May 27, 2007

Do neoclassical free market economists comprise a mafia within academia?

Christopher Hayes writes in the Nation:

Mafia is probably a tad hyperbolic, but there is undoubtedly something of a code of omertà within the discipline. Just ask ... David Card. ... Card, a highly esteemed economist at the University of California, Berkeley, caught flak for his heresy not on trade but on the minimum wage. In 1994 he conducted a study to see whether an increase in the minimum wage in New Jersey had the negative effect on employment that basic neoclassical theory would predict. He found it didn't. In fact, his regression analysis showed that, controlling for other factors, New Jersey gained fast-food jobs after increasing its minimum wage, compared with Pennsylvania, which hadn't raised wages. The paper attracted a tremendous amount of attention and criticism, and Card himself largely abandoned working on the minimum wage. In a 2006 interview, he explained his decision to leave the topic behind this way: "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."

Of course, Card's other famous study, the one of Miami in 1980-85 claiming that immigration doesn't lower wages, is wildly popular with many of the same free market economists and open borders pundits who hate the conclusion of his minimum wage study.

The problem with economics these days is not so much the various models as that economists believe that having models lets them get away without knowing much about the real world.

For example, Card's comparison of wage trends in Miami in 1980-85 relative to four other cities is pretty useless because that was the peak of the Scarface - Miami Vice cocaine boom in that city, so ceteris wasn't at all paribus. Now, anybody who watched TV in the 1980s should know that, but economists never seemed to notice it when discussing Card's study.

Worse, economists seldom seem to care that they are often ignorant about the realities that they so confidently pronounce upon.


My published articles are archived at iSteve.com -- Steve Sailer

20 comments:

Horatio said...

This doesn't just happen in economics. The hard sciences are also fettered by politics.

Andrea said...

Another reason that Miami wasn't a very good place to study immigration effects on the whole nation in the 80s is because the major immigrant group in the city at the time were Cubans, who are atypical of most Latin immigrants in that they are politically conservative, anti-Communist, and by the 80s had become mostly middle to upper-middle class (due to their habits of working hard and eschewing welfare; as well, most of the Cuban exiles were Cuba's business class).

The Mariel boatlift did knock things off-kilter, because Castro sent a lot of criminals over, but most of those were eventually rounded up. The drug cartels were mostly South American -- Columbian and so on -- anyway. The 80s in Miami were a time of feverish wealth and crime, but it was a unique situation. I should know, I lived all my life in Miami until 1999. (I was born in '63, so I was in my twenties during the 80s; these aren't misty childhood memories.)

By the way, my friends and I loved to mock the many ways Miami Vice distorted and exaggerated the Miami scene. Mostly it just made the city look a lot more glamorous than it was -- but that was an Eighties trend everywhere. Those shiny streets? They'd spray them with water before shooting the scene. Also we didn't have any cops as good looking as Crocket and Tubbs; our cops are the same lugs stuffed into their unattractive uniforms as in every other city.

jody said...

i have wondered about the same issue, and came to the conclusion that federal minimum wage is below the market wage for unskilled labor. i found that the lowest wages offered in the worst jobs were already about $7 an hour, higher than the $5 federal minimum wage.

so i doubt that if federal minimum wage did not exist, that there would be millions of people working for $2 an hour or something like that.

Anonymous said...

Funny how they're only ignorant or ideological when you happen to disagree with them.

Tim Worstall said...

There'sa much more important point to be made about the Card and Krueger paper on minimum wages.
NJ did not gain fast food jobs.
It gained fast food jobs at the capital intensive national chains.
Other papers have shown that the small Mom and Pop sotes, the delis and so on, lost jobs in NJ at the same time.
Which is consistent with entirely mainstream economic thinking, nothing heterodox about it at all.
If you raise the price of labour, but the demand for fast food stays constant, then there will be a reduction in employment in the low productivity end of the fast food business (the small operations cut opening hours, some go out of business etc) and thus a rise in demand at the high productivty ones, the highly mechanised fast food chains.
Card only measured one half of the changes.

Anonymous said...

What I wonder is how could those people in England have possibly thought they could survive economically by passing laws that prevented a certain class of people from working. I mean who was going to climb the chimneys, put their little hands in the machines, scramble through the tiny spaces in mines, etc.

I haven't read much history, but I do know some economic theory, so I know that England must have immediately gone into catastrophic decline and was never heard from again.

Thank God the U.S. has people that recognize the same peril that would befall the U.S. if it started passing laws saying a certain group of people could not work here.

TabooTruth said...

I think it's just the fact that economics, while it is very happy to embrace pages of mathematical proofs to show the sophistication of their models, are not willing to be scientific about human biodiversity. If only the economists were willing to add genetic IQ to their independent variable sets...that would be interesting

Luke said...

Neoclassical trade theory (ie, modern trade theory) predicted the adverse impact on American wages that Nafta and GATT would have, but the economics profession ignored -- nay, denied -- it. Not even the laws of supply and demand stand in the way of preconceived economic ideas, especially when they just happen to be in your own class's economic interests.

There is another school of thought which holds, on good evidence, that modern mathematical economists have become so enmeshed in the intricacies of modern mathematical models -- the math being a bit of a reach for them to begin with -- that they know longer bother to learn the fundamentals of supply and demand.

joshrandall said...

joI had been a longtime National Review reader and had accepted all their propoganda about how raising the minimum wage would wreak havoc,cause chaos,break up families,drive men to madness,etc. Eventually I began to question this and a lot of the other "gospel" of right wing economics,including our disastrous trading with China. But economics is not my profession,Im not really expected to know what Im talking about. THESE guys ARE!! Its their job--and if they are punishing guys for showing that they dont know what theyre talking about,it suggests they are IDIOTS!! How about a little diversity,guys? And I mean diversity of "opinion",not the type of "diversity" involving lesbians,Eskimoes,dwarves,etc!

Anonymous said...

Steve -- this herd mentality and the idea of "Who? Whom?" ala Lenin has support in politics as well.

If you look at who broadly supports the War in Iraq and military action in general to suppress threats, it's mostly white middle class men, and white middle class youths.

Brecher has touched on a couple of these points: the cubicle is ruled by a complex hierarchy of PC "protected class" groups (minorities, gays, women) with a wealthy white elite of inherited position at the top.

There isn't much if any room for advancement in the peacetime life of the cubicle. And peacetime means cheap is better than fast. So skilled blue collar labor is constantly under price pressure from manufacturing pushed abroad to places like China, or importation of cheap, replaceable labor from Mexico.

But in war ...

Fast is better than cheap, and a premium is placed on skilled and reliable domestic labor. Constant innovation leveraging skilled labor is far more critical. Young men who could never be more than cubicle drones can find advancement in war, or at the workstation drafting new machines for war.

The engineer, combat soldier, airman, technician, sailor, machinist, etc. rule over the complex PC hierarchy designed to prevent such advancement. Advancement threatening the inherited position of the elites.

IMHO this is why those most affected by the war (they or their kin might die) generally support it, and those least affected (how many Ivy Leaguers in the military? Almost none I'd guess) so adamantly oppose it.

If your upward mobility is blocked by peace but enhanced by war, you'll more likely roll the dice on war. Particularly as casualties are relatively low. If your hegemony is threatened by war but enhanced by peace you'll block war. The age-old conflict between the priest and the soldier.

This is so obvious I'm shocked no economist has covered it. The amount of material showing how wartime advancement pushed working class Americans into the middle class is astonishing. Yet, consistently ignored.

Anonymous said...

At my small Southern school, my Econ profs made sure that our students understood the substitution of capital for labor.

Lots of labor: not much capital investment. Lots of capital investment, not much labor.

There was considerable discussion about how some industries tended to be capital intensive, with resulting small labor pools that are highly skilled to leverage the capital investments, and how some industries are the other way around.

In China, there is almost no capital investments, labor is everywhere and in department stores in Beijing you'll see people everywhere often doing redundant operations. By contrast even in the US considerable investment has been made in automation. Particularly in payment (telecheck, credit cards, etc).

There were even some fairly abstruse set of equations that proposed to demonstrate the limits of labor in manufacturing (i.e. people literally stepping on each other) in terms of expansion. We had to work those out on exams.

I honestly don't know why this has been forgotten.

Anonymous said...

Excellent truth-telling piece Mr. Sailer.

Anonymous said...

But in war ... Fast is better than cheap, and a premium is placed on skilled and reliable domestic labor.

Bah. Who's going to pay for 50 million people working in a war/manufacturing economy?

Like it or not, there is a lot of upward mobility today even in the civilian sector. Thanks to the decline of unionism, young people are no longer blocked by hundreds of high-seniority loafers.

Mark said...

I long ago ceased to oppose minimum wage laws. I am now, in fact, staunchly in favor.

Why? Well, what's the argument against it? That it reduces job creation. You'd think that would be a bad thing, and it would if unemployment were high.

But unemployment isn't high. Instead it's low, and yet they're still saying "Don't cut job creation."

So who are we using to fill these job that are created with low minimum wages? Illegals, of course. Small wonder that the same groups that support excessive immigration - The CoC, Americans for Tax Deform, etc. - are the same ones who oppose minimum wage increases.

I want less job creation, because I want less immigration. So raise it all you want.

We don't need to increase the number of jobs available - we need to raise the quality and pay of the available jobs.

tommy said...

Steve's got it right. When all is said and done, reality doesn't bow to theory.

Andrea,

Cubans, who are atypical of most Latin immigrants in that they are politically conservative, anti-Communist, and by the 80s had become mostly middle to upper-middle class (due to their habits of working hard and eschewing welfare; as well, most of the Cuban exiles were Cuba's business class).

Of course, the original Cuban population in Florida was heavily selected from Cuba's entrepreneurial classes.

anonymous,

I haven't read much history, but I do know some economic theory, so I know that England must have immediately gone into catastrophic decline and was never heard from again.

Thank God the U.S. has people that recognize the same peril that would befall the U.S. if it started passing laws saying a certain group of people could not work here.


This gets to a good point. At the end of the day, short of foolish experiments with outright Communism, IQ seems to be a whole lot more important than economic policy in determining which nations are wealthy and which are poor. There is a fair amount of difference between the United States (pretty non-socialist), Austria (mildly socialist) and Sweden (pretty darn socialist) in economic policy, but not in the ultimate outcome: all three are First World nations.

joshrandall,

THESE guys ARE!! Its their job--and if they are punishing guys for showing that they dont know what theyre talking about,it suggests they are IDIOTS!! How about a little diversity,guys? And I mean diversity of "opinion",not the type of "diversity" involving lesbians,Eskimoes,dwarves,etc!

That pretty much sums up multiculturalism: diversity of complexion, homogeneity of thought.

Raising the minimum wage may increase the prices of items manufactured or retailed by minimum wage workers, but given the usually inexpensive nature of those sort of items, it may not significantly impact those making well above the minimum wage. It also may not much matter to minimum wage employees if it allows them to afford more of the products of non-minimum wage workers. (I could see the potential for feedback loops here, such as the pool of non-minimum wage employees experiencing some expansion to meet the demands of those making an increased minimum wage and thus offsetting some of the impact of a hike.) I suspect the issue is complicated and probably depends a lot on the sort of wage stratification an economic environment has. Studies that looked more at how economic stratification is affected by minimum wage hikes, rather than simply looking for raw numbers of job losses or price increases might be more revealing. It seems likely that some economies are better suited to "absorbing" the impact of a minimum wage hike than others.

Ceqli said...

A wise man once said, "Never let your ideology get in the way of your common sense."

Anonymous said...

At the end of the day, short of foolish experiments with outright Communism, IQ seems to be a whole lot more important than economic policy in determining which nations are wealthy and which are poor.

You forgot to mention corrupt and despotic regimes which don't enforce property rights and the rule of the law. Even if Zimbabwe had a mean IQ of 300, it would still be a Third World nation as long as Mugabe was in charge.

scott cunningham said...

Interesting hypothesis about cocaine in Miami. I haven't read the original Card study, but it would be very easy to replicate his study and control for cocaine using the DEA's STRIDE data. That would probably be an excellent undergraduate or masters thesis for some young student out there, in fact.

TabooTruth said...

Absolutely not true with Zimbabwe. If the average IQ there was higher, then whites wouldn't have become such a disproportionately wealthy market dominant minority. In that case, Mugabe wouldn't have been able to cement power by capitalizing on anti-white sentiment. The people ultimately determine the quality of their government, even if it is a dictatorship.

What is the best way to raise the wage for low skilled workers? Restrict the supply of low skilled workers. Wages will rise automatically as it become harder to find McDonald's cashier. How do we do that? Sterilization for women on welfare, and cutbacks on Mexican immigration.

Anonymous said...

it's possible Card's wage study was flawed and its free market critics were more or less accurate (the miami study wasn't good, Stephen Levitt's idea held up for years, etc.). in this case, what might be interpreted as a closed-minded academic mafia would in fact be a group of rational open-minded intellects irritated with a flawed study encouraging a rejection of correct classical economics. throw in a sniveling whiner like Card and (that most dangerous commodity) a journalist or two with a theory and...