I started doing some research into poverty this semester when I ran into the concept of “relative poverty.” I wrote down my immediate thoughts, stating:
I find an absolute poverty line approach (for identification) to make more sense than a relative approach (the latter being some fraction of the income standard). Although I am not well read on this topic, it seems to me the latter [confuses] poverty with inequality (I guess you could call it an inequality line instead).
I decided to do some more research and found a post on the same topic at the blog “Stumbling and Mumbling.”
The blogger first quotes Charles Moore in an article at The Spectator. Moore writes:
If poverty comes to be defined relatively for all purposes of public policy — households with less than 60 per cent of the median income, says the government — then poverty and inequality become the same thing.
If we measure poverty as something relative to someone else’s income, by definition it is already inequality. And this is Moore’s point. If we say “person A is poor because he has less than person B’s income,” we are not talking about poverty, but inequality (between person A and person B). And if we add in a proportion, now saying “person A is poor because he has less than 60% of person B’s income,” nothing has changed: we are still talking about inequality. Person A has less income than person B, and at least a certain quantity less. But that doesn’t mean he’s poor; it only means his income is unequal with B’s. Let’s say B makes $100 million a year. If A makes 59 million a year, then by this definition of “relative poverty,” A is poor, but ridiculously so. One might respond that we could simply make the proportion less than 60%, perhaps something like .1% in this situation. Unfortunately, this is a weak response: the changing of the numerical proportion in our measurement of “relative poverty” here is due to the fact that we really believe in some absolute standard which forces us to change it.
The Stumbling and Mumbling blogger (let’s called him S.M. from now) thinks otherwise and thinks it is obvious why Moore is wrong to anyone who goes beyond the surface of the issue. But rather than defining poverty and inequality, S.M. jumps straight into a numerical example. His logic is as follows: he uses the Gini coefficient as a measure of inequality and compares it with a measure of “relative poverty” as less than 60% of the median income. He shows that, even when there is an increase in the former, there can be a decrease in the latter. Therefore, the latter is not a measure of inequality.
His math is correct and I have no issue there. The problem I have is with his interpretation. His point is that, in his example, when inequality in the society increases, relative poverty in that society goes down. However, what Moore (probably, at least) and what I really think is not that relative poverty is a measure of inequality in the entire society. It is a measure of inequality comparing individuals who have less than the median income with those who have the median income. In other words, it is “a measurement of inequality in the lower half of the income distribution,” as Lane Kenworthy states here.
Let me restate this in a different way for clarity. While those in “relative poverty” decrease from society A to society B in S.M.’s example, the “relative poverty” line created still has to do with inequality. Because it is comparative to someone else’s income, by definition, it has to do with inequality, not poverty. The reason “relative poverty” goes down even when inequality in the entire society goes up is precisely because the median income has not increased. Increase that median income, keep the rest the same, and wallah! “Relative poverty” has increased and so has, quite clearly, inequality in the bottom half of the distribution.
There is a common argument in favor of the minimum wage. It goes something like this:
If we raise the minimum wage, workers will have higher wages. Thus, they will spend more on goods, and this demand will stimulate the economy.
There are a few problems with this line of thinking.
1) This assumes that the economy should be shifted toward consumption from investment. Since investment is geared toward the future, it is possible such a policy, if correct, could have the consequence of lowering the amount of goods in the future.
2) Even if the minimum wage is raised, for any sense to be made of this argument, the aggregate amount going to workers in wages has to be increased. If the basic argument against the minimum wage is right, that a price control on wages creates unemployment, then it is not necessarily the case that aggregate wage payments will initially go up, which is what is needed to “stimulate the economy.”
3) Ok, what if we drop, for the sake of argument, the claim that unemployment will cause aggregate wage payments to go down (or stay at the same level)? We have to immediately recognize that an increase in aggregate wages is still hard to stipulate. For example, if business A decides to increase wage payments, that’s less money it can spend on other factors of production, such as capital. In other words, it has to decrease payments to its suppliers, and these other businesses will end up reducing their own workers’ wages.
4) For aggregate wages to go up, then, it seems, that this money has to ultimately be taken out of payments to natural resources. Aggregate payments to natural resources has to go down. But an arbitrary allocation of money away from natural resources toward labor hampers the market’s function in economizing and allocating resources to their most highly valued ends. The resulting allocation will be inferior to the market allocation, and goods of lesser value will be produced since a less efficient combination of resources will be employed in creating those goods. The minimum wage will have the unintended consequence of producing lower quality goods for the very people who want it, even if it increases their wages.
#4 is my own line of thinking – as far as I know, I have not seen it in other Austrian works I have read (I might simply not be very well read though!). What do you guys think about this?
John Iadarola recently commented on a Louis Gohmert speech in the House of Representatives blaming welfare for causing women to make bad decisions.
I dont think any mom with absolutely no desire to have babies is going to suddenly have a huge one just because of welfare. But I don’t think it’s wrong to say that welfare can be an influencing factor on the decision. A mom who already had some desire to have a baby but before regarded the cons outweighing the pros only by a little might decide in the affirmative after factoring welfare into her decision.
For example, let’s say it takes 100 “satisfaction points” before a mom decides to have a child. Maybe she has 95 right now, but by adding an expectation of receiving welfare benefits, she gets the extra 5 necessary points.
Iadarola brings up a study that found no statistical difference in the amount of children had between welfare recipients and non-welfare recipients. I’ve already been through the problems with empiricism in economics, so I don’t have to comment in detail about it again. It suffices to say for now that, clearly, the study does not disprove any causal relationship we garner from the logic I have described above. Individuals value more goods greater than less goods; as such, women will value more money over less money and it obviously will factor into their decisions. Only in cases where the women do not see the money received in welfare as a good, such as the case where one finds the lack of self-reliance involved in accepting welfare as demeaning, will the causal relationship not be present.
What’s debatable is whether statistical analysis can be used along with judgment in deciding the size of the causal effect (this seems reasonable to me, but I haven’t made up my mind on it yet).
Finally, one side note, because I don’t want to let this slide: Iadarola is not necessarily correct when he criticizes Gomer for saying that in the 60s, he disliked the government’s policy. All that we can directly take from Gomer’s statement is that the policy began in the 60s, not that it was eating away at him in the 60s.
As long as the amount of ends is greater than the amount of means with which we (human beings) can achieve them, there will always be ends to allocate those means toward. In other words, in an economy, as long as the wants we have exceed the resources we can use to satisfy those wants, we will always have wants to allocate those resources toward.
If this is too abstract for you, take a hypothetical example. Imagine a world where people only have 100 total wants. They have 20 resources (which include land, labor, and capital), and with these 20 resources, they can only achieve 60 of their wants, meaning 40 remain unsatisfied. Now suppose that one resource, due to technological reasons or whatever, displaces another resource. Now 19 resources can achieve 60 wants, where 20 (resources) were needed before. What will the displaced resource now be used for? Clearly, it can now be geared toward one of the remaining 40 unsatisfied wants.
(A reader might quickly object, but what if the resource isn’t applicable to any of the 40 remaining wants!? The answer is that it might not be used at all, but in this post, we are examining labor in particular. Labor is the most nonspecific resource: it can be applied to a huge variety of different wants. Thus, this objection is not very relevant to this discussion.)
Is this example applicable to the real world? Certainly, and in greater force. In the real world, we essentially have an infinite amount of wants. If I could have the Starship Enterprise, I’d love someone to build it for me. If I could have
100 lam 100,000 1 million lamborghinis, well sure, why not? Resources, meanwhile, are finite. There is only a certain amount of land and natural resources, capital, and labor in existence at any time.
Since labor is a scarce resource, it seems, then, that there is no reason to assume that it could never be allocated toward some end. There should always be a job available if a person is willing to work. So why the mass unemployment?
The real reason is intervention with the price system – but before explaining that, let me introduce two types of unemployment:
1) Voluntary unemployment – this occurs when an individual chooses on his own not to work. He can be an elderly person who has saved enough money to retire. Or he can be a person on a job search who simply hasn’t found a wage worth working for yet. In this latter case, the individual would rather continue searching than accept some low wage. This is because he has enough funds saved to keep his job search for an extended period of time. As his funds dry up, he will become more desperate to find a job and will be willing to accept a lower and lower wage as time goes on. Eventually, he will choose something.
We would expect some amount of voluntary unemployment to constantly exist – there are always people searching for jobs and there are always people being displaced. However, we generally wouldn’t expect any particular individual to be perpetually unemployed – eventually, they will always be able to find another job (examples where this is not the case include where the individual is addicted to drugs, etc.)
2) Involuntary unemployment – also called structural unemployment, this occurs when the government interferes with the free market. The free market is the amalgamation of all voluntary decisions and voluntary exchanges. Involuntary, structural unemployment then occurs when the government intervenes with the price system.
The minimum wage is the easiest example to expound this theory with. Let’s say a homeless, unskilled woman, if put even at her best field of work, can only accomplish $5.00/hr of productivity. If the minimum wage is then, $7.25, she will be permanently unemployed. Employers will not hire her for $7.25 if she only contributes $5.00. As the minimum wage rises, then, the number of individuals permanently unemployed rises. The only way to escape this, is for the unemployed to somehow gain skills without work, which can be tough to achieve if they are not young and in school. The path of learning on the job has completely been taken away from them.
Therefore, when we see the perpetually homeless and the perpetually unable to find a job, there are no obvious effects of harmful choices such as drug addiction (note: even such cases are possibly due to government intervention, if a person is already unable to find a job due to some law, and then becomes a drug addict), and such laws are in existence, the first place we should look at as the culprit are those laws. Other examples include regulations such as laws mandating benefits, such as health insurance. This essentially creates its own minimum wage based off of the cost of the insurance. Workers who contribute less than the amount of cost of insurance will be unable to find a job. (These regulations add up, a minimum wage + mandated benefit would then have a larger effect than that expected from the minimum wage alone). A final example would be government manipulation of the interest rate, a price itself, and interestingly, it is this manipulation that causes the business cycle.
And the evidence is overwhelmingly positive: hiking the minimum wage has little or no adverse effect on employment, while significantly increasing workers’ earnings.
It’s important to understand how good this evidence is. Normally, economic analysis is handicapped by the absence of controlled experiments. For example, we can look at what happened to the U.S. economy after the Obama stimulus went into effect, but we can’t observe an alternative universe in which there was no stimulus, and compare the results.
When it comes to the minimum wage, however, we have a number of cases in which a state raised its own minimum wage while a neighboring state did not. If there were anything to the notion that minimum wage increases have big negative effects on employment, that result should show up in state-to-state comparisons. It doesn’t.
So a minimum-wage increase would help low-paid workers, with few adverse side effects. And we’re talking about a lot of people. Early this year the Economic Policy Institute estimated that an increase in the national minimum wage to $10.10 from its current $7.25 would benefit 30 million workers.
He’s wrong and here’s why:
1) State vs. state cross-sections are still not controlled experiments, by a long shot. There are about a trillion kazillion million (if you were doubtful of my trustworthiness, how do you feel now?) ways one state is different from another. And yes, many of these ways will be relevant for the question at hand (whether the minimum wage affects unemployment maliciously or not).
2) Even if they were close enough to controlled experiments, there is no reason to assume that a historical fact, that a raise in the minimum wage had little or no effect on unemployment in one time period, should carry over to another time period. Human beings are not inanimate objects like the subjects of the physical sciences. Human beings have the ability to choose, and these choices can change over time. Economics deal with human beings, and as such, cannot use historical findings to create some sort of law set in stone. History by definition, has to do with specific dates and times and specific people and specific choices. They are not universals. We say “on April 12, 1950, Jimmy went to the store!” The date and the name and the action all can change as time goes on. The same applies to historical claim regarding the effect of an increase in the minimum wage.
3) Even if we let #1 and #2 slide, it is STILL a wrong statement. We cannot assume that the effect of one increase in the minimum wage, from some amount to $7.25, carries over to another amount, $7.25 to $10.10.
The empirical method applied to economics sucks, plain and simple. There are too many weaknesses with it. Economics is not a natural science, it is a social science. We can’t even point to the success of empiricism like scientists can in the natural sciences. Astronomers can point to correct predictions of objects such as comets, e.g. if we look in the sky at this time, we’ll see the comet right here. All that economists, meanwhile, have to point to, is blatant failures, from terrible predictions about what would happen to the economy (this is right before the Great Depression), to an inability to stop the financial crisis, to this piece of work (this one’s the funniest by the way).
The correct method of economics is not empiricism but praxeology. The social sciences can only lay claims to laws that do not have to deal with particular choices of humans, but the universal characteristics of all human action.
Just anticipating a possible response. Some might say “oh but there could be reasons to assume that something that occurred in history would happen again.” I’m not saying this is impossible, but I’m saying it’s bad reasoning for a science dealing with human action, particularly when other methods are available.
Secondly if you’re wondering “how do you think the minimum wage affects unemployment?,” see here.
From this post, we see how we derive the fact that a person who engages in an exchange must value what he is receiving over what he is giving up.
Note that I am doing this from the point of view of one actor, but it applies to both. It’s interesting that, even with violent exchange, this analysis could be used to say that the individual being coerced also values what he is receiving over what he is giving up.
If Thievery Tom points a gun at Innocent Irene and demands that she give up a banana for his orange, she too is engaging in an exchange. Although violent, she is still purposefully acting, and (assuming she goes through with it) she thus prefers the state where she gives up the banana for the orange over the state where she retains the banana and he retains the orange. In other words, she prefers the orange to the banana.
I’m not sure if this can constitute a meaningful objection to the distinction between voluntary and involuntary action, but it’s something to think about.
My only response to this at the moment is that there’s a very real sense in which doesn’t value what she is receiving over what she is giving up. I don’t remember Rothbard responding to this sort of objection in Man, Economy, and State, and have not read enough Mises to say whether he responds to it or not.
The way it is solved likely revolves heavily around the introduction of voluntary action vs. involuntary action in the logical argument. As I come across this again in Mises or Rothbard, I’ll think about it.
One more thought: if someone responds, “well, of course she now has a new preference scale because of the introduction of a coercive individual,” I could say “well, anytime someone comes along and even offers an exchange, the other individual’s preference scale might change because of the introduction of the voluntary individual.”
And again, I’m not saying this is a meaningful objection nor am I saying that it can’t be easily “solved.” Just something I am thinking about at the moment.
1) All purposeful action involves a preference of one state over another.
2) Exchange is a purposeful action.
3) Therefore, exchange involves a preference of one state over another.
Premise #1: The state preferred is that which occurs with the successful action. The state being rejected is that which would have occurred had the action not been taken.
Premise #2: Exchange is purposeful, it has a goal in mind: to receive something by giving up something else.
Conclusion: This necessarily follows from #1 and #2: because exchange is a purposeful action, it involves a preference of one state over another. The state preferred is that with what is gained and lost in the exchange. The state being rejected is that where what is gained and lost in the exchange is not, respectively, gained and lost. The more common way of saying this is that he who engages in an exchange values what he is receiving over what he is giving up.
I’m doing this mainly for my own benefit. Spelling out the logic will help me understand the arguments more fully and make my own decision whether the stated conclusions do in fact necessarily follow from the premises. Hopefully, it will help others do the same. I don’t think this needs any more justification than that.
I was actually going to make a post saying I was taking a hiatus, because I’m in the middle of some work at the moment. But I figured I could do some GeneCallahan-style blog posts about the stuff I’m reading, since those posts don’t require as much effort above and beyond what you’re already doing and thinking about. (Unfortunately, if you’re reading this blog for insights comparable to what you’ll find on his site, you might be a little disappointed)
Just started reading Human Action. While Man, Economy, and State is fantastic, I don’t think you can get a full appreciation of Misesian methodology and epistemology without reading Mises himself.
Mises calls satisfaction a state where a person cannot and does not purposefully act. If you’re completely satisfied, you have no reason to act. A purpose means you have some goal worth attaining, and this implies this goal is better than what your state would be otherwise. This means some satisfaction is gained from achieving that goal, and thus you were not completely satisfied to begin with.
Mises goes on:
But to make a man act, uneasiness and the image of a more satisfactory state alone are not sufficient. A third condition is required: the expectation that purposeful behavior has the power to remove or at least alleviate the felt uneasiness. In the absence of this condition no action is feasible. Man must yield to the inevitable. He must submit to destiny.
The reason this condition is a necessary one can be demonstrated by an example (if you don’t find it straightforward). Take time for instance. Most people find the forward movement of time an inevitability. There’s nothing you can do to stop it, make it go backward, etc. and thus you don’t purposefully act to accomplish those goals. But what about people that make time machines? Clearly, they’re purposefully acting, right? Yes, but the only reason they are acting is because they have an “expectation” that their action has the power to change time; they don’t think it’s inevitable.
So according to the definition of action as purposeful behavior, expectation of some possibility of accomplishing your goals is a necessary prerequisite.