– July 21, 2020
female business executive

Among my all-time favorite books is Deirdre McCloskey’s 1990 volume, If You’re So Smart. In it, McCloskey explains the enduring relevance of what she calls “the American Question:” If you’re so smart, why ain’t you rich?

Like all questions designed to make a point rather than to elicit an actual answer, asking this question isn’t always appropriate. There are some important matters about which someone can be unusually well-informed but also unable to transform that knowledge into a sizable fortune. Consider McCloskey’s own specialty, economic history. This subject is indeed important, yet I know many excellent – smart – economic historians who, while solidly middle-class, are not rich by modern American standards.

But my economic historian friends don’t go about claiming to find “failures” in markets and then to be smart enough to offer advice to governments on how to “fix” these alleged “failures.” My economic historian friends are smart enough to understand that they, like all mortals, are not smart enough to interfere productively in the lives of people engaged in what Robert Nozick memorably called “capitalist acts between consenting adults.”

Sadly, many people aren’t nearly as smart as my economic historian friends. Many people stupidly suppose themselves to be so smart as to be able to identify opportunities for government productively to override market processes. All of these people should be asked the American Question: “If you’re so smart, why ain’t you rich?” The reason for posing this question is that the great majority of alleged “market failures” – if failures they truly are – are golden opportunities for these people to earn personal fortunes as they simultaneously improve the world. There’s no need to involve government.

Are Women and Minorities Really Underpaid?

The people who most obviously could earn riches by exploiting what they claim to be their knowledge of reality include those who assert that large groups of workers are systematically underpaid. Specifically, a great many politicians, pundits, and professors insist that women and minorities are underpaid. Were this claim true, it’s the equivalent of reporting that sidewalks all across America are littered with hundred-dollar bills. Why would anyone waste time writing op-eds about the availability of these easy riches? He or she should rush to gather the money personally. By doing so, that person would become rich and cleanse America’s communities of unsightly litter. It’d be, as they say, a win-win.

An underpaid worker is one who “at the margin” produces more value for his or her employer than that worker is paid. (In the language of formal economics, such a worker is paid less than the value of his or her marginal product.) This underpaid worker, therefore, is a profit opportunity. Another employer can bid that worker away from his or her current, exploitive employer and then employ that worker profitably.

While no serious economist insists that markets work so well that not a single worker is ever underpaid, serious economists are correctly and highly skeptical of assertions that entire classes of workers, such as women, are underpaid in markets. “Greedy” employers do not stand idly by without bidding for workers who are currently underpaid any more than “greedy” investors stand idly by without bidding for shares of stock that are currently underpriced.

But, assert many pundits, the economic way of thinking that casts doubt on claims that whole classes of workers are underpaid is far too textbooky and perhaps even ideologically motivated to take seriously. After all (these pundits continue) we have statistics proving the reality of underpayment!

Yet none of these statistics ever prompt those who peddle them as justification for government intervention into action of their own. If a pundit or professor truly believes that women generally, or minorities generally, are underpaid, why doesn’t that person put his money where his mouth is and get rich by starting businesses that scoop up all of these underpriced labor services?

Of course, in practice any such pundit or professor personally lacks the skills and experience actually to run a successful enterprise. Excellence at punditry or professing is emphatically not excellence at doing anything practical. But if this pundit’s or professor’s claim about whole classes of workers being underpaid is true, surely he’d tempt at least a handful of private entrepreneurs to act on this valuable information. But no. The pundit or professor convinces only other pundits and professors, along with politicians itching for intellectual cover to meddle in markets.

It’s a regrettable reality that such a pundit or professor or politician eagerly puts other people’s money where his mouth is but refuses to put his own money there.

Minimum Wages

A similar phenomena is at work on the minimum-wage front. There’s no shortage these days of people who claim to find that employers of low-skilled workers are “monopsonists” – that is, are employers possessing monopoly power in employing low-skilled workers. The conclusion is then drawn that these monopsonist employers underpay their workers and, thus, government can help these workers by mandating that no wages be paid that are below the government-dictated minimum.

Forget here the silliness of the claim that the likes of McDonald’s, Subway, La Quinta Inn, and Aunt Esmerelda’s Pizza Emporium each has monopoly power over its workers and doesn’t have to compete with other employers for labor. Instead, recognize that any professor or pundit who truly believes such “monopsony” power exists could earn a fortune by opening up her own restaurant, motel, or lawn-care service. That entrepreneur would have an easy time bidding workers away – at wages attractive both to her and to workers – from their existing employers.

Yet rather than put her own money where her mouth is, the professor or pundit who glibly shouts “Monopsony, therefore minimum wages!” instead puts the economic livelihoods of many unskilled workers at risk by endorsing a policy that, if her glib shout is mistaken, prices many of these workers out of jobs.

Conclusion

Not all assertions of the existence of market failure are ones that point to profit opportunities in the private market. (In fact, as I’ll discuss next week at this site, in labor markets government itself often enforces policies that keep the pay of some workers artificially low.) But a surprisingly large number of allegations of market failure do imply the existence of profit opportunities. And so these assertions – assertions such as that women as a group are underpaid – should be dismissed out of hand if (as is almost always the case) those who do the asserting refuse to risk their own time and resources on undertaking private-sector activities that would make these individuals rich as they simultaneously correct the alleged failures. If these individuals aren’t getting rich by acting with their own money on what they assert to be true, then they ain’t so smart after all.

Donald J. Boudreaux

boudreaux

Donald J. Boudreaux is a senior fellow with American Institute for Economic Research and with the F.A. Hayek Program for Advanced Study in Philosophy, Politics, and Economics at the Mercatus Center at George Mason University; a Mercatus Center Board Member; and a professor of economics and former economics-department chair at George Mason University. He is the author of the books The Essential Hayek, Globalization, Hypocrites and Half-Wits, and his articles appear in such publications as the Wall Street Journal, New York Times, US News & World Report as well as numerous scholarly journals. He writes a blog called Cafe Hayek and a regular column on economics for the Pittsburgh Tribune-Review. Boudreaux earned a PhD in economics from Auburn University and a law degree from the University of Virginia.

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