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I would agree that most are errors of omission. The most obvious one is that he completely ignores the problem of collective action, for example when he talks a

I would agree that most are errors of omission. The most obvious one is that he completely ignores the problem of collective action, for example when he talks about taxes. There are certain problems that private enterprise simply cannot solve for game theoretical reasons. A nice example is in this recent thread on HN on bicycle lanes: http://news.ycombinator.com/item?id=3149320 http://news.ycombinator.com/item?id=3149320 Here is an example of a different type of error, from the part on Minimum Wages: The first thing that happens, for example, when a law is passed that no one shall be paid less than $106 for a forty-hour week is that no one who is not worth $106 a week to an employer will be employed at all. There is plenty of empirical evidence against this from countries that actually have introduced minimum wage laws. Even worse, not having minimum wage laws perverts economic incentives. Here's an example. In Germany, people earning below a certain amount receive a basic subsidy from the state. It is a pitiful amount, but it allows them to pay the rent and survive. The problem is that this causes low-end employers to consciously pay their workers a ridiculously low amount, fully aware of the fact that their employees will receive additional income from the state. In effect, the government subsidizes employers that practice wage dumping. That is clearly inefficient. Now people react to this in two different ways. One camp says that the government subsidy should be abolished. But the latter is short-sighted, because society always pays somehow when people do not earn enough to make a living. Ideally, they pay via social safety nets, but if such nets do not exist, society pays in the form of increased black market employment and crime. The other camp (me included) argues that this abuse of the system should be prevented via a minimum wage law. That would cut into the employers profits, but there's nothing wrong with that. It also wouldn't eliminate jobs, because we're talking about low-end sectors where demand is highly inelastic anyway, such as cleaning services. Hotels will still pay for the cleaning service, even if it costs them twice as much.

dantheman 15y ago
I don't think that it's an error, in fact the argument he is making about minimum wage exists in a world without a state provided safety net. The main argument he is making in the book is that economics is a complex system and is hard, and that we always need to look at the forgotten man. Those that think policy decisions are simple - have a minimum wage or not - will cause a whole host of unintended side effects as your post describes.
jeffdavis 15y ago
"There is plenty of empirical evidence against this from countries that actually have introduced minimum wage laws." So you are saying that an employer would hire someone that only produces $96 worth of value per week for $106 per week?
- notahacker 15y ago
  People that only produce $96 of value a week would probably have been unemployed anyway; because theres no shortage of labour at the bottom end of the market companies would have been able to hire better staff at $96 per hour before the minimum wage, who would be worth retaining at $106 per hour. The correlation between wages and employee productivity is pretty loose.
  - jeffdavis 15y ago
    So you are arguing that there's nobody who produces a value of $1 - $105 per week? I would expect the correlation between wages and production to be much stronger at the low-income levels and for hourly positions. Regardless, it's what the employer thinks the employee is worth (or will be worth). If the employer doesn't expect at least $106+X dollars of productivity, they won't hire at $106. This is pretty basic microeconomics; supply and demand. Even if you're right that the first employee nets more than $106, that might not be true for the tenth one. The demand curve for employees is downward-sloping, right?
    - notahacker 15y ago
      I'd expect the correlation to be significantly less strong at the lower end of the market, particularly in a service-based economy like the US; worker productivity has a pretty minimal impact on number of burgers flipped per hour. They're minimum wage jobs because virtually anyone can do them, but unfortunately for people in low wage brackets there isn't an infinitude of unskilled employment opportunities to go around. It's pretty basic microeconomics that labour markets don't clear. Sure, intuitively you'd expect some very marginal employment opportunities to disappear, but the empirical evidence shows that companies prefer other options; raising prices, cutting profits or non-labour costs, increasing worker productivity where possible adjusting opening hours etc. so the effect on net unemployment is often minimal or non-existent.
dpatru 15y ago
> this abuse of the system should be prevented via a minimum wage law. That would cut into the employers profits, but there's nothing wrong with that. Hazlitt uses the whole book to drive home the most important lesson about economics, and that is: One must consider not just what is seen, but also unseen. Let's apply this to the case for minimum wage for hotel workers. Sure, the minimum wage helps hotel workers. Sure, hotels will still pay for cleaning services. That is all seen. That is the naive analysis. What is unseen? What is the unseen result of a higher-than-market hotel-cleaning wage? Workers who would best be employed in other tasks will now be employed cleaning hotels. Other goods and services that are more valued won't be produced because the people who would produce them are busy cleaning hotels. In general, the low-productivity employment sector will be made less efficient, because of lack of price information. For example, suppose the minimum wage is $7/hr, and the market wage for hotel cleaning is $5/hr while the market wage for cooking is $6/hr. A worker who could do either should, in a free market, choose cooking, because it is more valued (hence the higher wage). But a minimum wage hides this information. So if the worker chooses cleaning, the economy will be $1/hour poorer than it would otherwise have been. Also, the sector of the economy that employs large number of low-wage workers will become comparatively less efficient because of the high-than-market wage costs. This will encourage capital to flow out of this sector and into other sectors. The unseen effect of the minimum wage is a missing low-wage industry. This was made very obvious when the US Congress raised the minimum wage on the small pacific island of American Samoa. The result was that major employer on the island left the island and instead built a more mechanized plant in the state of Georgia. A lot of low-tech, low-wage jobs in American Samoa disappeared and were replaced by a lot fewer, higher-wage jobs in Georgia. This was the direct and visible effect, but over time, the unseen effect is the same: industries and jobs that won't exist because the minimum wage makes them illegal.
- nhaehnle 15y ago
  In general, the low-productivity employment sector will be made less efficient, because of lack of price information. For example, suppose the minimum wage is $7/hr, and the market wage for hotel cleaning is $5/hr while the market wage for cooking is $6/hr. A worker who could do either should, in a free market, choose cooking, because it is more valued (hence the higher wage). But a minimum wage hides this information. So if the worker choose cleaning, the economy will be $1/hour poorer than it would otherwise have been. In this particular scenario, do you believe that a person chooses between cleaning (an unskilled job) to cooking (a skilled job) based on the wage that is paid? Either the person is unskilled; then they have no choice. Or they have the skill to be a cook; then they presumably have the skill because they like being a cook, and will certainly prefer to do that over cleaning even if both are paid the same (in fact, they will probably prefer cooking even if it were slightly higher paid; wages only start coming into consideration when the difference is larger). Now you might argue that people will be deterred from even learning to become a cook in the situation you have outlined. That is doubtful, because again, price plays a much smaller role than you might think. But even if it were the case, the wages of cooks would eventually rise above the minimum wage if demand for cooks is high enough. It is a mistake to assume that there is always a God-given market price that is the "right" price for goods to have. The development of prices is always a negotiation within society. In the case of the minimum wage, society says that labour should have at least a certain price, because that is the morally right thing (and also avoids certain externalities that opponents of the minimum wage like to ignore). If society agrees on that, then minimum wage is efficient by definition.
ctdonath 15y ago
It is not an error, it is just a manifestation of the same point consequential to a different situation. In the US, the subsidized wage-dumping just turns into 100% subsidy with 0 work. Minimum wage laws in effect outlaw functional poverty. We hear much of shady businesses who hire those who work under-the-table for less than minimum wage, and in the next breath decry high above-the-table unemployment. The work is there, the laborers are there, but alas it is illegal to pay what some jobs are worth. Another consequence, little noted, is that minimum wage laws in effect create a "mundane labor" based currency. Instead of fixing a dollar to a weight of gold, or floating the currency outright, the value of a dollar is fixed to ~8.3 minutes of menial work. A gallon of gas thus costs about a half-hour of work ... and regardless of what minimum wage is, supply-and-demand realities mean that a gallon of gas[1] will _always_ cost about a half-hour of menial work; raise the minimum wage by fiat, and the price at the pump will rise to match. Sub-minimum-wage living becomes legally unviable precisely because low-end prices rise to match the absence of legal sub-minimum-wage incomes - at which point the government becomes obligated to confiscate and redistribute wealth to rescue those who are drowned by the consequences of minimum-wage laws. [1] - assuming oil itself is in consistent supply and consistent demand.
- dpatru 15y ago
  > Sub-minimum-wage living becomes legally unviable precisely because low-end prices rise to match the absence of legal sub-minimum-wage incomes - at which point the government becomes obligated to confiscate and redistribute wealth to rescue those who are drowned by the consequences of minimum-wage laws. Excellent point. The minimum wage creates a need for welfare for the unskilled because it makes it outlaws their jobs and it raises prices on them.
  - Joeri 15y ago
    Prices are not set by the cost of production but by supply and demand. In a healthy market the cost increase of a wage minimum cannot affect the prices, it may only make it uneconomical to produce certain goods (but this almost never happens because margins aren't usually that tight). What the minimum wage actually amounts to is wealth redistribution, from the holder of capital to the provider of labor. It doesn't change the amount of goods and services sold, it just affects who is buying them. Like all social redistribution schemes, it can be good if wealth isn't distributed equally enough for healthy market interaction, and harmful if wealth is distributed too equally for market incentives to exist.
anamax 15y ago
> The first thing that happens, for example, when a law is passed that no one shall be paid less than $106 for a forty-hour week is that no one who is not worth $106 a week to an employer will be employed at all. > There is plenty of empirical evidence against this from countries that actually have introduced minimum wage laws. Few employers run at a loss for very long. So, if they pay $y for something that is only worth $x, where y > x, they make up the difference somewhere. The four options are the salary for other employees, money for supplies, profits, and price of goods/services sold. Customers will walk if they're not getting value. Service providers will sell to the highest bidder. Other employees will go elsewhere, but not all employees are portable. That leaves stranded employees and employers.

dantheman 15y ago

I don't think that it's an error, in fact the argument he is making about minimum wage exists in a world without a state provided safety net. The main argument he is making in the book is that economics is a complex system and is hard, and that we always need to look at the forgotten man. Those that think policy decisions are simple - have a minimum wage or not - will cause a whole host of unintended side effects as your post describes.

jeffdavis 15y ago

"There is plenty of empirical evidence against this from countries that actually have introduced minimum wage laws." So you are saying that an employer would hire someone that only produces $96 worth of value per week for $106 per week?

notahacker 15y ago
People that only produce $96 of value a week would probably have been unemployed anyway; because theres no shortage of labour at the bottom end of the market companies would have been able to hire better staff at $96 per hour before the minimum wage, who would be worth retaining at $106 per hour. The correlation between wages and employee productivity is pretty loose.
- jeffdavis 15y ago
  So you are arguing that there's nobody who produces a value of $1 - $105 per week? I would expect the correlation between wages and production to be much stronger at the low-income levels and for hourly positions. Regardless, it's what the employer thinks the employee is worth (or will be worth). If the employer doesn't expect at least $106+X dollars of productivity, they won't hire at $106. This is pretty basic microeconomics; supply and demand. Even if you're right that the first employee nets more than $106, that might not be true for the tenth one. The demand curve for employees is downward-sloping, right?
  - notahacker 15y ago
    I'd expect the correlation to be significantly less strong at the lower end of the market, particularly in a service-based economy like the US; worker productivity has a pretty minimal impact on number of burgers flipped per hour. They're minimum wage jobs because virtually anyone can do them, but unfortunately for people in low wage brackets there isn't an infinitude of unskilled employment opportunities to go around. It's pretty basic microeconomics that labour markets don't clear. Sure, intuitively you'd expect some very marginal employment opportunities to disappear, but the empirical evidence shows that companies prefer other options; raising prices, cutting profits or non-labour costs, increasing worker productivity where possible adjusting opening hours etc. so the effect on net unemployment is often minimal or non-existent.

dpatru 15y ago

> this abuse of the system should be prevented via a minimum wage law. That would cut into the employers profits, but there's nothing wrong with that. Hazlitt uses the whole book to drive home the most important lesson about economics, and that is: One must consider not just what is seen, but also unseen. Let's apply this to the case for minimum wage for hotel workers. Sure, the minimum wage helps hotel workers. Sure, hotels will still pay for cleaning services. That is all seen. That is the naive analysis. What is unseen? What is the unseen result of a higher-than-market hotel-cleaning wage? Workers who would best be employed in other tasks will now be employed cleaning hotels. Other goods and services that are more valued won't be produced because the people who would produce them are busy cleaning hotels. In general, the low-productivity employment sector will be made less efficient, because of lack of price information. For example, suppose the minimum wage is $7/hr, and the market wage for hotel cleaning is $5/hr while the market wage for cooking is $6/hr. A worker who could do either should, in a free market, choose cooking, because it is more valued (hence the higher wage). But a minimum wage hides this information. So if the worker chooses cleaning, the economy will be $1/hour poorer than it would otherwise have been. Also, the sector of the economy that employs large number of low-wage workers will become comparatively less efficient because of the high-than-market wage costs. This will encourage capital to flow out of this sector and into other sectors. The unseen effect of the minimum wage is a missing low-wage industry. This was made very obvious when the US Congress raised the minimum wage on the small pacific island of American Samoa. The result was that major employer on the island left the island and instead built a more mechanized plant in the state of Georgia. A lot of low-tech, low-wage jobs in American Samoa disappeared and were replaced by a lot fewer, higher-wage jobs in Georgia. This was the direct and visible effect, but over time, the unseen effect is the same: industries and jobs that won't exist because the minimum wage makes them illegal.

nhaehnle 15y ago
In general, the low-productivity employment sector will be made less efficient, because of lack of price information. For example, suppose the minimum wage is $7/hr, and the market wage for hotel cleaning is $5/hr while the market wage for cooking is $6/hr. A worker who could do either should, in a free market, choose cooking, because it is more valued (hence the higher wage). But a minimum wage hides this information. So if the worker choose cleaning, the economy will be $1/hour poorer than it would otherwise have been. In this particular scenario, do you believe that a person chooses between cleaning (an unskilled job) to cooking (a skilled job) based on the wage that is paid? Either the person is unskilled; then they have no choice. Or they have the skill to be a cook; then they presumably have the skill because they like being a cook, and will certainly prefer to do that over cleaning even if both are paid the same (in fact, they will probably prefer cooking even if it were slightly higher paid; wages only start coming into consideration when the difference is larger). Now you might argue that people will be deterred from even learning to become a cook in the situation you have outlined. That is doubtful, because again, price plays a much smaller role than you might think. But even if it were the case, the wages of cooks would eventually rise above the minimum wage if demand for cooks is high enough. It is a mistake to assume that there is always a God-given market price that is the "right" price for goods to have. The development of prices is always a negotiation within society. In the case of the minimum wage, society says that labour should have at least a certain price, because that is the morally right thing (and also avoids certain externalities that opponents of the minimum wage like to ignore). If society agrees on that, then minimum wage is efficient by definition.

ctdonath 15y ago

It is not an error, it is just a manifestation of the same point consequential to a different situation. In the US, the subsidized wage-dumping just turns into 100% subsidy with 0 work. Minimum wage laws in effect outlaw functional poverty. We hear much of shady businesses who hire those who work under-the-table for less than minimum wage, and in the next breath decry high above-the-table unemployment. The work is there, the laborers are there, but alas it is illegal to pay what some jobs are worth. Another consequence, little noted, is that minimum wage laws in effect create a "mundane labor" based currency. Instead of fixing a dollar to a weight of gold, or floating the currency outright, the value of a dollar is fixed to ~8.3 minutes of menial work. A gallon of gas thus costs about a half-hour of work ... and regardless of what minimum wage is, supply-and-demand realities mean that a gallon of gas[1] will _always_ cost about a half-hour of menial work; raise the minimum wage by fiat, and the price at the pump will rise to match. Sub-minimum-wage living becomes legally unviable precisely because low-end prices rise to match the absence of legal sub-minimum-wage incomes - at which point the government becomes obligated to confiscate and redistribute wealth to rescue those who are drowned by the consequences of minimum-wage laws. [1] - assuming oil itself is in consistent supply and consistent demand.

dpatru 15y ago
> Sub-minimum-wage living becomes legally unviable precisely because low-end prices rise to match the absence of legal sub-minimum-wage incomes - at which point the government becomes obligated to confiscate and redistribute wealth to rescue those who are drowned by the consequences of minimum-wage laws. Excellent point. The minimum wage creates a need for welfare for the unskilled because it makes it outlaws their jobs and it raises prices on them.
- Joeri 15y ago
  Prices are not set by the cost of production but by supply and demand. In a healthy market the cost increase of a wage minimum cannot affect the prices, it may only make it uneconomical to produce certain goods (but this almost never happens because margins aren't usually that tight). What the minimum wage actually amounts to is wealth redistribution, from the holder of capital to the provider of labor. It doesn't change the amount of goods and services sold, it just affects who is buying them. Like all social redistribution schemes, it can be good if wealth isn't distributed equally enough for healthy market interaction, and harmful if wealth is distributed too equally for market incentives to exist.

anamax 15y ago

> The first thing that happens, for example, when a law is passed that no one shall be paid less than $106 for a forty-hour week is that no one who is not worth $106 a week to an employer will be employed at all. > There is plenty of empirical evidence against this from countries that actually have introduced minimum wage laws. Few employers run at a loss for very long. So, if they pay $y for something that is only worth $x, where y > x, they make up the difference somewhere. The four options are the salary for other employees, money for supplies, profits, and price of goods/services sold. Customers will walk if they're not getting value. Service providers will sell to the highest bidder. Other employees will go elsewhere, but not all employees are portable. That leaves stranded employees and employers.