The Invisible Handcuffs of Capitalism: How Market Tyranny Stifles the Economy by Stunting Workers (11 page)

For Feldstein, only a “spiteful egalitarian” would not welcome such an improvement in society.
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The windfall for the rich person would
still count as an improvement in efficiency, even if it would harm the (non-market) quality of life for many others. An example would be if the wealthy could use their funds to bid up rents that could drive many people out of their neighborhoods. In effect, then, this new kind of economics became a science of justifying inaction in the face of popular demands for a more equitable society.

Most economists are dismissive of any theory not built on what they consider solid micro-foundations—economists’ jargon for the patently unrealistic model I described. Mainstream economists seem to feel especially threatened by the suggestion that work, workers, or working conditions could be a legitimate subject of economic inquiry. As a result, any serious challenges to their theoretical position face a hostile response.

In one famous case, in 1944 Richard Lester published an article questioning whether labor markets operated in the manner that mainstream economics suggested. Lester had extensive experience in industry, having just served as chair of the Southern Textile Commission of the National War Labor Board. Using government data and surveys of industry leaders, Lester found evidence at odds with the assumptions of mainstream economic theory.
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His results suggested that an increase in the minimum wage would be unlikely to increase unemployment, a conclusion that infuriated major defenders of the faith.

George Stigler, a leader of the Chicago school of economics and a Nobel Laureate, led the attack. Thomas Sowell, an admiring student of Stigler’s and an important figure in the conservative movement, once likened Stigler’s style of debate to a “Demolition Derby.”
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This debate provided confirmation of that characterization. Stigler “made unequivocal claims that lacked any strong empirical evidence, as if such statements were so intuitively obvious as to brook no argument.”
⁷¹

Symbolic of his combative nature, Stigler captioned a picture of John Stuart Mill, describing him as “perhaps the fairest economist who ever lived: He treated other people’s theories at least as respectfully as his own, a mistake no other economist has repeated.”
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Stigler and his allies used enough invective to satisfy their colleagues that Lester must be wrong because his data was inconsistent with their theory.

Lester’s challenge to orthodoxy was silenced, so much so that, looking back at his performance almost three decades later, Stigler could write with evident pride, “The idea that minimum wage laws were the expression … of the well-informed desires of particular regions and classes of workers was not seriously considered by economists.”
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The following year, he proudly boasted, “One evidence of professional integrity of the economist is the fact that it is not possible to enlist good economists to defend minimum wage laws.”
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In the 1990s Alan Krueger of Princeton (currently Assistant Secretary of the Treasury for Economic Policy) and David Card of the University of California, Berkeley, resumed work on the minimum wage, stirring up a hornet’s nest by showing again that raisng the minimum wage did not increase unemployment.
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They too met with fierce criticism from fellow economists, some sponsored by the fast food industry. Card and Krueger were both distinguished economists. Card had won the prestigious John Bates Clark award from the American Economic Association, given to the outstanding economist under the age of forty. Moreover, their work stood up well under harsh scrutiny. Yet in the face of the controversy, Card dropped this line of research. He explained:

I’ve subsequently stayed away from the minimum wage literature for a number of reasons. First, it cost me a lot of friends. People that I had known for many years, for instance, some of the ones I met at my first job at the University of Chicago, became very angry or disappointed. They thought that in publishing our work we were being traitors to the cause of economics as a whole.
⁷⁶

Two Nobel laureates commented on their work in the editorial page of the
Wall Street Journal
. The milder of the two, Merton Miller, responded, “It sure plays well in the opinion polls. I tremble for my profession.”
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The second, James Buchanan, consoled his readers:
“Fortunately, only a handful of economists are willing to throw over the teaching of two centuries; we have not yet become a bevy of camp-following whores.”
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By inference, Card and Krueger did fall into that category.

Nobody need be surprised that Card went on to say that he “thought it was a good idea to move on and let others pursue the work in this area,” but any career-minded economists would be well advised not to do so.
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Lester and Card did not fail to convince their fellow economists because of errors in their work. Most economists either ignored their results or, worse yet, rejected them out of hand because they conflicted with their cherished beliefs. As Stigler’s colleague Milton Friedman once wrote, “Nothing is harder than for men to face facts that threaten to undermine strongly held beliefs, to change views arrived at over a long period. And there are no such things as unambiguous facts.”
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Another Chicago economist, Sherwin Rosen, was open about his refusal to take the study by Card and Krueger seriously. In an October 1997 interview with Craig Freedman, an economist working out of Australia, Rosen admitted:

If someone comes up and tells me now that everything I know is wrong I tend to be defensive. I naturally believe that the claim is probably erroneous. (laughs) Given your lifetime investment…. That’s right, given my investment, given what I’ve read over the years. When somebody tells me now that an increase in the minimum wage increases employment, there’s just been a study out on that [presumably, the Card and Krueger study], I’m very skeptical of that claim. I don’t believe it!
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The Chicago style of economics is famous for rejecting empirical evidence out of hand. Deirdre McCloskey, a former Chicago faculty member, recounted how people who used data and called the theory into question would “be met by choruses of ‘I can’t believe it’ or ‘It doesn’t make sense.’ Milton Friedman’s own Money Workshop at Chicago in the late 1960s and the early 1970s was a case in point.”
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Melvin Reder, another Chicago faculty member, offered further
insight in the way that Chicago refuses to give ground in the face of evidence that calls the micro-foundations into question:

Chicago economists tend strongly to appraise their own research and that of others by a standard that requires (inter alia) that the findings of empirical research be consistent with the implications of standard price theory…. The major objective is to convert non-economists to their way of thinking…. However imaginative, answers that violate any maintained hypothesis of the paradigm are penalized as evincing failure to absorb training.
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Charles Kindleberger, who was a distinguished economist from MIT, observed that in Chicago “Modifying the theory was the last resort, evaded as long as possible.”
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Economists frequently regard such stubborn resistance to be good science. Predictably, the troubling questions that Lester and Card raised had no effect. Economists’ beloved micro-foundations and their faith in market efficiency remained invulnerable. No wonder that economists today rarely bother to publish research that might cast doubt upon the core of economic theory. In this environment, economists can continue to use their transaction-based theory without the inconvenience of dealing with work, workers, or working conditions. However, by removing these critical aspects of life from their theory, economists blind themselves—and those who defer to their advice—to the kind of inefficiencies that this book shows.

Hey, Economists, Where Are the Workers?

In the early nineteenth century, Charles Babbage, who occupied what was once Isaac Newton’s Lucasian Chair of Mathematics at Cambridge, designed the world’s first computer, a complex machine driven by a hand crank rather than electricity. Babbage never managed to finish constructing his remarkable invention, but recently others have built two machines based upon his original plans.

Components for something this sophisticated required great precision. In overseeing their production, Babbage had to visit many factories. He also observed the work process at sites such as the London Bank Clearing House and the
Times
of London. Based on this experience, Babbage published
On the Economy of Machinery and Manufactures
, an extraordinary book that compelled George Stigler to say that “Charles Babbage deserves full membership in the club of mathematicians who have made significant contributions to economics.”
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Babbage charged the economists of his day with excessive abstraction. In a passage that Stigler cited with approval, Babbage charged:

Political economists have been reproached with too small a use of facts, and too large an employment of theory. If the facts are wanting, let it be remembered that the closet-philosopher is unfortunately too little acquainted with the admirable arrangements of the factory; and that no class of persons can supply so readily, and with so little sacrifice of time, the date on which all the reasonings of political economists are founded, as the merchants and manufacturers; and, unquestionably, to no class are the deduction to which they give rise so important. Nor let it be feared that erroneous deductions may be made from such recorded facts; the errors which arise from the absence of facts are far more numerous and more durable than those which result from unsound reasoning respecting true data.
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Despite his appreciation for Babbage’s words, Stigler still remained hostile to those who would pay attention to matters of production. In this regard, he was a vociferous advocate of mainstream economic theory, which explicitly avoided matters of production. Within the contentious intellectual climate, which gave birth to modern economics half a century later, the likelihood that economists might have taken Babbage’s reproach seriously and considered the actual content of the labor process was slim. Directly addressing dreadful working conditions would have undermined their determined defense of the status quo as being both efficient and just.

In addition, none of the important economists of the time had any close experience with the working class. Karl Marx wrote in detail about the appalling conditions of the workers. He was able to do so, in part, by reading the shocking reports that the British government published, and he also had extensive relationships with working-class organization.

Relatively few British economists took advantage of the opportunity to make such contacts. Nor did they read the same government documents that Marx did, although they took advantage of other official publications to inform themselves about matters of trade and finance. The United States was more cautious about making such matters public, but economists still had the option to consult with people who had blue collar jobs, even in the absence of such extensive documentation.

Intellectual ambition also played a role in the disappearance of work, workers, and working conditions. Fueled by an intense desire to make economics appear more scientific, many mainstream economists followed in the footsteps of Macleod, attempting to emulate physics, while showing how economic processes are supposed to maximize efficiency. By assuming that consumers made the sophisticated calculations necessary to maximize utility, economists were able to satisfy themselves that they were on solid scientific ground.

When this theory was taking hold in the late nineteenth century, the labor input seemed increasingly less significant in the face of massive factories and growing technological mastery. Economic theory only needed to assume that each employer would continue to hire an additional unit of labor so long as this unit added to the firm’s profits.

Since economists built their whole theory around the assumption of individual rationality, one might expect a serious interest in investigating how people, including employers and workers, actually make decisions. A small group, known as behavioral economists, do follow this line of research. Drawing upon long-standing knowledge of psychologists as well as experiments of their own, the behavioral economists have reported “a range of empirical facts that are at apparent odds with assumptions of standard economic theory.”
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One might
expect that economists would seriously engage with research that called their own theories into question. Such has not been the case; mainstream economics is largely unaffected by the work of behavioral economics. An article in
The Economist
matter-of-factly attempts to rationalize economists’ lack of regard for behavioral economics:

Behavioural economics … is best understood as a set of exceptions that modifies but leaves intact the canonical model of rational choice, not least since it is irrational to suppose that people in general behave irrationally.
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Ironically, this assumption of rationality does not deter many conservatives from decrying the consumption habits of the poor when defending the existing distribution of income.

The exclusion of work, workers, and working conditions was not simply an accidental oversight. It served an important purpose in defending capitalism from the accusation of exploitation. The radical shift from labor to extreme subjectivity in which unmeasurable consumer preferences became the center of economic analysis sealed labor’s marginalization in the theoretical world of economic theory. Other fields, such as sociology, industrial relations, or psychology, might seriously explore questions of work, workers, or working conditions, but economics would not.