Politics Trumps Economics
4th September 2017
Years ago I was conversing with a hard-core economist, one of the benighted variety who assumes that everyone behaves like a wealth-maximizing robot. I observed that even if he were right in his presumption that economic decisions are made rationally and in a way that comports with economic efficiency, government stands in the way of efficiency. In my pithy phrasing: Politics trumps economics.
So even if the impetus for efficiency isn’t blunted by governmental acts (laws, regulations, judicial decrees), those acts nevertheless stand in the way of efficiency. A simple case in point is the minimum wage, which doesn’t merely drive up the wages of some workers, but also ensures that other workers are unemployed in the near term, and that more workers will be unemployed in the long-term. Yes, the minimum wage will cause some employers to substitute capital (e.g., robots) for labor, but they will do so only to reduce the bottom-line damage (at least in the near-term). The politics (the urge to regulate) trumps economics (the efficiency-maximizing state of affairs that would otherwise obtain).