Socialists Make Good Businessmen & Capitalists Good Politicians

Let’s start with two economic theories:

  • Coase argued that the firm exists to exploit efficiencies outside the pricing process, a view that Coase himself described as a discussion of the “optimal” amount of economic planning.
  • Mises and Hayek argued that it was local knowledge that made possible a pricing process that could reflect the value of goods, making possible more efficiency in their allocation. I.e. socialism is bad, because socialists would do away with this local pricing process.

So, if socialism is good at the micro-level and capitalism is good at the macro-level, we’d expect socialists to be good at business (and a lot of owner-owned companies?) and capitalists to be good at politics.

So why do we see a lot of socialists in power and a lot of capitalists at the helm of industry? Solve me that paradox.

Okay, so maybe I’m stretching the argument a little. Still. Let’s call it the Hayek–Coase Theory.

Do More Immigrants Mean Lower Wages?

In an interview with Ezra Klein, Bernie Sanders says,

What right-wing people in this country would love is an open-border policy. Bring in all kinds of people, work for $2 or $3 an hour, that would be great for them. I don’t believe in that. I think we have to raise wages in this country, I think we have to do everything we can to create millions of jobs.

It’s true that we’re usually taught that if you increase the supply of labor, wages will go down. But, remember, that’s if we assume all else is equal. Famous left-wing economist Paul Krugman might disagree with that assumption.

In his famous work on trade theory — what won him the Nobel prize —, Krugman argues that a larger population implies a greater demand for goods, and therefore labor, because…you know…there’s more people. So what does this imply with regards to wages? If industries, or the economy as a whole through the division of labor, can benefit from economies of scales, it means lower prices and higher real wages.

So, if Bernie Sanders were really interested in raising incomes, he’d be an open borders advocate.

The Authoritarianism of Auburn Monetary Policy

By the end of May [1934], the choices facing Germany had become starkly obvious. In a remarkably frank article, the wirtschaftsdienst demanded that if the Reich government had decided definitively not to devalue [the currency], it should draw the necessary conclusions, In the journal’s view, the choice against devaluation marked a fundamental divide between the liberal economic policies of countries such as Britain and a newly emerging system of National Socialist economic management. If devaluation was ruled out, then there was no alternative but to begin as soon as possible with the establishment of a new and powerful system of economic controls.

A. Tooze, The Wages of Destruction (New York: Viking, 2006), p. 83.

Mathematics as a Signal

Some economists justify the use of math in economics as a means of keeping their model straight. What if it has another purpose? What if it’s a signal?

In economics, a signal is a means of communicating something to others. For example, suppose that a large group of employers is looking for candidates with a certain skill, say the ability to sit down, study a topic, and train themselves on it (e.g. if you’re a digital analyst, you may want to train yourself on JavaScript). Prospective candidates who can do that will want to separate themselves from prospective candidates who can’t, so the former develop a signal. Let’s, for the sake of an example, say that this signal is a degree from a four-year university. The degree shows that you can be given a book and you can attend a few hours of lecture every week, and that you can learn the material (supposedly, right?).

Ideally, the signal should have a cost. Restated, it should be costly for someone to attain that signal. In our example, the optimal cost is one that is costly enough to dissuade candidates who don’t fit the employers’ criteria and not too costly that it dissuades those who do fit the criteria.

Math could be interpreted as a signal, at least as far as its use in economics in concerned. Suppose we’re interested in differentiating good economic theorists who can make enlightening insights on complex topics from average economic theorists who aren’t so good at doing that. Math, specifically the kind of math you learn for economics, is not easy to learn. There’s a cost, and that’s the amount of time spent studying it (time you could have spent studying/doing something else). The cost is high enough to weed a lot of people out.

At my alma mater, math is used as a signal to differentiate those who intend to move on to grad school and those who don’t. You can get an economics degree from San Diego State University with only precalculus, trigonometry, and “business calculus.” But, if you want to go to grad school, the straightforward economics degree isn’t usually good enough. Instead, you get a “specialization is quantitative economics,” which necessitates a higher level calculus class and then a mathematical economics class, which pretty much sums up 13 semesters of math (derivatives, integrals, and matrix algebra, pretty much). That specialization serves as a signal to boards which regulate the entry of masters and PhD candidates.

In the academic world, perhaps math signals certain capabilities, including the ability to think about complex subjects and derive accurate results. Note, this is a generalization, and I’m sure there’s plenty of very good economists who aren’t so good at math, or at least don’t use math much in their work — in fact, I know good economists who fit this characterization. But, maybe they’re the exception to the rule?

Do Unpaid Internships Make You Worse Off?

This morning, I read a LinkedIn article on unpaid internships, where I saw the following,

First off, it is worth noting that getting a paid internship in college is a very smart idea. The National Association of Colleges and Employers recently did a survey of people who graduated in 2013 with a bachelor’s degree and found that a graduate who did a paid internship while in college made an average starting salary of $51,930 – compared to a $37,087 average salary for workers who didn’t do an internship.

But here’s a shocking statistic from that same survey: 2013 graduates who did an unpaid internship while in college actually made less than students who got no internship at all – $35,721 a year, on average, compared to the aforementioned $37,087. Pretty bad deal – work for free and then make $1,366 a year less when it’s time to work for money.

There’s something wrong with that interpretation.

Let’s consider a single representative of a recent graduate. She has three options available to her, ordered from best to worst:

  1. Take a paid internship and later land a $51,930 salary
  2. Skip the internship and go straight for a full-time job with a $37,087 salary
  3. Take an unpaid internship and later take a job with a $35,721 salary

What determines which option she’ll take? Obviously, all recent graduates will want (1), but not all recent graduates will get that opportunity. Only the best will. Let’s say our graduate isn’t in that tier. She can opt for (2), but after we eliminate all those who achieved (1) we still have to choose the best of what remains to fill the limited number of full-time jobs available. That’s a second tier of candidates. Let’s say our representative doesn’t fit that category either. So, without options (1) and (2), the only thing she can do is (3).

What the author of this article wants to do is eliminate option (3), so that the only thing our candidate can do is be unemployed and hope that some time soon she’ll be able to fit into (1) or (2).

In any case, notice his wording. He’s saying that taking an unpaid internship leaves you worse off than choosing to work without that internship experience. That’s misleading, because to a lot of people who choose option (3), option (2) was never really a choice they weren’t sufficiently qualified. Option (3) leaves you better off, however, than not having a job at all!

A much more direct, if a bit more crass, way of putting my point is, those differences in incomes might represent differences in the skills different candidates have to offer. If someone takes an unpaid internship and over the long-run ends up making an average salary of $35,721, maybe it’s because they couldn’t compete against those other candidates who ended up getting jobs directly out of college or a paid internship.

So, it’s not that they’re getting bamboozled by employers. It’s that the unpaid internship was really their best choice, because (1) and (2) were really never on the table for them.