David R. Henderson  

Krugman versus Krugman on Labor versus Butter

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In my recent post "Krugman's Priceless Economics," I criticized a recent column by Paul Krugman in which he argued against thinking about labor markets in terms of supply and demand. I quoted the following from his article:

Specifically, this view [that wages are set by supply and demand] implies that any attempt to push up wages will either fail or have bad consequences. Setting a minimum wage, it's claimed, will reduce employment and create a labor surplus, the same way attempts to put floors under the prices of agricultural commodities used to lead to butter mountains, wine lakes and so on. Pressuring employers to pay more, or encouraging workers to organize into unions, will have the same effect.

But labor economists have long questioned this view. Soylent Green -- I mean, the labor force -- is people. And because workers are people, wages are not, in fact, like the price of butter, and how much workers are paid depends as much on social forces and political power as it does on simple supply and demand.


I had no reason to wonder why he decided to use butter as an example of a good for which price floors create a surplus. I assumed that it occurred to him off the top of his head or that he had seen it in a past economics lecture or economics textbook.

Well, it turns out that he did see it in an economics textbook. In fact, he (or his co-author) wrote it in an economics textbook. The example is from Microeconomics by Paul Krugman and Robin Wells.

Not only did Krugman and Wells write the example of price floors creating surpluses but, more important, given his current view, they used that example to explain how a price floor called the minimum wage creates a surplus of labor, with this important difference: whereas governments buy the surplus butter, no government buys the surplus labor.

And this textbook is not from the 1990s, when Krugman often used standard price theory to explain the problems with government interventions. This textbook is from 2009.

HT to Robert Murphy, who himself hat-tipped Jeremy Hammond.

Now that I'm hat-tipping Robert Murphy, I should point out that he makes an important point about the absurdity of using private voluntary behavior, as Krugman did, to argue from government imposing that behavior economy wide. A quote from his piece:

[I]t is a very strange argument to say, as Krugman does, that since we observe Walmart raising wages voluntarily, that therefore having the government force other firms to do so involuntarily won't cause any major problems.

Look, Target just announced that it will lay off thousands of workers as part of a package to save $2 billion over two years. So should Stephen Moore write an op ed arguing that the government should require all existing firms to lay off thousands of workers, because the possible downsides are obviously smaller than what conventional wisdom suggests?


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COMMENTS (17 to date)
Nick writes:

Am I supposed to interpret from your title that this is some sort of 'gotcha'? All this tells me is that Paul Krugman is intellectually honest and willing to present the standard argument that in competitive markets, price floors create surpluses, and that if the labor market is competitive, we should expect a reduction in employment.

I doubt Paul Krugman disagrees with that that reasoning, rather, he questions the premise that the labor market is competitive. If you want to learn more about why he questions that premise and what he feels the correct model should be, I assume you can find this information in his textbook or his writings for the NYT.

Otherwise, you should be praising him for intellectual honesty in that he is willing to accurately and fairly present the logic behind a view he disagrees with. Presenting this as some sort of 'gotcha' reflects worse on you than on him.

Andrew_FL writes:

Why are Krugman's defenders pretending his point has anything at all to do with monopsony? He literally said supply and demand don't apply to labor.

I still want to know why wages rising relative to prices could cause involuntary unemployment if that's the case, by the way.

Bob Murphy writes:

Nick, are you being serious? Suppose instead Krugman had written, "A lot of conservatives think you should analyze the minimum wage the same way you do a price floor on butter. Just like price floors on butter lead to 'butter mountains,' so too will the minimum wage lead to unemployment. Now I have to admit, there are some economists--like me--who wrote it up just like that in our textbooks to teach people how to think about economics. But these conservatives should have realized that the exact opposite of what I said in my textbook is true. Rather than read my textbook from 2008, instead they should have read econometric journal articles that came out earlier."

If Krugman had written it that way, would he have been intellectually DIShonest? Because that is a totally different article from the one he wrote, and you're saying the one he wrote showed his intellectual honesty.

Aaron Zierman writes:

The price of butter may not matter as much as where your bread is buttered.

David R. Henderson writes:

@Nick,
Am I supposed to interpret from your title that this is some sort of 'gotcha'?
Yes. Plus what Bob Murphy said above.

magilson writes:
no government buys the surplus labor.

Yes, it does.

http://www.nber.org/papers/w20884

Nick writes:

@Bob Murphy

I see a fundamental difference between teaching how to think about economics, and teaching a set of facts about how the economy actually works. Note that you conflate the two when you say "...our textbooks to teach people how to think about economics" and "...these conservatives should have realized that the exact opposite of what I said in my textbook is true".

The aim of introductory economics textbooks is generally not to teach students how the economy actually works, rather, it is to teach a way of thinking that we believe is useful in reasoning about the economy.

To take a less partisan example, we often motivate demand curves by arguing that intuitively they should slope downward. Then, later on, we complicate the story by thinking about decomposing demand into income and substitution effects, and then we go back and say "Ah, look, turns out the story was more complicated than we thought -- demand curves might slope upward for certain types of goods."

Would it be at all appropriate to criticize this textbook for contradicting itself on the question of the slope of demand curves? Of course not -- the point of the textbook wasn't to teach that it's some fundamental truth that demand curves slope upward, the point of the textbook is to demonstrate a way of reasoning about the question 'What happens to the amount people want to buy if the price of a good increases?'

The vast majority of introductory economics textbooks introduce the topic of labor markets in this manner -- first, we analyse labor markets using the model of perfect competition, then, we introduce complications like monopsony. More advanced textbooks may introduce models of oligopoly, or search and matching models -- but you need to learn the basics of supply and demand before you can understand why more complicated models are required!

Do you seriously believe that Paul Krugman holds such a major cognitive dissonance in his head? Doesn't it seem somewhat more likely he's capable of writing a textbook that presents a mainstream view, even while he disagrees with that view?

We should applaud his ability to write a non-biased textbook, not try to use it as some sort of gotcha.

Mr. Econotarian writes:

Dishonest: Minimum wages never cause changes in employment

Honest: A number of small studies have been unclear to the change in total employment due to relatively small changes in the minimum wage. These studies were not capable of measuring the change of who is employed (i.e. fewer less competent employees, more competent ones entering the labor force), and clearly a high enough minimum wage will cause a decrease in total employment.

Mark Bahner writes:

Hi Nick,

Amazing! Your take on this blows my mind. Here's what Paul Krugman said:

Some background: Conservatives — with the backing, I have to admit, of many economists — normally argue that the market for labor is like the market for anything else..."

...and then:

Setting a minimum wage, it’s claimed, will reduce employment and create a labor surplus, the same way attempts to put floors under the prices of agricultural commodities used to lead to butter mountains, wine lakes and so on...

Why use the phrase "it's claimed," except to be thoroughly misleading?

The use of the phrase, "it's claimed" makes it seem like he never had anything to do with correlating the minimum wage to "butter mountains, wine lakes, and so on."

But he's the guy who correlated the minimum wage to "butter mountains"! Don't you think that's a fundamentally misleading method of presentation?

Bob Murphy writes:

Nick,

Here's what Krugman wrote in a 1998 book review:

"… what the living wage is really about is not living standards, or even economics, but morality. Its advocates are basically opposed to the idea that wages are a market price–determined by supply and demand, the same as the price of apples or coal. And it is for that reason, rather than the practical details, that the broader political movement of which the demand for a living wage is the leading edge is ultimately doomed to failure: For the amorality of the market economy is part of its essence, and cannot be legislated away."

So it's not just his textbooks, but also his book reviews, where Krugman himself advances views on labor markets that he then criticizes non-economist conservatives for believing?

Why should we trust what Krugman writes in op eds? Maybe he's saying the opposite of what he believes there, too?

Nick writes:

Bob Murphy,

Looks like Krugman in 1998 held some different views from Krugman of 2015. Is that a surprise?

If this post had been about Krugman (1998) v. Krugman (2015), I wouldn't have posted a comment. But it wasn't, it was about his introductory economics textbook, and as I've already said, suggesting that he's somehow teaching material that he then repudiates in the NYT is both a misunderstanding of the teaching process, and an unfair criticism of someone who is guilty of nothing more than writing an introductory economics textbook that presents the mainstream rationale for not having minimum wages and does so in a fair and unbiased manner.

Nick writes:

@Mark Bahner

Actually, Paul Krugman was not the one to originate the argument that price floors in a competitive labor market may be counterproductive. That idea dates back at least to Alfred Marshall and probably much further.

It's important that students learn this idea, and so Krugman presents it in a fair and unbiased manner. It's also important that they eventually recognize that it may be that labor markets are not competitive and that a minimum wage may increase employment.

Charley Hooper writes:

Nick,

You've just given Krugman a "get out of jail free" card and you've dramatically reduced the value of all economic writing.

People can and should be held to the words they write. If they write something they don't actually believe, then we, as readers, don't know that they don't believe it unless they specifically tell us.

So if I write that the world is flat and then I later write that it is spherical, readers have every right to think that I've been inconsistent. If I've changed my mind or given a more nuanced answer, I should explain that change. Absent that explanation, I've been inconsistent.

But, it is entirely unhelpful for someone, like yourself, to speculate later that my "flat earth" statement was simply reflecting the views of those who think the earth is flat and I really thought all along that the world was spherical.

How can you know what I'm really thinking unless you've personally talked to me or unless you've read my writing? But, as you point out, my writing might not agree with my actual thinking, and my speaking might not even agree with my thinking, so you're left with nothing but speculation upon speculation. In other words, you've destroyed the value in economic writing. Is that your objective?

Dear David and Bob,

Thanks for the hat-tip! I see from his Mises piece Bob stumbled across an earlier article I'd written in a google search. I actually published a post on Krugman's recent Walmart article a couple days ago listing 4 different reasons why his argument why the minimum raise should be raised is laughable.

Please check it out!

http://www.jeremyrhammond.com/2015/03/03/paul-krugmans-laughable-argument-that-wages-arent-determined-by-the-law-of-supply-and-demand/

Four is not an exhaustive list, of course. Just the ones that most immediately jumped out at me.

Peter Close writes:

Your "whereas governments buy the surplus butter, no government buys the surplus labor". Err? Yes they do - or at least they pick up the tab through benefits - at least in the UK; maybe not so much in US!

Also, in my original post that Bob linked to, I did credit someone else with the find about Krugman's own textbooks.

So I should add the hat-tip to Ben Powell:

http://www.huffingtonpost.com/ben-powell/krugman-minimum-wage_b_4428174.html

Paul writes:

If you really want to critique Krugman's hypocrisy, you should check out his text's chapter on tax incidence, where we explains that workers bear the burden of the payroll tax because labor supply is almost perfectly inelastic and labor demand elasticity is thought to be around either -5.0 or -3.0, I can't remember which off the top of my head. But he certainly did not say it was 0.

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