The Problems with a Minimum Wage (Economics 101)

[Imran Siddiqui]

(Sorry, missed this post)

Thank you for showing your faith. You really must have a strong belief to say this so boldly. Ah, maybe you don't know about the works of Gary Becker (it's more sociological) but he applies the rationality to everything in the social life : if you want a girlfriend or a child, it's rational ! What a wonderful world

I'm familiar with Becker, and his ideas on cost-benefits for having children. I agree. In our minds we do cost-benefit analysis for everything.

You seem to forget that companies earn a profit from their activity... Except in a Perfect Competition system, where profit = 0. But... Did you already talked to a businessman ? Talk him about zero-profit and watch him laugh

Well, there is really no Perfect Competition system so production really isn't where Marginal Revenue meets Marginal Cost. And capital was only an example, I didn't mean to say that I was going to tell you ALL of the determinants of price and quantity .

There is nothing explaining the relationship between companies, to explain why the changes on one market can deeply affect other markets

Two Supply and Demand curves then .

V. Hayek's ideas are responsible for the Hoover's catastrophe, while Keynes' ideas saved the day.

Hoover catastrophe? I didn't know that he was responsible for the Federal Reserve following a tight monetary policy during the recession .

Friedman is just another Guru saying that people are rational

Yes, and I believe that people are rational (in both economics and international relations... both make the claim). Prove why they aren't .

Some of Keynes' ideas do have merit, but plenty of them really are dead wrong.

[Spiffor]

Yes, and I believe that people are rational (in both economics and international relations... both make the claim). Prove why they aren't

I won't prove it to you. Nor will you prove me the opposite. It's a matter of belief. I won't prove the existence of God either. I believe people act with their heart too, you believe they're only rational.
Maybe we should make a poll to see if people believe in rationality or not...
BTW, do you believe in God ? If yes, is it only because of the Pascal paradox (you have so few to lose and so much to win) or because something else ?

[Kropotkin]

Rationality might be so much. That's one reason why it's both hard to prove and refute. A person might for example act irrational from the perspective of classical economics theory but rational from his/her own perspective due to the fact that there's a lot of factors in the real world not taken into consideration by a a theory that works from a few assumptions and ceteris paribus.

Neoclassical theories (and many other theories too for that matter) based on the axiom of human rationality often have serious problems with the reality but that doesn't mean that people doesn't act in a rational way.

[Imran Siddiqui]

A person might for example act irrational from the perspective of classical economics theory but rational from his/her own perspective due to the fact that there's a lot of factors in the real world not taken into consideration by a a theory that works from a few assumptions and ceteris paribus.

Exactly... but the neo-classical theory doesn't believe that someone making a choice is irrational. He has evaluated costs and benefits and made a choice that is rational to him. IE, a person can't act irrational in neo-classical theory, because the action is rational to him/her.

BTW, do you believe in God ? If yes, is it only because of the Pascal paradox

I'm a Deist. And it isn't because of Pascal. It is because I believe there had to be something that created this mess . I have debated it in my mind and come to that conclusion... basically a cost-benefit analysis of what works with my thoughts on the world.

[Kropotkin]

Yes, but in most chases what's rational is decided by a number of asumptions of what's rational. There's no more assumptions than rationality from the start but then you need to add up things if you're dealing with anything.

That people then acts irrational shows that people are a) irrational by nature or b) the assumptions are not realistic. The general neoclassical theory that people are rational can not be proved or falsified as a whole. That's both the weakness and the strengh of the theory.

[Adam Smith]

Rationality can mean a bunch of different things.

For people like Becker, all decisions in life, from brushing your teeth to selecting a mate (or deselecting a mate ), can be explained by a fully laid-out economic theory. I think his work is creative, and comprehensive, but not at all convincing, and not usually what neoclassical economics has in mind when talking about rationality.

For people like Lucas and Sargent, rationality means that all economic actors know the full economic model, and all implications of any action that any other agent might take. For example, all consumers "know" that if a Democrat is elected, the money supply will expand, and inflation will result. This theory is known as rational expectations. It leads to a "now you see it now you dont" type of economic model: any action that the government could take is already anticipated by economic agents, and so will have no effect. Only unanticipated actions (crop failures, new technologies, oil embargos) have any efffect on the economy. While the results of some actions might be anticipated, I dont think this is a particularly convincing model. The reason is that it costs agents time and money to assemble the information and understand the implications of the underlying model. If economists cant get it right after studying economics full time, what makes you think individual agents can get it right?

Neoclassical economics usually defines rationality as a minimum set of axioms which agents need to follow in order for the theory to work. IIRC, if you strart with three basic axioms for agents, then you can derive the rest of microeconomics from that. The axioms are
1. Agents can compare any two bundles of goods, A and B
2. Either A preferred to B (A > B), B > A, or A = B
3. If A > B, and B > C, then A > C.
(Note that axioms are assumptions about the behavior of agents. They are not the same as assumptions made abotu the operation of individual markets, as discussed above.)
Vernon Graham, who won the Nobel Prize a couple of years ago, did a lot of work testing these assumptions on groups such as pigeons, drunks, and college students, which you might expect not to be "rational". He found that the basic assumptions held up even in these groups, which suggests that the underlying theory is fairly robust.

edit: typos

[Kropotkin]

Hey, when I'm drunk I think I'm the most rational guy ever

Becker and his kind have turned out to be very boring and pointless.

[Spiffor]

The general neoclassical theory that people are rational can not be proved or falsified as a whole.

I totally agree. It's exactly what I think when I'm saying "it's a matter of belief"

Vernon Graham, who won the Nobel Prize a couple of years ago, did a lot of work testing these assumptions on groups such as pigeons, drunks, and college students, which you might expect not to be "rational". He found that the basic assumptions held up even in these groups, which suggests that the underlying theory is fairly robust.

Since I studied the scientific method in social sciences, I have no faith anymore in any scientific work. It's way too easy to prove what you want to prove, just by choosing the right method, and by selecting the right data. I'm not telling Vernon Graham lies, I'm just telling that any scientist who doesn't believe in rationality can prove the opposite, just by using another method and other data. I stand still that rationality is unprovable.

[Imran Siddiqui]

Neoclassical economics usually defines rationality as a minimum set of axioms which agents need to follow in order for the theory to work. IIRC, if you strart with three basic axioms for agents, then you can derive the rest of microeconomics from that. The axioms are
1. Agents can compare any two bundles of goods, A and B
2. Either A preferred to B (A > B), B > A, or A = B
3. If A > B, and B > C, then A > C.
(Note that axioms are assumptions about the behavior of agents. They are not the same as assumptions made abotu the operation of individual markets, as discussed above.)
Vernon Graham, who won the Nobel Prize a couple of years ago, did a lot of work testing these assumptions on groups such as pigeons, drunks, and college students, which you might expect not to be "rational". He found that the basic assumptions held up even in these groups, which suggests that the underlying theory is fairly robust.

Good to have a good economist on this thread to explain the things that I knew but have forgotten .

And yeah, that form of rationality I see as being pretty convincing. I don't think a person would pick C > A if they actor considers A > B and B > C in terms of utility.

But I also like Becker... a bit more... well, philosophical as well