First Principles or Bust

So over the weekend, I got into a nice little... discussion with someone that had a very different view of the world that I do. They were a progressive, so most of our disagreement was about economics and the governmental involvement in education, and things like that. This is not particularly unusual. The problem was that we would approach historical events from different perspectives, which would, of course, change our analysis.

History is an important empirical test for theories of economics and other social sciences, but there are some insurmountable problems with the study of history. Mises pointed out that historical circumstances are always different from case to case, there are no fixed values (Human Action). Because there are no fixed parameters, it is impossible to parse the historical record perfectly. Instead, we have to approach from the other direction. We develop a theory and we look at history through that lens or 'understanding' as Mises terms it.

Some people might disagree that this is how history should be done, and that history needs to capture all of the relevant facts, and then form judgments from there. But what facts are relevant?  When we are choosing what facts to include in the analysis, we are using some theory already to decide if a fact might be useful. History is messy, which means that unraveling the true cause and effect is difficult. Discarding a fact you think is irrelevant might make deciphering the events impossible.

This means that we need a good way to determine what actions, events, and people are important before looking at the data. We have to have an a priori theory to give a proper understanding of history, rather than having a theory that twists in the wind and cannot bring insight to the facts of the present, or worse, a theory that can bring any insight to the present. A purely empirical theory will not know what data needs to be gathered and what data can be safely ignored.

So how do we get around this issue? All the data that we look at will be cherry picked to some extent, since we don't have the time to go through all of the facts of any specific event, and so the data we get will have a selection bias. I think the solution is as Mises presented in Human Action. We have to develop an a priori theory that can explain the phenomena that we are interested in, and then look at the data in that light. It is also important to understand that this theory has to be logically consistent, otherwise it is useless. No a priori theory will be completely falsifiable, since there will always be confounding factors to various degrees. Conflicted data with the theory would highlight these areas where additional explanation is required.

We need to make sure that we correctly select the axioms and starting points of the theories we end up using. It is extremely important that the first principles are solid, otherwise any theory will fall apart, or worse, be correct in some cases for all the wrong reasons.

The way I see it, historical theories can either be specific enough to be falsifiable, or general enough to be somewhat predictive. Some mix of the two, and specific parts of the theory can be falsifiable, but the overall structure will not be. As an example, we could say that in general, higher taxes will lower the growth of GDP (or something similar). Specific test of the theory will be if we raise taxes, the rate of growth of GDP might go up, which would mean that in this specific case, the theory didn't hold. But there are other confounding factors that would make that a bad conclusion, and we can't go back in time and try holding taxes at the same level.

I guess the main thing I'm trying to get at is that when it comes to history, it is impossible to get all the facts, and the facts you get have a selection bias. Therefore it is important to get the theory explicit and established beforehand so that others can challenge it directly. If people are operating with different theories, this needs to be discussed both before and after discussion of the historical facts.

The Minimum Wage: Common Arguments

With Bernie Sanders so popular on my Facebook feed, the $15 dollar/hour minimum wage has been floating around a lot, and there are a lot of arguments that I think need to be addressed.

A good starting point to refute is the Salon article about the myths of the minimum wage. 

Myth 1: The minimum wage was never meant to be a living wage. 

Liberal/Progressive Take: Everyone working a full time job should be able to support their family.

Okay, so I'm not going to argue intent of the policy. It may well have had the noble intention of having everyone living above the poverty line. Intentions, sadly, don't really matter. What matters is the effect of the policy and the means by which the policy is enacted. 

The problem with the argument about the minimum wage is the definition of 'living wage.' I have lived at $8/hour. It wasn't that bad. Adjusted for inflation, that is about $10/hour in today's dollars. In graduate school, my wage is officially ~$20/hour, but I only get paid for 20 hours/week. This would be full time at ~$10/hour. I have lived fairly well on that. One problem with having a single living wage across the nation is nonsensical. A living wage will be different in LA or NYC than it will be for some podunk town in the middle of nowhere. A national minimum wage would try to impose the living wage of NYC on a smaller town that has a lower cost of living.

Also, I often hear that a parent should be able to support their family on the minimum wage. This is a load of bull, with a very simple question. How big is the family? Should a single mom be able to support three kids? 4? 5? Where do we draw the line? What about a two parent household? Should they be able to support any number of kids on minimum wage? This notion of supporting a family is one that doesn't allow for the continuation of the logic. 

Myth 2: Minimum wage increase won't help anyone if other costs go up too

Liberal/Progressive Take: This won't make a difference in inflation because it will take people off other welfare programs, and will also stimulate the economy with additional spending.

This argument is basically that paying people more will take them off welfare, and allow them to get off food stamps and other welfare programs. The problem with this argument is that it is that it is also just as possible that because people on the welfare system know it so well that instead of earning more, they will try to cut back hours to stay on welfare because it is familiar. We can't be sure as to the response of people to this particular stimulus.

As to the argument about stimulating the economy, this is the standard broken window fallacy. The workers who are getting paid are spending more, sure. But you don't see the employees who were never hired and what they spend, or the other spending that the businesses would have made if they didn't have to pay workers the additional amount. 

Myth 3: An increase in the minimum wage is bad for employers

Liberal/Progressive Take: This will spur workers to be productive, and make business run more efficiently.

It will certainly spur employers to find ways to cut employees out. The way that wages actually rise is by individual workers becoming more productive on average. Raising the minimum wage will indeed force employers to do more with fewer workers, which goes against the progressive response to Myth 5. If we pay workers more, they have to work harder to compensate, or work with additional capital investments to make them more effective.

As to other arguments about paying more being a good business practice, that is something that individual business owners have to determine. For most industries, this is true, since according to the Salon piece, only 4.7% of workers are on minimum wage. This means that 95% of employers ALREADY KNOW that paying employees more is good for retention, and I think the reality is all employers know it, but they don't care about keeping the 4.7% that is on minimum wage, otherwise they would pay more. Duh.

Myth 4: $15 is a random number.

Liberal/Progressive Take: It is what is required to raise workers above the poverty line, while being feasible for businesses.

So that means if the poverty line changed, this number will change. So who defines the poverty line? Also, who determines what is feasible for businesses? The minimum wage would take the ability of employers to find what is feasible for them, if that number is below this proposed minimum. 

Myth 5: It will cost us jobs and raise unemployment

Liberal/Progressive Take: There is no evidence from analysis of 13 states, and these states had faster job growth.

This directly contradicts point 3. If workers become more productive, that means that you can do the same amount of work with fewer workers. Also, this is a causation is not equal to correlation. Just because these states had faster growth and increased the minimum wage, doesn't mean that they are directly related. These states may have grown even faster if the minimum wage was not raised. I would have to see a more careful analysis rather than the aggregation at the state level, and other confounding factors. 

Myth 6: Only teenagers and uneducated people work for the minimum wage.

Liberal/Progressive Take: 4.7% of the working population is at or below minimum wage, and 88% of those are above the age of 20, and 43% have attended college.

What kind of college education? There are many fields in the social sciences and humanities that don't really have economic value to most companies. Do they have value? Sure, but not to companies trying to serve consumers. So college education can be (though isn't always) irrelevant. Should I care about your dance major? Depends. Am I a dance company?

The 88% of people on minimum wage who are over the age of 20 don't have a whole lot of other opportunities. If they did, they would be working for more than minimum wage. But that is irrelevant. What is relevant is if we are then advocating for age discrimination? Should someone be entitled to higher pay just because they are older? I would say no. Why should it be okay to employ a highschooler at minimum wage, but not a 21 year old, or a 30 year old? To use another social justice bugbear, that would be unequal pay for equal work, and that is not right. So why are these 20 year old unable to do more complex jobs that pay better? Have they not learned on the job? Why should they be entitled to more just because they are older?

Myth 7: Seattle already has a minimum wage of $15 and it's terrible

Liberal/Progressive Take: Totally not terrible, and the $15 minimum hasn't been reached yet

This is hard to argue about since it is true, they haven't gotten the wage to $15/hour yet, because of a slow roll out. So we can't judge the effects. Also, the big companies with large profits that they cite, Starbucks and Howard Schultz, are not the companies that would be most affected. Those are companies that are operating marginally, and just scraping by. That what is meant by the marginal change. It is not going to change for companies that are doing well, but a company that is doing barely okay will not make it. 

Bernie Sanders: Problems with Soundbite Policies

Bernie Sanders is a self described democratic socialist who has become fairly popular among young liberals. He is technically independent, but he is running for the Democratic Party nomination. I disagree with most of his economic policies (as I will outline below), but I'm glad that he is at least open about his stances, and he often correctly identifies problems with the current system.

The Policies:
Going through his website, his own promotional material, we have the following headlines:

Real Family Values
Create Decent Paying Jobs
Income and Wealth Inequality
Getting Big Money Out of Politics
Climate Change and the Environment
A Living Wage

As headlines, these might be things I could support in sentiment, but not in practice.

Real Family Values
Bernie Sanders uses 'real family values' as things like mandatory paid vacation, sick leave, and other benefits.These are not the responsibility of the government to provide workers. This is something that workers should negotiate with the employers themselves. How can the government know how much vacation each worker needs or wants? Furthermore, with medical leave, he proposes that it be paid for by an 'insurance' program like Social Security. Government programs are not insurance, and it would not be optional, it would be mandatory.

Many of these policies focus only on the workers' side of the equation, with out recognition that the employers are people too, and have to look out for the interests of the consumer. Suppose a key employee gets sick for an extended period of time. Okay, they now have paid leave. The project that they were working on is sitting around waiting for them to get back. The project is on a tight deadline. What is the employer to do? If this is a key project, and required for the future profitability of the company, then a replacement needs to be hired to do the work of the person on leave. Now, when they get back, what happens? One of them is redundant, and should be fired (or reassigned in the wider economy, if that makes you feel better). The worker is not entitled to pay from an employer without the corresponding exchange.

All of the proposals under this heading are additional regulations on what people are allowed to negotiate with employers. In my ideal world, employees would be able to freely negotiate these terms without the need for a government program or system to require the terms of the employment contract.

Create Decent Paying Jobs
This is a typical view of both the political Left and the political Right. He advocates for a large spending program to build infrastructure and employ young Americans. He doesn't go into the details of what this would mean exactly, but it is a government intervention into the economy which will lead to more problems down the road.

He does correctly point out that the official unemployment rate is inaccurate, since the official numbers ignore the people who have given up looking for work, or those who want more hours. The solution is not, however, to spend other people's money to have people doing what no one cares enough about doing. At least part of his program will include job training, which is less than useless, since it will be paying people to teach other people how to do jobs no one else wants. If they did want them, they would be paying already.

It is conceivable that there are some people who would benefit from these job training programs. The problem is that it is essentially the broken window fallacy. The gains that we see are at the cost of actions we don't see. We can't see how the teachers and instructors would be spending their time if they weren't employed in this government program, and we don't see how the taxpayers who are paying for them would otherwise spend the money.

Income and Wealth Inequality
I've touched on this before, but it bears some repeating. Income inequality is not important. At all. The problem is that the poor are poor. If they are getting even poorer, that is an even bigger problem, but the richness of the wealthy is not at all a problem. There is some degree that this is a complaint about how the world is not fair, and how the rich and the poor should be closer together. In addition to the complaint being about how life is not fair, there are no reason to think that government intervention would improve the situation. In fact, I think that the government intervention has made the problem worse. It is government intervention and regulatory capture that leads to these problems in the first place, and if the banks had been allowed to fail and go through bankruptcy, maybe we would need his plan to break up the banks,

Getting Big Money Out of Politics

Here, I think is one of the worse misinterpretations of the First Amendment that is the problem on the Left, and one that I would hope Bernie Sanders understands better than he is letting on, since he is an independent.

First, I will give him due respect for advocating for a constitutional amendment rather than just overturning the ruling, though he is advocating for that too. But the problem with these ideas is that while money might not quite be speech, money must be spent to make speech effective.

He goes into a little more depth with his interview on Vox, where he gets into ideas that could get very dangerous for democracy, even more than he thinks ours is in danger from the oligarchy. His first idea after reversing the Citizens United decision is to at "at least make sure that candidates who are running will have as much money as their opponents." This might sound okay at first glance, but consider these questions:
Who determines a candidate?
What kind of paper work is required?
Can anyone become a candidate?
Is there a limit on the number of candidates in each race?
Will it be restricted to official political parties?
What if the candidate is religious? Will the state fund the campaign even if it is a religious one?
What about independents?
These are all questions need to be answered about publicly funding candidates. The power is shifted from the voters to the people who pick the candidates. This has already happened to a sad extent because of ballot access laws that impose additional requirements on candidates outside the two party system. Public funding of elections will only exacerbate this problem.

His other idea on this vein is not as bad, but seems somewhat redundant. He thinks that a $100 tax credit for donating to any candidate as a way to 'democratize' the election funding process. It is better than the previous idea, since it doesn't spend taxpayer money on candidates, but my $100 contribution is already a vote. If I'm giving $100 to a candidate, I'm voting for them, and paying them $100 to help convince other people to give their vote to them. At that point, you could basically hold the elections as fundraisers, and each person has 100 votes to spend on the candidates of their choosing. It seems a little redundant.

Climate Change and the Environment
Here, he claims that we need to move away from fossil fuels, and use government funds to 'stimulate' the economy to reduce greenhouse gas emissions. This doesn't address part of the problem in that the traditional energy companies receive other government subsidies. The way to solve the problem is not to add additional stimulus, but to take away subsidies from the traditional system.

Living Wage
The debate about the minimum 'living wage' is an interesting one, but it again gets into a question of entitlement of the workers. Workers are not entitled to a living wage. Also, the living wage is different in different areas of the country. A national minimum wage doesn't make sense, since the living wage in New York City will be much higher than in Podunk, Anywhere. Personally, where I am now, I can live quite comfortably on $10 an hour full time. That is significantly lower than the living wage that he proposes.

Many people advocating for the living wage also claim that it is not possible to raise a family on the current minimum wage. That sucks for the kids, but why should the bad choices of those parents be our responsibility? It is a very simple solution: don't have kids. Having kids is a choice, and it is one with many long term consequences. If you can't afford children, make the choice not to have them. If you do have them, then make the sacrifice and work your ass off to take care of them, but don't complain to the people who haven't made your choices for you.

The living wage also runs counter to personal agency. People should be allowed to set their own price for their labor, even if it is below what anyone else thinks is tolerable. The living wage infringes on the rights of both the employer and employee to set the prices of their own services.

Equal Pay for Equal Work is Incompatible with Free Market Capitalism

The buzz phrase “Equal pay for equal work” is most commonly associated with the so called ‘gender wage gap,’ that women are getting paid less for the same work. While there may be a small gap due to discrimination, it is certainly not the 77% number that is often cited by mainstream reporting. But that is not the biggest problem with the issue of the phrase “equal pay for equal work.” The real problem with this phrase is that it is in fact regressive. If we truly embrace this philosophy, then it will be essentially impossible to progress, either technologically or socially.

Economic and technological progress hinges on the exact opposite idea: do the same work for less pay. Even better, many do better work for less pay. This is the nature of economic and technological competition. Technological progress strives to lower prices, producing the same goods at a lower price point. The winners are the ones who provide what consumers think is the best product for the lowest price. Cutting the price for the same product, or a superior product requires paying less for all the accumulated labor that produced the product. This is essentially less pay for equal work.  

Perhaps this is a misunderstanding of the phrase. What if we use another conception of the phrase? Let us examine equal pay for equal output, equal pay for equal effort, and equal pay for equal time worked.

• Equal pay for equal output: This is the most reasonable interpretation in my opinion, but even in this case ‘equal pay for equal work’ is wrong. In this interpretation, the price of products could never fall, since we can consider the product to be the output. If equal output must be paid the same rate across the market, then computers would in fact be more expensive that the first computers, since they do so much more.
• Equal pay for equal effort: We can consider this to be in some sense to be equal sweat equity for equal pay. This is also wrong, because just because someone works really hard doesn’t mean that their effort is valuable. If we have two people who dig ditches and move the dirt to a more useful location (landscaping or something), and one of them puts the dirt in the wrong location that is just as far away, I think we can see that they have both put in equal effort. One put the dirt in the right location, while the other did not. Clearly, the one who put the dirt in the wrong location should not be paid the same amount as the one who put it in the right location. If we required equal pay for equal effort, we would be forced to pay misdirected effort the same as good effort, which is clearly wrong.
• Equal pay for equal time: This is clearly ridiculous, as if we had to pay equally for equal time, hourly salaries would be the same for every profession ever, where clearly some are worth more than others. Someone who can build a twice as fast as someone else should clearly not be paid half as much for the same house (and faster too).

These objections might seem trivial, but they demonstrate the significant problems with the mantra ‘equal pay for equal work’ even if we can clearly define what equal work actually means.

Capitalism, by which I mean the free market, works by allowing the competition of people to accept lower pay for equal work; by giving people the freedom to provide services for cheaper than other people. 

The Marxist concept of 'Property'

Something that I hear Communists say is that they want you abolish private property. This is found in the Communist Manifesto, and I've seen a few Facebook communists claim this. I have no particular intellectual problem with this, until I hear the secondary claim: That they don't want to take away your home or your belongings. I typically hear it as the want to abolish private property for the things that you 'don't need.' A good example would be a second home, or something like that.

The problem with this is that it is inconsistent, and neglects the reason for 'ownership' of even a small amount of property. Suppose we limit each individual to what they need, as the Communist ideal would go: "To each according to his need." What is it an individual needs? Food, water, housing. In this day and age, we consider housing to include electricity, sanitation, and temperature control (heating and A/C). Okay, so if we consider that each person will control their own food, water, housing (own it). How do we get the builder to make that second house beyond his own? He won't own it, since private property doesn't exist, and he already controls his own home.

Suppose we have a small community, with one farmer, and one builder  (and we are supposing that the single farmer can feed everyone. I'll deal with the other case in a bit). The builder builds two houses, and one goes to the farmer. Is the builder then free forever to live off of the farmer? What if the builder is no good at farming, or is incapable of it? Is the farmer then forced to work to feed the builder for the rest of the builder's life? Suppose some disaster strikes, and the farmer is injured, and can only work enough to feed himself. Does he still have to provide food for the builder?

Now, that construction was a little naive, and the builder could farm, and the farmer could build. But in that case, why is one entitled to the labor of the other? If the builder builds a second home, why is the farmer entitled to it for no labor? The builder spent his labor to build it, surely he should be compensated for his work somehow. Otherwise, it would be slavery. Similarly, if the builder can't farm, how is he entitled to the work of the farmer? They can certainly trade between the two of them, but that presupposes that there is ownership of the goods being traded. The extra house being traded for food requires that the extra house is owned, as is the food.

Let us also look at the case where the farmer cannot feed both himself and the builder with his labor. If he doesn't enlist the builder's help, one of them will starve. Is the builder the one who gets the food? Well, not if you own the labor and materials that you need. In that case, the farmer gets to keep the food, because he needs it, and only the excess is given away. This puts the builder in a predicament. Why should he build a house for a farmer who will not feed him? In reality, the builder should build his house and then take up farming, but leaving that aside, why should he build that second house for the farmer? He gets no benefit, and starves to death, at which point the farmer can take his stuff (unless the farmer died of exposure).

The problem with abolishing private property is that there is no incentive to reach beyond subsistence. There is no reason to build that second home, since you won't use it. There is no reason to farm the extra food. Any extra labor beyond subsistence has its benefits denied to the individual, and becomes a form of slavery.

Why Economic Inequality Should Not Matter

I see a lot of liberal rants about the 'growing economic inequality' and the 'top 1%,' but I think that they are missing the fundamental issue. While it is a nice thought that wealth will be distributed more evenly, so that everyone can enjoy private planes and mansions, we should not be judging society by what the rich can have and the rest can't, but rather by what the normal person can afford. Perhaps it is because humans are a jealous species, but it strikes me that the rich being rich doesn't in any way hurt me.

Consider the case if we take inequality to an absurd extreme. The rich people own planets and have their own private space ships to travel between them. The poor people are stuck on Earth in the state that they are in now. The rich in this case are vastly wealthier than the rich are now, while the poor are just as poor as they are now. So why would the inequality make the difference in social good? Because the poor are more jealous of the rich for having access to more resources?

Contrast this case with a completely equal society with no wealth. There are no rich, only poor, but the income inequality is zero, since no one is making anything. This is where everyone is basically subsistence farming or hunting and gathering, working 12 hours a day to eat, and clothe themselves. This is a situation that is not unlike where humanity started. I think it should be fairly uncontroversial that we have made some progress since then, and I think it is somewhat uncontroversial to say that it is better to be living now, with the large inequality, than 10,000 years ago with less inequality.

What I think should be somewhat clear from my examples is that what is important is not the inequality between the rich and poor, but rather the condition of the poor themselves. If we are concerned primarily about poverty, then what we want is a society where the poor are getting better off the fastest. What happens to the rich should be mostly irrelevant. While the redistribution of wealth from the rich to the poor might sound like a way to fix the problems of inequality, in the long run, this ends up harming the poor more than it helps. In situations with attempted large scale redistribution, such as in the communist states or in other dictatorships (Zimbabwe comes to mind), the poor end up being worse off, eventually to the point where the system collapses, which hurts the poor the most.

As the saying about capitalism goes, a rising tide raises all boats. There are some objections to this from liberals who think that the system that we live in is pure free market capitalism, but there is no other system that I'm aware of that has led to a larger increase of the standard of living of the poor.

What are we entitled to?

This is the central question that pervades much of politics. Social Security, Medicare, Medicaid, Public Education, Health Care, Food Stamps, to name the big ones. These are examples of programs that most people seem to believe are important for the Government to run because we have a 'right' to them, or are 'entitled' to them. I argue that in general, we are not entitled to anything. To paraphrase Mark Twain, the world doesn't owe us. It was here first. The only exception that I can think of might be parents. Parents owe their children, since it wasn't the child's choice to be born. However, society does not owe anything to the parents just because they have a kid. It is the parents' responsibility to provide and raise their children, and no one else owes the kids that. How the parents do this, either by subsistence farming, or working, is up to them. This doesn't preclude charity or outside help, only that individuals are not obligated to help. If the parents want other people to help them, then they first have to do something of value for other peoples in the form of a job.

Fundamentally, all products and services that we consume are the result of human labor at some level. Everything that money can buy is fundamentally buying labor, from the labor used to mine or acquire the raw materials, the labor required to refine the materials into a useful form, to the labor required to build the final product. This means that if people are entitled to a 'living wage,' or a 'baseline' salary just for living, they are entitled to someone else's labor. This can only work in a society that is wealthy enough to provide the excess that is required to support those that consume more than they produce.

In a subsistence society, this is especially clear. If a society is barely supporting itself, then feeding someone who is not productive, and will not be productive means that other people have to go hungry, and possibly starve. If we were to reduce to the simplest case of two people on an island with no contact with the outside world, but enough food to sustain both of them, is either one entitled to the labor of the other? Suppose that it takes most of the day to find enough food for one person. What if one of them gets sick or injured? Is the other person required to feed and care for them, if it means that they will go hungry? I'll grant that it is certainly possible that there is a beneficial exchange that is possible. If one person takes care of the other while they are sick, it is more likely that the same will happen if the situations are reversed, but there is no obligation to do so unless it has been previously agreed upon.

This previous agreement gets in to contracts and the ideas of contract law, which I think makes sense to be a different post, but I think that all that is necessary for now is that if you agree to give someone something in exchange for another good or service, then you are more or less obligated to give that good or service. But barring that, there is no obligation and no entitlement to anything.