Wednesday, 26 May 2010

The Armchair Economist

Earlier in the year I read a book called 'The Armchair Economist' by Professor Steven E. Landsburg*.  I enjoyed the book immensely and for the most part agree with Professor Landsburg's conclusions, but as an rank amateur as an economist not everything is crystal clear to me and I have a couple of questions on points made in the book.

I have emailed these questions to Professor Landsburg today, if I receive a response to any of the points I will post the reply here also (with permission of course).

Query 1: The Indifference Principle (Chapter 4)
With regard to the discussion of the indifference principle and the tipping of bus-boys Landsburg points out that bus-boys cannot be the beneficiaries of changing social attitudes towards tipping them, neither can the restaurant owners benefit.  This is because neither bus-boys nor restaurant owners are in possession of a resource in fixed supply.  If you want an explanation of why I'd recommend getting your hands on a copy of The Armchair Economist.

My query is this: how is this argument affected by minimum wage laws?

My initial thoughts on the matter are that legally binding minimum wages artificially inflate earnings at the lower end of the income spectrum; this leads to higher wage bills for owners/managers of low-paid workers (think supermarket shelf-stackers, fast-food workers, etc.), unless of course they cut staffing levels.

If they cut staffing levels they are worse off than they would have been otherwise since they are spending the same money on staff, but have less staff, who will presumably be stretched more thinly, less work will get done, there will be more problems with poor customer service/staff stress/etc.  The people out of work due to employers having less positions to fill also lose out here.  The beneficiaries appear to be the people working minimum wage jobs, if they still have a job it will be paying more than it would have been otherwise.

If the employers maintain staffing levels at what they would have been without the minimum wage law anyway they are still worse off, as they will have a higher wage bill and hence lower profits.  No-one will be out of work and everyone working in minimum wage jobs will be earning more, so would again appear to be the beneficiaries of this policy.

The employers could pass on the additional cost of paying higher wages to the customer, by charging higher prices, but one thing I do recall from my own economics education (a single 1 semester class in my 4th year of university) is that a seller can set either the price which a good/service is sold at, or the quantity sold, but not both.  Raising prices means selling less, and presumably the business owners have already set their prices at, or close to, the level which maximises profit.

Whichever outcome occurs in terms of staffing levels, there is another effect minimum wage laws would appear to have.  By artificially inflating the wages of certain jobs they make those jobs more desirable relative to other low-paid (but above minimum wage) jobs.  If it lures people to work in supermarkets instead of in bars for example then the supply of bar staff is reduced; surely then bars have to offer higher wages as well?  Does this effect exist in reality?  If so, how far does it spread through the economy?  Do minimum wage laws then effectively bid-up the wages of everyone?

Query 2: Why I am not an Environmentalist (Chapter 24)
The subtitle of this chapter is "The Science of Economics Versus the Religion of Ecology".  The gist of Landsburg's argument is that environmentalism is flawed because it turns matters of preference into matters of morality and instantly assumes the moral high-ground.  I follow this argument and agree with the general conclusions.

What I am confused about is Landsburg's position on recycling.  He points out that recycling paper eliminates the incentives for paper companies to plant more trees and hence forests shrink.  This is perfectly true, but surely the purpose of such recycling is not to maintain larger forests?  Recycling paper does not appear to me to be of particular importance, more interesting to consider the recycling of plastic or metal.  Unlike paper, which is made from a renewable resource (wood pulp), metal and plastic are finite resources (there is only so much metal in the World, the same is true of oil, the refining of which produces the raw materials for plastic manufacturing).  The purpose of recycling metal and plastic then, seems to be a sensible method for making the most out of these resources, rather than just dumping them in landfills.  Needlessly dumping valuable resources makes the World a poorer place (this is in contrast to burning money - see Chapter 7 of The Armchair Economist).

Landsburg of course points out that time is also a valuable resource, but the time it takes to rinse out a can or bottle and then throw it into a bag (instead of a different bag, in the bin) is minuscule.  The real question, which hasn't actually been resolved, is therefore: what is worth more - the time it takes to rinse out a plastic bottle or the plastic itself, which can then be used for some other purpose?

* Actually, I read two of Professor Landsburgs books simultaneously, the other being 'More Sex is Safer Sex' - I'd highly recommend both of them.  I don't yet have a copy of his latest offering 'The Big Questions', as a price-sensitive consumer I'm waiting for it to come out on paperback.

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