Different River

”You can never step in the same river twice.” –Heraclitus

May 4, 2006

Economists Don’t Think Everything is About Money

Filed under: — Different River @ 3:35 pm

One of the most common misconceptions about economics and economists is that we are concerned mainly, or even only, about money. Once when I was teaching an introductory economics class, on the first day I asked the class, “What is economics?” Eventually I got them around to the right answer, which is roughly, “The study of how people make decisions in response to incentives.” One student jumped in to clarify/correct me: “Financial decisions,” he said — no doubt expecting some brownie points for claifying what I really meant for the rest of the class.

No, I said — all decisions. And then I gave my now-standard introduction — a discussion of the decision whether or not to wear a seatbelt. That’s an economic decision — but it’s not a financial decision, at least, not in the way most people understand the word “financial.”

Donald J. Boudreaux of George Mason University has explained how economic — but decidedly not financial — thinking applies to the price of gasoline. He writes:

Contrary to popular misconception, economists do not believe that money is all that matters.

I remember during the 1979 gasoline shortage that many Americans opposed getting rid of the government-imposed price ceiling on oil and gas prices because, these people thought, lifting this ceiling would raise the cost of gasoline. Economists explained again and again that while lifting the price ceiling would raise the price charged at the pump, the full price of gasoline would in fact fall.

By bringing forth greater supplies of oil and gasoline, lifting the price ceiling would eliminate the necessity of waiting in long lines at the pump — as well as eliminate motorists’ anxiety of not knowing if they’ll be able to fuel their automobiles.

In short, the full price of gasoline was much more than the dollar amount charged at the pump; it included also the time spent waiting in long lines and the anxiety caused by the uncertainty of gasoline availability.

To suppose that the only cost incurred by motorists was the money they paid at the pump is to overlook the value of their time and peace of mind.

And here it is applied to wages and employment:

Recognizing that costs and values go well beyond those things whose prices are expressed in money is a key to the economic way of thinking.

For example, suppose that Congress raises the federal minimum wage from $5.15 to, say, $6 per hour. Further suppose that employers don’t fire a single worker in response to this minimum-wage hike [as economic theory suggests they will -- but for now assume they don't --DR]. Can we conclude that workers are made better off by this minimum-wage increase? No, at least not if we understand that workers value things in addition to the wages they are paid.

A worker’s job quality surely matters to him. How many breaks is he allowed to take while at work? How readily does his employer forgive him for innocent mistakes? How willing is his employer to allow him to take a day off to sit with his sick child? How comfortable and safe is the workplace? These and countless other “non-price” features of a job are vitally important even though they don’t show up in the wage figure.

If employers respond to this hike in the minimum wage not by hiring fewer low-skilled workers but instead by working their low-skilled workers harder, the quality of low-skilled jobs falls. Of course, these workers are now being paid a higher wage. But only those who focus exclusively on wages will conclude that this increase in the minimum wage definitely makes workers better off.

In other words, if your employer is forced to pay you more than is required to make you take the job, he or she may respond by making the job harder in a way that recaptures some of that “extra” wage. Or some nonmonetary benefits may be reduced. (Do you get free coffee at work? Free burgers if you work at a fast-food place?)

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