Ep. 187 Gary Wolfram on the Minimum Wage and Other Misguided Policies
Gary Wolfram is an economics professor at Hillsdale College, who was both a teacher and colleague of Bob during his two stints at the school (first as a student then as a professor). They discuss Gary’s background as an economist in both academia and the political sphere, and why government intervention hurts the people it ostensibly helps.
Mentioned in the Episode and Other Links of Interest:
- The YouTube version of this interview.
- Gary Wolfram’s book, A Capitalist Manifesto. #CommissionsEarned (As an Amazon Associate I earn from qualifying purchases.)
- Bob’s article on the $15 minimum wage. Walter Williams’ 2007 FEE article on the minimum wage.
- Mises’ Liberalism and Bastiat’s The Law.
- Help support the Bob Murphy Show.
The audio production for this episode was provided by Podsworth Media.
It seems to me that there’s tension between Prof. Wolfram’s minarchism and his appeal to public choice economics. If it’s true that people are “rationally ignorant” about government policies, then there is little hope for educating the public about the actual consequences of these policies and “winning the battle of ideas.” In other words, a public choice economist should be aware that minarchism is not a viable option since people lack the incentives to learn of the benefits of a free society and thus keep the government in check.
Teaching the fundamentals of real economics (such as the unintended consequences of the minimum wage) as Prof. Wolfram does is a laudable and noble vocation. He is to be commended for sticking to his guns.
I now regretfully question the potential reach of such teaching. In the past year I’ve been dismayed to discover that most people, even those who are generally considered intelligent, refuse to acknowledge that even forced business closures have catastrophic economic consequences. Someone who cannot understand that turning business off turns business off has a vanishingly small hope of grasping marginal productivity and substitution effects.
I’m at a loss to explain what is going on inside their skulls. Public schools have not only failed to teach; they have exterminated the capacity for rational thought. I’d like to suggest that we stop calling their attendees ‘public school students’ and start calling them ‘public school victims.’
I was pleased to hear Prof. Wolfram’s crisp description of the marvel of market coordination in the form of “How does New York City have the exact correct amount of Starbucks coffee without a planner?” If I may suggest an improvement; remove the name Starbucks, because corporate retail chains DO engage in planning and Starbucks as an entity does not constitue a market. I think the point world be less open to criticism if generically phrased, “the exact correct amount of coffee.”
On that subject, some unbroken students might enjoy “It’s a Wonderful Loaf” ( https://wonderfulloaf.org ) by Russ Roberts.
“Public school victims” is good.
Something to consider: In college, I have not noticed an appreciable difference between the private school students and the public school victims. My observations are minimal, though, but after normalizing for home environment, it seems not to have much of an effect. I see that common core has made a big difference in decreasing public school student performance in college, at least in engineering colleges.
And I think they should be called “public school survivors.”
Mr. Wolfram argues that the free rider problems is a limit on anarcho-capitalism.
Another problem is civil courts. David Friedman wrote that it could all be taken care of by private insurance companies. But his argument fall down. I give an AnCap this simple example.
You, Abe, live in AnarColand, you are stopped at a stop sign. Your neighbor, Bill, rear ends your car. You get estimates for damage, $1,000. Your insurance company, AbeCo has a $1,000 deductibles, so you take the bill to Bill. He ignores it. You present the bill to his insurance company, BillCo. If the insurance company pays, it will have to raise its rate on Bill, and Bill will go to another company, so BillCo ignores it. What to do?
The AnCaps respond either that I do not understand how insurance works, but I am a practicing trial lawyer. I do know how they work. They only pay because of the threat that they will be taken into a court and might have to pay more. Then they usually double down on insurance companies in AnarCoLand will be better. When I ask how, they either repeat how ignorant I am. After that, they either gently, or less gently, inform me that I am an immoral person who does not understand personal responsibility.
Have you heard this statement about moral citizens before? Right. The anrcho caps are describing the New Soviet Man.
Thomas, do you think fire insurance wouldn’t work either in an an-cap society? E.g. your house burns down, you tell the insurance company to give you $300,000 to rebuild it, and they just say no?
You asked his opinion of an insurance case with different incentive circumstances, Dr. Murphy.
The fire insurance case is between two parties: Insurer and insured.
The car accident case involves three parties: Insurer, insured, and third party victim.
In the two-party case, there is a clear AnCap that by not paying, the insurer loses reputation and customers. Incentives here are clearly aligned toward good market behavior
In the three-party case, how does negative market feedback apply?
– If the insurer refuses to pay out, it gains reputation for protecting clients.
– If the insurer pays out, it wins reputation among a diverse set of non-paying customers, but loses reputation among those with focused interest – its clients.
Thomas has brought a serious point to the discussion I have never seen treated in AnCap literature. Thank you, Thomas.
I hate to add-on replies, but I think this bears mentioning. (feel free to combine/concatenate them).
The current car insurance model would be untenable in AnCapistan for reasons stated.
However, a bilateral insurance contract would work just fine. You get insurance in case someone hits you, and your insurance pays you if they do, not the accident-causer’s insurance.
Clort is correct.
A dispute with your insurance company is called a “First Party” dispute.
A dispute with someone who damaged your car is called “Third Party.”
The “second party” is the insurance company. It does not have a dispute with itself, so there are no “second party” cases.
1st and 3d party disputes are different.
1st party: If you have a dispute with your insurance company, and sue them, they generally pay your attorney fees. That is because you and your insurance party are not supposed to be adversaries. When you win a case, they pay for your insurance, because you basically hired an attorney to help them understand their own contract with you. They more they fight you when they are wrong, they more they have pay later for your attorney.
3d party: They have a strong financial incentive to ignore you.
I know libertarians, some of them are AnCaps.
I know libertarian lawyers, none of them are AnCaps.
Over the course of time, an insurance company would have clients that are violators (where it has to make a payout to a third party and then chase down its client) as well as clients that are victims (where it has to pay its client and then chase down a third party or its insurer). Thus it would be to an insurance company’s benefit to agree with other insurance companies on rules for payouts, and to abide by them regardless of which scenario it is facing, otherwise it would be an outcast among the insurance community and unable to function effectively for its clients. Similarly, if an insurance company routinely ignored judgments against it, then no one would do business with this insurance company or its clients.
In an ancap world, there would be much more vigorous competition in every industry, including the insurance industry, than we see today. Imagine how competition would proliferate if the legislated regulatory apparatus didn’t exist. In highly competitive industries, the margin for error is lower, and thus insurers would likely work harder to have strong commercial reputations.
i don’t see why we would be using the dollar in this scenario
Why would Bill’s insurance company pay anything? They are liable for the injuries above $1000. Are you going to sue your neighbor over a $1000 auto damage claim? Or even more comical, are you going to sue an insurance company for a $1000 damage claim?
But at any rate, it isn’t Bill’s insurance company that would be worried over being dumped by raising Bill’s rates, it is Bill who would be dumped by the insurance company. If Bill’s insurance company wanted to keep Bill as a customer, they wouldn’t raise his rates in response to Bill’s accident.
The example is kept simple for example. It is property damage, not injury. And yes, people do sue over $1,000. It is public policy to encourage low damage lawsuits. Small claims courts are simplified and the amount sued for is reflected in the filing fee. The filing fee for a hundred dollar dispute can be as low as $50. It turns out that when people can’t afford justice in a court, they take it out with more available, more violent methods.
And if you sue your own insurance company for improperly refusing to pay even aa small amount, it often pays your attorneys fee if you win.
But we can make the amount $10,000. The result remains. AnCapsistan can’t even handle minor traffic damage. That fender bender brought down your whole fantasy country.
But the arguments against minimum wage don’t matter. Real Politik shows that the congressmen will do as they receive campaign contributions from unions.
“However, a bilateral insurance contract would work just fine. You get insurance in case someone hits you, and your insurance pays you if they do, not the accident-causer’s insurance.”
This might be plausible. Please entertain the knock on effect that very bad driver causes everyone else’s rate to go up. But the bad driver got so many points on his license, that he can’t drive. So AnCapistan has police, but no courts, and criminalized bad driving, while AnCorland has no courts or police. I prefer AnCorland.
Re: Knock-on effect. It’s not an easy thing to think through, us being fish grown in statist waters.
There’s the radically different incentive structure to consider when the roads themselves are privatized. How is access to those granted/limited? Does someone with a bad record end up paying increased access fees? Does the road owner share some liability for allowing bad drivers on the road?
It’s definitely stuff for smarter people to think about. It’d be interesting to see it modeled in various exercises, including an online ‘sim’ game with realistic economic constraints and varying proposed legal structures/traditions.
“The road owner will decide tort payments” is the most logical argument I have seen so far.
You give yourself far too little credit. You are asking the hard questions.
The smarter people argument is” “David Friedman figured this out, I just am not smart enough to understand it.” Unfortunately, David Friedman’s system is not smart. Because David Friedman’s “insurance companies will take care of this” argument is naive. It shows a childlike innocence of people in disagreement. “They just have to figure it out.”
The road is owned by a company that decides who will pay brings us some next questions. Who owns the road? Is it owned by an insurance company? Will that cause a conflict of interest? The insurance company will want to make the road safer, but if there is a damage, it is incentivized to refuse to pay any money. What are you going to do?
If you don’t want to travel on Walmart brand roads, because they never pay, can you travel on Amazon roads? Will we double the amount of roads to allow competition? Triple the roads?
As crazy as these questions are, they are better than the David Friedman “you just don’t understand insurance companies” argument, as that quashes any questions. David Friedman ignores the obvious problems. It is time we tackled them. He cannot. He is occasionally on Quora. I tried to discuss this with him on quora. He did not replied when I asked the actual question. He has no vision on this. Only arrogance.
On the minimum wage, one thing that has always worried me about citing the statistic that only 2% (or whatever it is) of workers are paid THE minimum wage is that this only refers to the federal minimum wage. There are many states where the state-legislated minimum wage is higher, and thus the percentage of folks paid A minimum wage is higher. Has anyone ever seen work done to account for state-level minimum wages?