When it comes to matters of economic analysis, I rarely disagree with my friend Walter Block.
Prof. Block has published more peer-reviewed articles than anybody I have ever personally known: at present, over 500 of them. It usually doesn't pay to argue with him, although I once debated him on the economic wisdom of seeking a Ph.D. degree in economics. But that is not a theoretical issue. It is a dollars and cents issue.
Prof. Block recently took on a pair of University of Chicago professors. He says that they do not understand basic economics. Here, I discuss their arguments and his. That's because I want my readers to understand basic economics.
Here is how Prof. Block began.
Saul Levmore and Martha Nussbaum, two professors at the University of Chicago Law School, have written an article in the Wall Street Journal entitled “Let’s Agree on an Age to Retire; Current antidiscrimination law hurts businesses and both younger and older employees” (September 23-24, 2017, p. C4;). These two professors should be ashamed of themselves for writing this bit of economic illiteracy. The University of Chicago Law School, which prides itself on its economic sophistication, should immediately fire them for violating that characteristic. And the Wall Street Journal, which also claims some economic sophistication, and, sometimes even achieves it, should greatly regret publishing this contribution to economic fallacy.Wherein lies the blunder of these two authors? They write as follows: “In the U.S. after many years of a declining retirement age, the average worker is now retiring later, which means that there are fewer jobs for young people.”
Fewer jobs? Give me a break. The number of jobs is limited, only, by scarcity. As long as people want more goods and services than they already have, which pretty much means forever, given human beings in their present incarnation, there will be no limit, no limit whatsoever, on the number of jobs. Lookit, Profs. Levmore and Nussbaum: when the automobile replaced the horse and buggy, there were many fewer jobs in the latter industry. Any problem with that? Of course not. Ditto for when the computer replaced the typewriter and the cell phone the old fashioned camera. The number of jobs is not a fixed amount, such that if some people take more of them (the elderly in this case), there will be fewer for others (youngsters). Rather, the number of employment opportunities is as flexible as can be. No one can “hog up” jobs, and limit them for other people, at least not in any economy with even a vestige of freedom.
Block is arguing that jobs are limited by capital investment. That is to say, jobs are limited by scarcity. This is accurate. Nevertheless, as economists, we should look to see if there are impediments in the development of capital. We should seek to discover obstructions to the increase of capital, and also obstructions in the allocation of capital.
Here is my conclusion: jobs are also limited by government regulations that interfere with the creation of capital, the pricing of capital, the pricing of labor services, and the costs associated with breaking the law.
The two University of Chicago professors are making a similar assessment. They are talking about the economic effects of government regulation into the labor markets. This is a reasonable approach to the question of the economic effects of laws prohibiting a specific kind of age discrimination: against older workers.
Are we to say that anti-discrimination laws have no economic effects? Obviously, Prof. Block thinks they do. He is an anarcho-capitalist. He doesn't want the state to do anything, other than go away permanently. So, it is legitimate to ask this question: "What are the negative economic effects of a particular government regulation?" There have to be some negative effects. Somebody has to lose. So, we are back to that age-old question: "Who wins, and who loses?"
The two professors at the University of Chicago are trying to identify the negative consequences of a particular form of federal regulation. There have to be some negative consequences associated with this legislation. So, what are they?
I think the two professors have identified such a negative consequence. The law keeps older people on the job longer than they would otherwise have remained on the job. How is this possible? Because the legislation forbids employers from replacing older employees with younger employees. If an employer attempts to do this, he becomes subject to state and federal investigations, lawsuits, penalties, and all the rest of it. In other words, the legislation creates fear on the part of employers. I can hardly blame employers.
If the Equal Opportunities Employment Commission, which enforces anti-discrimination regulations, is convinced that a particular employer is enforcing age discrimination, such as a freeze on raises for older workers, the employer will be investigated. He cannot legally use methods that seem to be legal under other circumstances in order to discriminate against older workers. In other words, the employer and his employees of all ages are not allowed to work out mutually beneficial arrangements.
In short, economic policies that apply to a competitive free market are not appropriate to economic conditions that are produced by government intervention. Costs and benefits are different. Risks and rewards are different. Negative sanctions are different. The government imposes negative sanctions, not customers. The regulation interferes with customer authority. The customer operates in terms of high bid wins. But, in this case, the principle of high bid wins does not apply. The principle of negative sanctions imposed by the government applies.
Here is another howler of theirs: “In most workplaces, wages rise with seniority, but productivity does not.” Whoa. We have a law in economics to the effect that wages tend to equal marginal revenue product, or productivity. If a gap forms between the two, market forces tend to equalize them once again. Possibly, what Profs. Levmore and Nussbaum say in this regard can occur when government is the employer, but certainly not in the private sector. If wages exceed productivity, losses will be registered, and bankruptcy is sure to follow.
I respond with the same line of reasoning. Employers and employees are not legally allowed to establish wages that are consistent with marginal productivity of workers. Any attempt on the part of an employer to work out an arrangement with either older workers or younger workers that would enable younger workers to be paid more than older workers will be met by an investigation by the EEOC. The employer will have to prove that the company's wage policies are not a hidden form of age discrimination. It is not easy to prove this. That is because federal regulatory agencies supply the judges to decide whether the agencies are correct or not. This is the curse of administrative law in the modern world. Administrative law is the greatest single threat to our liberties. That point was made in 1983 by Harvard legal historian, Harold Berman, in the Introduction to his magnificent book, Law and Revolution.
Let me give a real-world example. A friend of mine was in charge of a tax-exempt libertarian research organization. There was a woman on the staff who was totally incompetent. I know this for a fact; I once worked for the organization. I remember her well. She had ingratiated herself with the head of the organization, and she was a full-time cook. She was a lousy cook. She made a good plate of spaghetti, but that was it. She should have been fired years earlier. I remember one of the long-term employee's comments to me on my first day on the job. He was drinking a cup of coffee. He asked me this: "Do you drink coffee?" I answered as follows: "I don't like coffee." He immediately responded: "Well, you might like this."
After I left the organization, the employer died. The man who replaced me moved up to run the organization administratively. He fired the woman. She immediately sued the organization for age discrimination. He had to hire her back to do light housework. She continued to draw a salary far above her productivity. As far as I was concerned, if she had been paid minimum wage, she was being paid too much.
Now grab ahold of this one: “… employers hesitate to hire middle-aged workers, who may stay on the job long after their pay has exceeded their productivity.” Here, these authors double down on their ignorance of the fact that when wages are higher than productivity, profits take a sock in the chops. No, no, no, employers who stay in business do not long pay more to their employees than the contribution of the latter. Instead, they fire them. Or, lower their wages! Often, this occurs by giving them no raises, and allowing inflation to eat away at the real value of their pay packets, but when productivity falls, so do wages, or bankruptcy ensues. Reading these University of Chicago Professors, one could be forgiven for thinking that the unemployment rate for “middle-aged workers” is far higher than that for youngsters. But the very opposite is the case (due in large part to the fact that minimum wages are set above the productivity levels of young employees, but below that of the much maligned “middle-aged workers.”)
Employers pay lots of employees more than they are worth whenever this is the government's condition for remaining in business. For example, employers pay unionized workers way above what those workers would be paid in a competitive market. This is the result of federal legislation interfering with market pricing. The result has been the steady decline of unionized labor, and the simultaneous development of new businesses in states that do not force employers to hire members of trade unions.
Employers make their economic decisions at the margin, just as we all do. We make individual decisions in terms of expected benefits and expected costs. This understanding of human decision-making is basic to modern economic theory. This analytical approach was pioneered by the first Austrian School economist, Carl Menger, in 1871. The idea was developed in extensive detail by his disciple and colleague, Eugen von Bohm-Bawerk. Employers look at expected revenues, and they try to limit their expenditures on factors of production. When the government intervenes to force a subsidy to certain factors of production, employers may continue to stay in business under these terms of exchange, as long as the business remains profitable. It will not be as profitable as it might otherwise have been, had there been no government interference, but the employers keep the doors open. They are still ahead of the game at the end of the period of production.
So, I am inclined to believe the assessment offered by the two University of Chicago professors. There have to be some negative consequences. There has to be some loss of efficiency. Whenever you see a government regulation, look to see who is favored. There will always be somebody who is discriminated against. If the government imposes laws against age discrimination, by the very nature of the enforcement of the laws, the government imposes wage discrimination against younger workers. That seems to me to be the logic of economic analysis, given the existence of a specific form of government interference into the labor markets. That is what the two University of Chicago professors were trying to deal with, and I think their analysis is correct.
The federal government is subsidizing older workers. Older workers are taking advantage of this interference in free market transactions. In other words, older workers are responding predictably to economic incentives. The government is telling employers that they dare not fire older workers. The government is also telling employers that they dare not pay wages in such a way that older workers might be persuaded to quit. In other words, the federal legislation is accomplishing exactly what it intended to accomplish: to subsidize older workers. Of course, the government cannot get something for nothing. What it gets is discrimination against younger workers. But this, in the words of Bastiat, is the thing not seen. The public sees the benefits to older workers. The public does not see the costs imposed on younger workers. This is the ideal form of government regulation. The benefits are visible politically; the costs are not. This is why we have ever-increasing quantities of economic interference with the market. Younger workers are not given the raises. They are not given promotions that they otherwise would have received, had there been no federal intervention into the labor markets.
CONCLUSIONS
In issues of economic analysis, my advice is clear: follow the money. If money is flowing in one direction, try to figure out why. In this case, the why should be obvious: government intervention into the labor markets. There are winners: older workers who are paid more than a free market would have enabled employers to pay them. Therefore, we need to look for the losers. The two University of Chicago professors have identified the losers. I agree with their assessment. Younger workers are being penalized by federal laws against age discrimination. The age discrimination that is prohibited is discrimination favoring older workers who are being paid more than their economic output would otherwise enable them to perceive. Therefore, we need to look for the losers. I think the two University of Chicago professors have identified the losers: younger workers.
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