How to Understand Economics

A student left a comment on the blog regarding her/his experience in her/his economics class. The professor told the class that ceilings on rent creates slums; that all taxes on corporations are useless because the cost is always passed on to the consumer (and even refused to concede simply the possibility that a corporation making huge profits could “withstand” a small tax without raising prices); and that high unemployment is the result of wages being above the equilibrium.

Okay, start with the last one. David Card and Alan Krueger, did extraordinary work in showing that raising the minimum wage did not create unemployment. Card was a winner of the prestigious John Bates Clark award for the outstanding economist under 40 years of age. Despite his accomplishments, he came under great pressure for this work. Later, in an interview, Card said: “I’ve subsequently stayed away from the minimum wage literature for a number of reasons. First, it cost me a lot of friends. People that I had known for many years, for instance, some of the ones I met at my first job at the University of Chicago, became very angry or disappointed. They thought that in publishing our work we were being traitors to the cause of economics as a whole.”

Given this intense hostility to any questioning of economic orthodoxy, few professors will be hired who would teach the class differently. Unless your professor is quite old, the likelihood is very high that he has been thoroughly indoctrinated in this way of looking at the world.

I can be fairly certain that your teacher did not mention a couple of points. He is correct that other things being equal — the famous weasel words of economics — higher wages will discourage an individual employer in isolation from hiring more workers. During the Great Depression, John Maynard Keynes explained, in effect, that the individual employer’s wage bill is a cost to him, but a benefit to other employers. As a result, the extra wage adds to aggregate demand, creating more opportunities for employment.

Secondly, higher wages encourage more technical change, which can displace workers. However, technical change also reduces the cost of production, creating a similar effect to higher wages. In addition, new workers will be hired to produce the new technologies.

Of course, if the minimum wage were suddenly increased to $100 an hour, serious dislocations in the economy would occur and employment would suffer — at least for a while.

Let me just take a second to mention your question about taxes. Your professor will certainly tell you that the people who run corporations deserve high compensation because they are highly intelligent, yet they are unable to comprehend the deep truths of introductory economics; namely, that they should not give a hoot about whether they pay high taxes or not. They squeal about high taxes, because high taxes and convenience them.

One final note: watch carefully what corporate executives say. They rarely express concern about their own welfare, presumably because they are deeply humanitarian. Instead, they worry that policies to regulate them or tax them will ultimately harm workers or consumers. That is why so few of them need to devote much of their personal income to charity, because they go to such great lengths to see that their corporations operate for the social good.


3 comments so far

  1. Martin Langeland on

    Please, what about Lester Thurow’s zero sum society in which, if memory serves, he advocates no taxes on corporations? He makes up the loss by stiffer taxes on dividend and capital gains income, I believe.
    Thanks very much for a sane economics blog.

  2. d on

    all “other things being equal.” yes. I believe he prefers to use “ceteris paribus.” ; )

    thanks for the reply.

  3. Michael Fisher on

    I work for a trade union in London which is involved in campaigning against privatisation. I am looking for good radical/progressive critiques of the theory and practice of privatisation. Can anyone help?

    (PS. I am reading Railroading Economics – very interesting)

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