Regular reader Kevin Corcoran sent me another email that’s worth posting as a standalone blog post. Here it is:
Earlier this morning I decided to re-read Ludwig von Mises’s book Theory and History: An Interpretation of Social and Economic Evolution. (I know it’s considered bad manners to flaunt my crazy, party-hard lifestyle like this, but hey, it’s the weekend and I like to indulge.) I first read it nearly 20 years ago, and thought it was worth revisiting as I suspect I’ll be able to understand and engage with it much better this time around.
Mises begins by defending the idea of methodological dualism – the idea that the study of social sciences like economics requires a fundamentally different approach than is used in the physical sciences. He points out that physical sciences give way to regularity and prediction that simply isn’t available in social sciences. He writes “Under identical conditions stones always react to the same stimuli in the same way; we can learn something about these regular patterns of reacting, and we can make use of this knowledge in directing our actions towards definite goals…A stone is a thing that reacts in a definite way.” However, Mises argues, there is a crucial difference between the things studied by the physical sciences and the subject of social sciences – humanity. “Men react to the same stimuli in different ways, and the same man at different instants of time may react in ways different from his previous or later conduct. It is impossible to group men into classes whose members always react in the same way.”
Mises doesn’t think this means social sciences are incapable of making predictions of any sort – only that these predictions are only vaguely definable and partly knowable. In his words, “This is not to say that future human actions are totally unpredictable. They can, in a certain way, be anticipated to some extent.” But this partial understanding and vague predictability makes attempts at applied social science fundamentally different from other applied sciences.
One lesson I think we can take from this as economists is to temper the specificity of our predictions to policy changes. For example, when asked what to expect from a binding wage floor, many economists (I count myself among the guilty) have a knee-jerk reaction to just say “increased unemployment.” [DRH note: I always say “reduce employment” because of how unemployment is measured. To be unemployed in the official statistics, you must be out of work and looking for work. The minimum wage law may discouraged those whom it puts out of work, to the point where they don’t bother looking.] But we also realize that this is just one of many ways employers can react. Employers might cut jobs or hold back on creating new positions they otherwise would have. But they often can, and do, respond in other ways. They might cut hours. They might reduce benefits. They might put less effort into providing a pleasant working environment. I thought back to 2014 when minimum wages were being pushed up in the SeaTac area in Washington, and the experiences being described by some workers who “benefitted” from that wage increase:
“Are you happy with the $15 wage?” I asked the full-time cleaning lady.
“It sounds good, but it’s not good,” the woman said.
“Why?” I asked.
“I lost my 401k, health insurance, paid holiday, and vacation,” she responded. “No more free food,” she added.
The hotel used to feed her. Now, she has to bring her own food. Also, no overtime, she said. She used to work extra hours and received overtime pay.
What else? I asked.
“I have to pay for parking,” she said.
I then asked the part-time waitress, who was part of the catering staff.
“Yes, I’ve got $15 an hour, but all my tips are now much less,” she said. Before the new wage law was implemented, her hourly wage was $7. But her tips added to more than $15 an hour. Yes, she used to receive free food and parking. Now, she has to bring her own food and pay for parking.
These kinds of experiences are overlooked when economists are too quick to predict unemployment. And when unemployment is given as the predicted cost of binding wage floors, rather than described as one of a variety of different ways employers might respond, situations like the one described can be overlooked. Skeptics might look around, see that technically no jobs were lost, and conclude that economists are wrong to warn about the costs and tradeoffs of this kind of wage setting. It would be more accurate, and more honest, for economists to say “There are a lot of different ways the labor market might adjust. Here are several different ones. I don’t know which employers will react in which ways, and neither do the advocates of this policy. But these increased costs are going to have to be borne by someone, and though the legal incidence of the cost increase is on the employer, much of the economic cost will be borne by the employees, whatever form that cost may take.” [DRH note: As I have often put it, employers adjust on many margins.] Granted, this doesn’t make a quippy sound bite for talk radio, but it has the virtue of being true.
Here is the biography of von Mises in David R. Henderson, ed., The Concise Encyclopedia of Economics and the pic above is of von Mises.