Models are Necessary but Not Sufficient

August 22, 2017
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Over on Facebook, Daniel Kuehn – prompted by this Cafe Hayek blog postwrote:

It would be really embarrassing for Donald J. Boudreaux if there were a famous economist with a widely referenced monopsony model where one of the key distinctions between the competitive and monopsonistic case was whether recruitment costs were constant or increasing in employment.

But it wouldn’t be embarrassing at all.  Anyone can devise a model to show almost anything.  And economics is filled with widely referenced models that are useless (or worse than useless).  The Keynesian Cross comes to mind.  So, too, the textbook model of so-called “perfect competition” (which, in addition to being a model in which almost everything resembling real-world competition is either squeezed out or appears as a monopolizing (!) tactic, isn’t even logically coherent – for in the model no room exists for any agent actually to change prices).

The value of an economic model is found in its ability to make the world more understandable.  Devising a model is no evidence that the named concepts in the model have anything in reality to correspond to them, or that the model is a useful analytical tool.

So, again, the existence of the model to which Mr. Kuehn refers is not embarrassing at all.

I’ve written a great deal here at Cafe Hayek on the absurdity of positing the existence of monopsony power in the American market for low-skilled labor as a reason to entrust governments with the power to enact minimum wages.  I’ll not here rehearse the many reasons why the allegations of monopsony power are absurd and serve as no good justification for minimum wages.  But I will share below my response to Mr. Kuehn on Facebook:

Daniel: If you – or a famous economist – is convinced that real-world markets are sufficiently full of workers who are underpaid, then put your money where your mouth is and create jobs for these exploited workers. Prove to us that you know what you’re talking about rather than demanding that the state use low-skilled workers as guinea pigs to test to see if your model of monopsony power applies in reality. If you’re unwilling to in some way pony up something of personal value to you – to put something of your own at risk (such as your own money or time) to ‘bet’ on the reality of such a far-fetched claim – what business have you to demand that the state put other people’s livelihoods at risk in a bet on your far-fetched claim? By asserting that monopsony power is prevalent enough in reality to justify the state stripping low-skilled workers of the right to compete for employment by offering to work below some politician-determined minimum, you assert the widespread existence of profit opportunities. Why don’t you exploit these? Alternatively, what explanation have you for the fact that these opportunities remain unexploited by people with actual business experience and a hunger to earn profits? (And – while we’re at it – you must know that even if monopsony power exists, that is only a necessary and not a sufficient condition for minimum wages not to reduce employment. What explanation have you for why the prices of the outputs of the monopsony-power-laden employers are not competed down? If these output prices are competed down, then there are no excess profits out of which the higher wage-bills can be paid.)

Perhaps the greatest virtue of classical liberalism is its insistence on humility.  If you have an idea, great!  Pursue it and test it, but do so on your own dime and own skin or on whatever dimes and skin you can persuade others to give or to lend to you voluntarily.  Mr. Kuehn, of course, is no classical liberal.  He, like most academics, apparently believes that his ability to model social phenomena and to find some empirical evidence in support of his models entitles him to counsel the state to force others to behave according to his theories.  This attitude is the height of arrogance and of disrespect for one’s fellow human beings.  Unfortunately, as I said, it’s the prevalent attitude today among academics and policy-wonk types.  Most of these people itch to play god with the lives and livelihoods of others.  I myself cannot conceive of having such an attitude.

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