The Economics of Power

Krugman recently had an editorial in the NYT talking about the decision by Walmart to raise wages above the legislatively mandated minimum wage.  He took this as a signal that raising the minimum wage is not as devastating or intractable as many would have you believe.  His arguments are roughly that the literature for the most part shows no disemployment effects from raising the minimum wage, that there are efficiency benefits from raising wages (Walmart actually claims this as the reason for the wage hike) and finally that Walmart’s move shows that forces beyond typical supply and demand from market competition are determining wages.  That is, Walmart could obviously pay their workers more and did not do so for numerous reasons, mostly due to a choice open to them due their enormous economic power.  He claims that though the labor market is tight, it doesn’t appear to be tight enough to force Walmart’s hand.

Many conservative economists are mocking this piece, though in my mind it feels more like schoolyard jeering; “There goes Kruggie again boys, with his wild theories” rather than careful rebuttals.  Some claim the literature does show disemployment effects, which may be true though doesn’t square with my readings.  Some go as far as to quote Krugman’s own textbook that talks about the minimum wage reducing employment as if there is no difference between an intro textbook, a NYT editorial for mass consumption and economic reality.  Finally others are like “herp derp if you did that for everyone then there would be no effect except inflation” nevermind that most people are not earning minimum wage.  Furthermore, while classical analysis obviously shows that it reduces employment, on a macro level in a liquidity trap things might be different.  One person’s wages are demands for another person’s labor after all.

Now, when Krugman talks about supply and demand I believe he means the naive view that supply and demand are somehow exogenous variables and together they set an inviolate price.  You could take a more encompassing view, that I believe Krugman actually holds based on his writing, that supply and demand include social and political factors.  However, once you admit that you have to start dealing with all these social and political factors and can’t justify the market price as some divine price not to be questioned.  Walmart is so large that it can shift the demand curve for labor in its favor and many workers are so close to poverty that they supply more labor than they might otherwise do at some wage level.  Economic power is a real thing that affects supply and demand and ignoring it makes your analysis irrelevant.

The fact that corporations have any profits is explicit evidence that something other than pure competitive market forces is at play, that somehow economic power is allowing companies to extract rents.  Pharmaceutical companies make money off the ability to convince governments to enforce patents for them.  Defense companies do the same by making sure congresspeople feel the need to purchase the latest and greatest military technology.  Capitalism is crony capitalism and that is pretty much impossible to escape from because most markets wouldn’t exist without the government and regulation and cronyism is an immediate byproduct of such things. Maybe the problem is government.  However, the Silk Road story suggests that libertarian utopias are impossible and markets require some kind of social contract/government to function.

On an individual level, CEO pay is not, as classical economics assumes, equal to marginal product, just as it isn’t for the assembly line worker.  CEOs get paid more because they have convinced people that managerial talent is rare and worth a lot.  The worker’s wages might be depressed by technological change or a government biased against unions (the workers attempt at accruing economic power to counterbalance that of businesses’).  Are we really going to argue that Dan Brown or Kim Kardashian or Honey Boo Boo are exceptionally talented people whose output is of superior quality justifying making so much more than other “artists?”  Or is it because they are Adler Superstars, their value determined by social forces?  Experimental evidence suggest profound sociological effects on prices.  This feeds into the myth that education can save all of us from inequality.  Education inequality is not correlated with income inequality  and there are many stories of important inventors and artists that never manage to capture the value of their product.

As I pointed out in my post on Rawlsian social justice, marginal product as determining wages is an idea that seems to be around merely to justify draining all economic power from workers while allowing those lucky enough to be on top to rationalize their good fortune.  We need to accept luck and economic power and myriad other social and political forces as important variables in supply and demand and stop treating market prices as anything but a convenient indicator of all the complex processes that determine it.



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