Krugman vs. Hazlitt on Minimum Wage: Who Is Really ‘Wrong About Everything’?

by Jul 22, 2013Liberty & Economy0 comments

Paul Krugman lambasted Austrian economist Henry Hazlitt as having been "wrong about everything", including the minimum wage. So who's right?

On his blog last week, Paul Krugman lambasted Austrian economist Henry Hazlitt, writing that “Hazlitt has been wrong about everything for more than 80 years” and acting bewildered that Hazlitt is nevertheless “still regarded as a guru.” His explanation for this is, “Bad ideas, it appears, are extremely robust in the face of contrary evidence.”

This is remarkable hypocrisy, and seemingly a classic case of psychological projection, given how Krugman advocated the very bad idea to have the Federal Reserve inflate in order to lower interest rates in order to create a housing bubble to replace the burst dot-com bubble.

Krugman’s arrogance in light of his own record as truly astounding. His case that Hazlitt was “wrong about everything” is that Hazlitt argued during the Great Depression against fixing the price of wages above a certain minimum. Krugman trumpets John Maynard Keynes arguing that where there are a lot of unemployed workers because businesses would be running at a loss to hire them at the minimum wage, a reduction of wages is not the answer, that “it is a delusion” to “suppose” otherwise. Krugman quotes Keynes arguing that “if wages are cut all round, the purchasing power of the community as a whole is reduced by the same amount as the reduction of costs; and, again, no one is further forward.”

The problem is Krugman either doesn’t understand, or pretends not to understand, that this is absolute nonsense.

First of all, it’s a strawman argument, because Hazlitt didn’t call for wage cuts “all around”. Hazlitt simply was not arguing for across-the-board cuts in workers’ wages. So quoting Keynes here is totally irrelevant to Hazlitt’s argument. One must presume that, had Krugman ever actually read Hazlitt, he must know this.

Second, it is nonsense to argue that allowing the market to determine wages would not help to lower unemployment during a depression. As Hunter Lewis writes in Where Keynes Went Wrong, “Since wages are just one of many prices, this meant that unemployment is caused by an imbalance of prices. Since the primary function of markets is to bring prices into balance, it makes no sense to say that markets cannot correct unemployment.”

As Hazlitt himself explained in his book Economics in One Lesson, there are “harmful results of arbitrary governmental efforts to raise the price of favored commodities. The same sort of harmful results follows efforts to raise wages through minimum wage laws. This ought not to be surprising; for a wage is, in fact, a price.”

Hazlitt further observed that the first effect “when a law is passed that no one shall be paid less than $30 for a forty-hour week is that no one who is not worth $30 a week to an employer will be employed at all. You cannot make a man worth a given amount by making it illegal for anyone to offer him anything less. You merely deprive him of the right to earn the amount that his abilities and situation would permit him to earn, while you deprive the community even of the moderate services that he is capable of rendering. In brief, for a low wage you substitute unemployment. You do harm all around, with no comparable compensation.”

Or here’s how Murray N. Rothbard eloquently reiterated the same logic: “In truth, there is only one way to regard a minimum wage law: it is compulsory unemployment, period. The law says: it is illegal, and therefore criminal, for anyone to hire anyone else below the level of X dollars an hour. This means, plainly and simply, that a large number of free and voluntary wage contracts are now outlawed and hence that there will be a large amount of unemployment. Remember that the minimum wage law provides no jobs; it only outlaws them; and outlawed jobs are the inevitable result….

“The advocates of the minimum wage and its periodic boosting reply that all this is scare talk and that minimum wage rates do not and never have caused any unemployment. The proper riposte is to raise them one better; all right, if the minimum wage is such a wonderful anti-poverty measure, and can have no unemployment-raising effects, why are you such pikers? Why you are helping the working poor by such piddling amounts? Why stop at $4.55 an hour? Why not $10 an hour? $100? $1,000?

“It is obvious that the minimum wage advocates do not pursue their own logic, because if they push it to such heights, virtually the entire labor force will be disemployed. In short, you can have as much unemployment as you want, simply by pushing the legally minimum wage high enough.”

In his book, Lewis observes that Hazlitt himself noted that Keynes did not challenge the logic of his argument against minimum wage laws “head-on by any coherent and clear-cut argument.” It is difficult to deny, Hazlitt wrote, “what has become in the last two centuries the most strongly established principle in economics—to wit, that if the price of any commodity or service is kept too high (i.e., above the point of equilibrium) some of that commodity or service will remain unsold. This is true of eggs, cheese, cotton, Cadillacs, or labor. When wage-rates are too high there will be unemployoment. Reducing the myriad wage-rates to their respective equilibrium points may not in itself be a sufficient step to the restoration of full employment (for there are other possible disequilibriums to be considered), but it is an absolutely necessary step. This is the elementary and inescapable truth that Keynes, with an incredible display of sophistry, irrelevance, and complicated obfuscation, tries to refute.”

Similarly, neither does Krugman by any coherent and clear-cut argument refute the logic by which Hazlitt concluded that eliminating minimum wage laws would have benefited workers by allowing them to gain employment during the Great Depression. He simply declares Hazlitt “wrong about everything”, cites an irrelevant quote from Keynes, and then goes on to cite Irving Fisher to bolster his assertion that following Hazlitt’s advice would have made things “worse” and the “overall effect” would have been “to deepen the depression.” He reiterates his argument that “making it easier for wages to fall, as Hazlitt demanded then and his modern acolytes demand now, doesn’t just redistribute income away from workers to the wealthy (funny how that happens); it actually worsens the economy as a whole.”

That Krugman can make this argument with a straight face is remarkable. Krugman constantly calls for more inflation, which doesn’t just redistribute income away from workers to the wealthy by robbing them of the purchasing power of their wages (funny how that happens), but actually worsens the economy, like by creating housing or other asset bubbles that precipitate financial crises when they eventually burst, as they must.

Krugman has even explicitly argued the “case for a higher inflation rate” on the grounds that “it’s really, really hard to cut nominal wages”, so in lieu of “wage cuts”, just have “higher inflation”, which “would lead to lower unemployment”.

Krugman constantly contradicts himself, but seems totally oblivious to the implications. So it is that he can argue that Hazlitt was “totally wrong” to argue that eliminating minimum wage laws would reduce unemployment and yet at the same time it is true that reducing workers’ real wages through inflation would reduce unemployment. It’s a case of Krugman offering a heads I win, tails you lose argument.

In another example, Krugman pointed out that Spain had a problem with high unemployment because (emphasis added) “During the boom prices and wages rose more rapidly in Spain than in the rest of Europe, helping to feed a large trade deficit. And when the bubble burst, Spanish industry was left with costs that made it uncompetitive with other nations.” He argued that “If Spain still had its own currency, like the United States”, then it could just inflate, which would make its “currency fall, making its industry competitive again.” But since Spain didn’t have its own currency, “it must cut wages and prices until its costs are back in line with its neighbors” (emphasis added). Again, how is it that Krugman make this argument implicitly acknowledging that allowing wages to fall helps to fight unemployment and yet at the same time proclaim that Hazlitt was “totally wrong” to have argued for scrapping minimum wage laws in order to help lower unemployment during the Great Depression?

And it’s not as though Krugman doesn’t understand that wages are a price. In another blog post, he wrote about “our big problem, which is mass unemployment”. He commented (emphasis added): “Basic supply and demand analysis says that things like that aren’t supposed to happen: prices are supposed to rise or fall to clear markets. So what’s this apparent massive and persistent excess supply of labor? In general, market disequilibrium is a sign of prices out of whack; and most people commenting on our mess accept the notion that one or more prices are for some reason not adjusting.”

For some reason? He goes on to say of Austrian economists like Hazlitt and Rothbard: “For some reason, they would argue, wages are too high given the demand for labor.” For some reason? Why does Krugman pretend not to know for what reason Hazlitt, et al, argued wages were too high? In a stab at the Austrian school, Krugman, “If you think the problem is that wages are too high, your solution is that we need to [be] meaner to workers.” Thus, Krugman attributes to Austrians malevolent intent and vicious regard for workers, even though their whole purpose of arguing against minimum wage laws is to help allow those workers to get a job. Krugman’s solution for the same problem of unemployment, on the other hand, is to rob those workers of their purchasing power, so it seems more reasonable to say that Krugman’s solution is the one involving being “meaner to workers”.

It’s amusing also that the paper where Krugman has a home for column-writing and blogging, the New York Times, editorialized in 1987 that raising the federal minimum wage from $3.35 an hour was “a mistake”, that “there’s a virtual consensus among economists that the minimum wage is an idea whose time has passed. Raising the minimum wage by a substantial amount would price working poor people out of the job market.” A higher minimum wage “means fewer jobs”; it “would increase unemployment: Raise the legal minimum price of labor above the productivity of the least skilled workers and fewer will be hired.” In conclusion, “The idea of using a minimum wage to overcome poverty is old, honorable—and fundamentally flawed.” The title of the editorial was “The Right Minimum Wage: $0.00”.

As for Irving Fisher, here is what he had to say two days after the peak of the bull market in 1929, as Murray Rothbard pointed out in his book America’s Great Depression: “[The turnaround in stock prices] will not be hastened by any anticipated crash, the possibility of which I fail to see.” On October 15, he said that stocks had reached a “permanently high plateau”, and he expected “to see the stock market a good deal higher than it is today within a few months.” On October 22, he reiterated his belief that “we will have a ragged market for a few weeks and then the beginning of a mild bull movement that will gain momentum next year”. He said on November 3 that stock prices were “absurdly low”. They fell much further.

So it seems it was Fisher who was totally wrong about everything. Meanwhile, Austrian school luminary Ludwig von Mises was commenting in 1928 how each bust cycle is followed by a boom that “must eventually expend itself as another crisis”. This situation was “due only to the circumstances that the ideology which dominates all influential groups—political economists, politicians, statesmen, the press and the business world—not only sanctions, but also demands, the expansion of circulation credit” (emphasis added). The year before the crash, he wrote that “It is clear that the crisis must come sooner or later” as a consequence of this inflationary policy, and the “only way to do away with” the business cycle was “to reject the fallacy that prosperity can be produced by using banking procedures to make credit cheap.”

But never mind that. Never mind the fact that students of the Austrian school of economics like Ron Paul warned that the Fed’s artificially low interest rates would create a housing bubble that would precipitate a financial crisis, while Krugman was arguing that the Fed should lower rates to create a housing bubble. Never mind! It’s the Austrian economists who are and have always been “totally wrong about everything”, you see. No logically valid argument necessary.

This article was originally published at Foreign Policy Journal.

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About Jeremy R. Hammond

About Jeremy R. Hammond

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