same. I don’t think this needs any more justification than that.

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Knowing vs. Thinking

Often, after someone hears of anarchocapitalism, all sorts of objections on practical grounds are raised. How would the roads be built? How would private defense function? Wouldn’t warlords just take over?

The ironic feature of all these questions is that they are purely speculative. Meanwhile, more fundamental knowledge is on the side of the anarchist libertarian, who points out, e.g. in response to the second question, that not only is there nothing logically incoherent about private defense (you could just defend yourself or hire others, after all), but practically speaking, we have reason to expect private defense to be much more efficient.

Ex ante, two individuals that engage in a voluntary transaction both gain from the trade. Otherwise, they would not have engaged in the trade. So we know that private defense would satisfy the desires of consumers far more effectively than government, an institution completely separated from the satisfaction of preferences.

I find this analogous to the knowing vs. thinking (or believing) distinction. The more fundamental knowledge i.e. knowing, is what we can deduce from human action about voluntary transactions, e.g. that a private defense agency must satisfy the preferences of consumers or it would go out of business, and a more efficient competitor would take its place. The less fundamental knowledge, thinking, is the speculative objection, e.g. that an incentive exists known as the “free rider” incentive and such an incentive could possibly lead to worse defense service production on a free market (for a quick rebuttal, note that the free rider incentive is one of many competing incentives involved in human action. Another, for example, is the desire for social acceptance, and those who paid for a private defense agency could socially reject free riders). Of course, this distinction can be applied to a number of examples.

This is why so many libertarians who read Mises and Rothbard (especially the latter) on economics have no problem imagining a stateless society. If the state can’t manufacture and sell shoes as well as the market, why should we expect it to do better anywhere else? Praxeology, after all, makes no distinction between the content of means or ends, but only discusses the fact that man does have means and ends (and so a consistent application of the praxeological analysis to economics should lead one to taking the libertarian position on every issue when it comes to economic efficiency).

In fact, as I heard Tom Woods say recently, to him it’s so clear a stateless society could work (he did not say this last phrase, but I believe it was a hidden part of his argument; if he ever sees this and doesn’t think this is accurate, then I would take his word over mine), we should accept that as our initial premise and fully accept the non-aggression principle, and those in favor of a State must make their case why a stateless society cannot work. In other words, it should not be up to the libertarian to prove a stateless society could work.

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Occam’s Razor in Economics

If we ever chose to apply Occam’s Razor to economic theory, it’s clear that Austrian business cycle theory would win over all other cycle theories.

A response to ABCT from the typical person is a “well duh, of course if banks create money out of thin air, creating more claims on their supplies then they actually have, people will realize their insolvency and there’ll eventually be a bank run.”

Or “of course interest rates are a price just like any other price and coordinate market activity, and if you essentially place a price control on interest rates there’ll be unintended consequences.”

ABCT is common sense applied to economics. The reason that business cycles occur is not that complicated.

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What is praxeology?

Commenter ‘Bruce‘ at Free Advice asks:

“It’s dangerous to look ignorant, but I suppose I will.

What is: praxeology???”


My response:

It’s the deductive method of Austrian economics. It starts with the premise that persons act, that actions are purposeful, they involve the use of a means to attain a end and are motivated by that end. It goes on to deduce conclusions from this premise through the use of logic: if a premise is true, and valid logic is applied, then the conclusion must also be true. Logical chains can be formed by using the old conclusion as a new premise and then again using valid logic. Austrians have used this method to explain marginal utility, the law of demand, how the business cycle occurs, and much more.

If you’re looking for an introduction to the type of reasoning used by Austrian economists, you can look at An Introduction to Economic Reasoning by David Gordon or look at praxgirl‘s videos on YouTube. If you’re interested in reading about Austrian economics in depth, you can look at Man, Economy, and State by Rothbard.

A guest also posts a link to a youtube video lecture I would highly recommend: Is Austrian Economics ‘Unscientific’? Here, Dr. Jeffrey Herbener compares and contrasts Austrian economics with the natural sciences, statistics, and morality. He also explains the methodology in an easily understandable way.

The Minimum Wage Does Indeed Cause Unemployment

The minimum wage is being spoken about again thanks to Obama’s recent State of the Union Address. To be honest, I don’t know how people still manage to sit through the whole thing to find out what he’s saying, but kudos to them!

In his speech, Obama proposes raising the federal minimum wage from its current $7.25/hr to $9.00/hr. Why anyone would want to raise the minimum wage when unemployment is already very high is beyond me. Oh, but wait! The Department of Labor says it doesn’t cause unemployment  (HT2 EPJ).

The president’s plan to raise the federal minimum wage will benefit 15 million American workers, and have a positive effect on the economy. Still, there are some common myths about raising the minimum wage. We checked in with our Chief Economist Jennifer Hunt on the following three myths:

Myth: Raising the minimum wage reduces employment. False Minimum wage increases have little or no adverse effect on employment as shown in independent studies from economists across the country. Additionally, a recent letter by leading economists including Lawrence Katz, Richard Freeman, Joseph Stiglitz and Laura Tyson points out that “[i]n recent years there have been important developments in the academic literature on the effect of increases in the minimum wage on employment, with the weight of evidence now showing that increases in the minimum wage have had little or no negative effect on the employment of minimum wage workers, even during times of weakness in the labor market.

Myth: Raising the minimum wage will negatively affect teen employment. False Eighty-nine percent of those earning the minimum wage are 20 years of age or older, and studies have shown that minimum wage increases have had little or no adverse effect on teen employment.

Before I show why the above is incorrect, let me go through the logic of why the minimum wage does cause unemployment. I have already explained it here and here, but I will give a very brief explanation again. Many economists like illustrating the effect of the minimum wage on employment through supply and demand. If a price floor is put above a market equilibrium price, then it will cause a surplus. In the case of the minimum wage as a price floor, the wage is the price, and labor is the commodity. In other words, there will be a surplus of labor supplied by prospective workers over labor demanded by employers.

However, a simpler and even more intuitive explanation exists. The goal of most companies is to earn profits. Employers will not hire employees unless it helps them earn a profit. So if an employee contributes $8/hr, an employer will not hire that employee at a wage any higher than $8/hr. If in this example, the minimum wage is at $7.25/hr, the employer can profitably hire that worker for $0.75/hr ($8.00 contribution – $7.25 wage = $0.75 profit). If, however, the minimum wage is raised to $9/hr, then he would earn losses of $1/hr by hiring that worker ($8.00 contribution – $9.00 wage = $1.00 loss); in other words, he will not hire that worker and the worker will be unable to find a job. Therefore, the higher the minimum wage, the fewer workers that can find a job, and the higher the unemployment rate.

But what about those studies the DoL is claiming disproves my logic? Well, to put it simply, they don’t. Logic should be debated against on its own terms. If a premise is true, and valid logic is used, then the conclusion must also be true. Empiricism does not change this. Empiricism may give us reason to doubt logic and look for errors, but it does not disprove logic itself.

In addition, many empirical studies come to completely opposite conclusions. I and two classmates did an econometric study about the effect of the minimum wage on youth unemployment, comparing state by state. We found a positive correlation of 4.6 (i.e., for every increase of $1.00/hr in the minimum wage, there was a corresponding increase of 4.6% in the youth unemployment rate). This is in complete contradiction of the study they cite above.

Does my study prove that there will always be an increase of 4.6% in the youth unemployment rate for every $1.00/hr increase in the minimum wage? Absolutely not. The study is only historical. It is not predictive. Economics is the study of human action. Human action can always change. Humans can invent new ways to act. They don’t have to act exactly as they did in the past. There is no law of behavior mandating that human interactions lead to a 4.6% increase in unemployment for every $1/hr increase in the minimum wage.  Unfortunately, this is only the first of numerous problems with econometrics.

Although such studies are only historical, are they even correct? Can we undoubtedly say that the effect of the increase of $1/hr in the minimum wage was a 4.6% increase on youth unemployment? Even this we cannot be sure about. There are a myriad of variables we simply cannot account for, or would even think to account for. How do we know it was the effect of the minimum wage that caused that unemployment? What about the business cycle? Maybe certain businesses coincidentally made poor decisions. Etc. etc.

We can show whatever we want with an econometric study. The methodology is completely flawed. The correct methodology of economics, of human action, is what Mises came up with: praxeology. The causal-realist approach allows us to look at human action and understand what specific causes lead to certain effects, rather than rolling around endlessly in a sandbox saying one grain of sand does this or that when there are millions of other grains that may actually be more important.

Let’s again look at the logic and think more about the absurdity of saying increases in the minimum wage don’t cause unemployment. If that’s true, why not raise the minimum wage to $20.00? Or $50.00? Or $100.00? If we can achieve prosperity with the wave of our magic legislation wand, why not do it on a bigger scale? Because it would cause massive unemployment. When people talk about raising the minimum wage by a smaller amount, they are only talking about increasing unemployment by a smaller amount. And this is probably why econometric studies on the minimum wage come to different conclusions so often. Because what they’re measuring isn’t very large, and a lot of other factors they don’t account for may be more important.

An anonymous commentor at a blog I found today makes another very important point:

So if increasing the minimum wage does not mean jobs will be destroyed and unemployment will go up, then does the contrapositive hold true that if you lowered or eliminated the minimum wage that jobs would not be created and unemployment wouldn’t decrease?

Liberals complain non-stop about job shipped overseas since 40% of the world lives on less than $2/day. Those jobs went overseas because they are illegal to create here and pay a wage that makes economical sense.

Many individuals that realize jobs go overseas because wages are cheaper over there don’t pursue the logic all the way. The reason we lose out on many of those jobs are  because those jobs are illegal here, thanks to the minimum wage.

An increase in the minimum wage will cause an increase in unemployment, all else equal. If Obama is successful in increasing the federal minimum wage, unemployment will be higher relative to whatever level it would have been otherwise. This means that you could see the unemployment rate even go down even with an increase in the minimum wage, not because of the minimum wage but in spite of it. This is precisely why empiricism is an incorrect method for discovering causal relationships.

Be Careful with your Words. You Might Just End Up Saying the Opposite of What You Mean.

It’s amazing how the insertion or replacement of one word can make a sentence have a drastically different meaning than what it would have had otherwise. I’m not talking about inserting words such as “not” into a sentence. That’d make for the bestest blog post ever, but it’ll have to wait =/.

Stefan Molyneux in this interview (at about 10:11) says the following:

“Okay, what about, you know, the praxeological argument that if you increase the money supply without a concurrent increase in goods and services or other nonmonetary phenomenon, you will NOT add to the general wealth of society, you will only increase prices.” [emphasis original]

Molyneux here is trying to explain an example of a praxeological statement. When I first heard it, I interpreted it (the way I believe Stefan Molyneux meant it) to mean “if there is an increase in the money supply, ceteris paribus, general wealth will not increase.” That is why Molyneux included the phrase “without a concurrent increase in goods and services or other nonmonetary phenomenon”; because there very well could be an increase in general wealth if there were more goods and services.

However, after watching this clip, Robert Wenzel of EPJ criticized Molyneux for implying that he (Molyneux) thought that increases in the money supply are called for when goods and services increase. At first, I thought “Wait what? There’s no way he said that” but after further explanation I became convinced Wenzel was correct.

So to explain, let me restate Molyneux’s quote with my emphasis in bold:

“Okay, what about, you know, the praxeological argument that if you increase the money supply without a concurrent increase in goods and services or other nonmonetary phenomenon, you will NOT add to the general wealth of society, you will only increase prices.”

So here, if we take literally what Molyneux says, Wenzel is clearly correct. By saying “if you” increase the money supply without a concurrent increase in goods and services, “you” will not add to the general wealth, Molyneux is setting up a cause-effect relationship between the person increasing the money supply and that same person not adding to the general wealth. However, the implication of this is that if the person increased the money supply in the opposite circumstance, i.e., when goods and services did increase, that person would have increased the general wealth!

So if we change the quote slightly, it makes sense in the way I believe Molyneux intended it to:

“If there is an increase in the money supply without a concurrent increase in goods and services, the general wealth will not increase.”

In this case, there is no forced connection between the money supply and the general wealth. In other words, there is no implied belief that if there was an increase in the money supply with a concurrent increase in goods and services, it would be the increase in the money supply that caused the increase in general wealth.

Now, I have no reason to believe Molyneux believes what was implied by his statement. In fact, I have every reason to believe the opposite. He constantly critiques the Federal Reserve’s expansion of the money supply, and so I doubt he holds the position that comes across in his words. But what this shows me is that slight variations in language can have drastic effects on what you actually say versus what you really mean.

Time Preference A Day After Thanksgiving

I can’t connect Thanksgiving and economics quite as easily as Gary North can without copying others’ ideas so I’m going to stretch this one 🙂

Time itself is a scarce good that must be economized — that is, an individual must choose to act with his highest values respective of the amount of time it takes to act. All other things equal, any good will be preferred sooner rather than later. This is the universal fact of time preference.

Immediate counter-examples may be brought up: some people prefer ice cream during the summer over ice cream in the winter. Since it is November right now, doesn’t that invalidate time preference? After all, I would prefer the good, in this case, ice cream, later (during summer) rather than sooner (during winter).

This type of argument confuses the concept of a “good” with its physical properties. The good, ice cream during summer, is actually a different good than the good, ice cream during winter. In this case, ice cream over summer has so much more value over ice cream over winter that a person will choose to wait till summer rather than having it sooner or immediately.We can think about this differently by replacing the word “good” with the word “satisfaction”. A person will prefer to have any given satisfaction sooner rather than later. In this case, the satisfactions are different; hence, they are not the same good.

Another example that may be brought up is preferring to wait until next year’s Thanksgiving rather than celebrating it today, the day after Thanksgiving (this example works much better with birthdays but bare with me). If I had to choose, I wouldn’t pick to celebrate Thanksgiving two days in a row and then be “forced”(obviously we could celebrate two days in a row and still celebrate next year’s Thanksgiving but we are assuming one or the other must be picked) to skip the next year’s Thanksgiving. I would rather celebrate Thanksgiving on the actual day rather than having it sooner.

This argument also confuses the concept of a good, but it also confuses the concept of timing with the concept of time preference (we can apply this to the previous argument as well). The timing of Thanksgiving plays a role in how much it is valued: a person generally will value any holiday on its actual date (its timing) rather than celebrating it sometime earlier on a different date. Time preference still holds in that, if a person could truly have the good Thanksgiving (with its timing on Thanksgiving) sooner rather than later, he would, but it is impossible.

As we can see, time preference is not a concept that can be denied (much like the “fact” of heterogeneous subjective values during exchange). However, instead we may compare different levels of time preference: low time preference versus high time preference. Just like subjective values, we cannot put a number on time preference: for example, we cannot say that Mary has 7 time preference and Bill has 5.4 time preference. However, we can say Bill has a low time preference and Mary has a high time preference and we can compare their time preferences by saying Bill’s time preference is lower. So if Bill was willing to wait a day to receive satisfaction from eating an apple, whereas Mary was only willing to wait 10 minutes to receive the same satisfaction from eating an apple, we could say Bill has a lower time preference than Mary.

Note: There is an inherent problem in comparing time preferences because we do not know if Bill and Mary have equal satisfactions or if their satisfactions received from eating the apples are different so it would be truly difficult to compare their time preferences. We have ignored this problem for simplification purposes.

Also if anyone is interested in learning praxeology, you can check out praxgirl on YouTube.

It may be tough to follow and completely comprehend each lesson in one watching, so if you have to watch it multiple times to understand some of the concepts, don’t be frustrated. For more serious learners of economics, I would recommend buying a copy of Man, Economy, and State with Power and Market by Murray N. Rothbard. (there are free pdf and audio links in that link as well).