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Why Would a Rational Being Say That?

Summary:
A few months ago, the New Republic reported on a conference, the Third Modern Monetary Theory Conference, of which it was a sponsor (Osita Nwanevu, “Spreading the Gospel of Modern Monetary Theory,” October 3, 2019). One of the participants, affiliated with the Real Progressives website, declared: Wages are the way they are because corporations have control. She probably did not mean to opine that wages are too high. But then, if corporations set wages, why aren’t they setting them at subsistence level, or at most, in order to avoid jail, at the government-imposed minimum wages. In America, 2.1% of all hourly-paid workers are paid the federal minimum wage or less (according to the Bureau of Labor Statistics). Adding the higher state or local minimum wages, the

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A few months ago, the New Republic reported on a conference, the Third Modern Monetary Theory Conference, of which it was a sponsor (Osita Nwanevu, “Spreading the Gospel of Modern Monetary Theory,” October 3, 2019). One of the participants, affiliated with the Real Progressives website, declared:

Wages are the way they are because corporations have control.

She probably did not mean to opine that wages are too high. But then, if corporations set wages, why aren’t they setting them at subsistence level, or at most, in order to avoid jail, at the government-imposed minimum wages. In America, 2.1% of all hourly-paid workers are paid the federal minimum wage or less (according to the Bureau of Labor Statistics). Adding the higher state or local minimum wages, the proportion of workers getting no more than the minimum wage clearly exceeds 2.1%, but there is no readily available estimate about how many. Even if we make the exaggerated assumption that the proportion is 13%—which was the proportion of workers paid at or below the federal minimum wage in 1979, when nobody in the land was competing with the feds’ wage-setting power—we still face the mystery of why corporations pay 87% of hourly workers more than what they are legally forced to.

Moreover, people, including employers and workers, are not plants who just remain prisoners of their roots when they have incentives to move, that is, to engage in new exchanges. One has to look at incentives to understand the market.

Our activist did not help her case by adding:

Because of money going into politics and deregulation and all that crap.

But then, who among us has never made youth errors (especially in the roaring sixties, when not being a leftist was the ultimate social sin) or said anything imprudent that went farther than his thoughts? And, of course, as John Stuart Mill argued in On Liberty, the free circulation of all ideas, including those that look false, is indispensable for discovering the truth.

Perhaps that person is right on the wage issue. Perhaps there exists, or will exist, a serious theory backed by credible empirical evidence to the effect that corporations, properly defined, control wages in America. We should not assume that we are in possession of some revealed economic truth. Perhaps I am the one who is not being rational? We should always keep that sort of question in mind and stay alert for other explanations that could account for a puzzling statement. Perhaps we should read or reread 19th-century socialists and John Kenneth Galbraith.

Assuming that these doubts are not justified in the case under consideration, the question becomes, why could our Real Progressives representative utter such a non-sensical statement? Economic theory suggests at least four answers or hypotheses.

First, there is the answer from behavioral economics: the poor thing is subject to cognitive limitations—for example, the availability bias, which leads her to consider only what she hears in her ideological silo. Rough translation: she’s an idiot. But a rational-choice economist will want to dig deeper.

Second hypothesis, this one within the purview of rational choice: “rational ignorance.” The probability that her vote will flip the outcome of any election is zero for all practical purposes, so she has zero incentive to spend time and other resources gathering and analyzing information about public issues. She thus remains rationally ignorant. She votes blind. Moreover, because her own participation in Real Progressives’ activities has only a tiny likelihood of influencing political results, she also thinks blank—and makes statements like the first one quoted above (the second one too).

A third answer, also within rational-choice economics, relates to signaling. By suggesting that employers control wages and exploit their plants (sorry, I meant “their employees”) to the stem (“to the bone”), she is simply signaling to her environment, perhaps as a matter of social survival among her peers, that she shares their opinions and sentiments. “I am one of us, not one of them.”

A fourth hypothesis is the one developed by Roland Bénabou and Jean Tirole in their article “Mindful Economics: The Production, Consumption, and Value of Beliefs” (Journal of Economic Perspectives 30:3 [2016], 141-164). Our progressive friend produced (or borrowed ready-made) and consumed her belief about corporations and wages because it makes her feel good about herself and her identity, giving her more utility than adopting a true belief would. She trades-off a better cognition against the affective or functional value of a distorted belief. In a sense, we could say that she is stupid by choice.

The fact that many people hold the political opinions they hold just to feel good is a potent argument for preventing them from imposing their beliefs on other people by force, that is, a potent argument for limiting government power. The three other hypotheses point to the same conclusion.

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