Some Ground Rules for the Minimum Wage Debate

The debate over the effects of the minimum wage (and whether it should be increased and indexed to inflation) flares up every few years, especially when good-hearted politicians [1] promise to promote the public welfare by raising the price floor on wages.

The arguments marshaled by the two sides tend to be fairly similar every time this happens. And in many of the articles that cover the opinion and editorial pages of newspapers we get a repeat of some inadequate arguments that ought to be laid to rest. My goal in this post is to articulate some rules for the two sides that will make the debate a lot more productive.


For the political “left”:

1) Appeals to social justice are fun and all, but devoid of economics - It’s the consequences of a government policy that matter, not its intended consequences. Even if we accept as 100% true the fact that companies are evil, greedy, and dictatorial, if the economics of the minimum wage points to outcomes that are contrary to the stated intended outcomes, then all the social justice arguments are irrelevant – and useless.

Example: if raising the wages of 1 million workers by 20% requires 1 million workers to lose their jobs entirely, is this a good policy? Probably not. Of course, the estimated disemployment effects of minimum wages are far below the numbers I just gave. But the fact remains that appeals to social justice are pointless if we find out that economics tells us good intentions will ultimately be thwarted.

What should you do? If you find that your argument only claims that we need a “living”, “fair”, or “reasonable” wage and that corporations are exploiting us, don’t publish it anywhere! Include evidence from economics that a law in fact can achieve your goals without having large unintended consequences. If you don’t, you will not (and should not) be taken seriously. Of course, the evidence you present must avoid the other pitfalls set out below.

2) Pointing to Card and Krueger (1994) isn’t enough (and never was) - If we accept empiricism in economics, we know that it takes a whole body of research to establish the existence of an effect with confidence. Before Card and Krueger (1994), the minimum wage literature was strongly weighted in favor of minimum wages having significant disemployment effects. It is possible for an article to singlehandedly crack apart a whole body of literature if it has an impeccable argument for why the entire literature previously employed a methodology that systematically biased the results in one direction [2]. Card and Krueger (1994) does not meet the bill. They do not have fantastic controls that correct for all previous confounding variables (or any other such groundbreaking improvement). As such, this study is not enough to overthrow the results found before their study.

What they found in the New Jersey/Pennsylvania study was that there were some positive employment effects in New Jersey after the minimum wage hike, even when compared to neighboring Pennsylvania, which did not raise its minimum wage. What they failed to do was provide a compelling theoretical argument for why this might have happened, especially when they did not find an increase in output (which would have been a slight bit of evidence in favor of the monopsony explanation). The 1994 study has been roundly criticized, and I feel fairly comfortable saying that it’s doubtful they did a very good job controlling all the factors that could have had an impact on employment, thereby identifying a causal effect of minimum wage on employment (or lack thereof).

Card and Krueger (1994) opened the door in the debate, but they did not get very far past the threshold. Simply throwing out the name is not enough to win a discussion legitimately. Don’t do it.

What can you do? You can point to other studies that have found minimal or insignificant disemployment effects due to minimum wage increases, many of which employ methodology that is leaps and bounds ahead of that in the 1994 article. An example is Dube’s recent work, which uses policy discontinuities in counties across state lines as counterfactuals. In English, they study lots of data from counties that are on state lines, where one state increases its minimum wage and the other does not (which, the argument goes, creates a situation where we can be more sure that the changes in employment are due to the change in minimum wage, since the bordering counties are [allegedly] so similar) [3].

3) Convincingly argue that non-wage factors are not relevant to the debate - While the simplest model of markets (perfect competition) predicts that a minimum wage will cause some people to be laid off, a more nuanced view states that it’s not necessary for workers to lose their jobs. Their total compensation package (which is what matters in the labor market) could remain the same while the minimum wage increases if non-wage benefits fall. That is, even if the wages of employees go up, it’s possible that the total compensation they get stays the same. What could that mean? It could be that firms will provide less job training, it could be that working conditions will be improved less quickly (or even fall into partial disrepair), it could be that workers are made to work harder than they’d otherwise like in order to make up for the increased wages, or it could be that other benefits (health benefits or others) could be curtailed or frozen. These are all called the margins of adjustment of the firm in response to a minimum wage hike. Even if studies show employment to be completely unaffected, there could be a significant reduction in employee welfare if these other factors take a hit. It’s your job to argue that either these effects are statistically insignificant (either through theoretical or solid empirical arguments) or to state that workers don’t really care about these benefits as much as wages (which seems like a tough task, given that employers choose to provide some of these benefits instead of additional direct wage compensation). You should also address the possibility that employment isn’t hit because low-skilled workers are replaced with high-skilled workers, leaving total employment levels unchanged but low-skilled workers worse off.

4) Back up the claim that current increases are similar to the ones studied before – and that inflation indexing will not have significant negative effects - Even if you believe the data shows that small increases in the minimum wage will not have a bad effect on employment, this does not mean that all the current proposals can use that data as evidence for their case. Some of the proposed increases are very substantial – far beyond the minor adjustments about which economists can make reasonable claims. We also don’t have very good data on indexing the minimum wage to inflation. What evidence would you present to argue that this won’t have a negative effect down the road? This requires some explanation, since there is no prima facie economic reason for why the wage of the lowest-paid (and lowest-skilled) workers ought to increase with the average price level of consumer goods in the economy (CPI) (or your price inflation index of choice). We don’t expect the price of potatoes, or of burgers, or of anything else to mirror increases in CPI. Why should the minimum wage (without negative side effects)?


For the political “right”:

1) Demolishing Card and Krueger (1994) isn’t enough - I am sure that people who are against the minimum wage can find plenty of reasons to discard Card and Krueger’s 1994 study as evidence against the minimum wage. Many of these reasons are likely very good. However, the fact is that the field has moved beyond that study, producing other empirical arguments against large disemployment effects, the most notable ones being found in the work of Dube.

Ultimately, it may be that most studies finding evidence against the existence of disemployment effects are wrong. The point is that if you think so, you have to critique the best of these arguments and not merely content yourself with showing Card and Krueger (1994) is inadequate. We know that that study is inadequate as a refutation of the preexisting literature. Move on. Critique the latest studies (and use Neumark and Wascher’s work to back you up in your critique, for example), or stick to theoretical arguments (and be prepared to explain why the empirical studies are not good enough).

2) Presenting simple regressions that show disemployment effects without controls is bad science - I covered this point in my earlier post on some sloppy economics flying around earlier this year. Here’s the gist of my argument: to be able to claim you are doing science, you have to prove the effect you’re seeing in the data is really due to the policy in question. If you simply look at employment before and after minimum wage increases, you are not doing this. As such, the data is useless to either prove or disprove employment effects. Why? Because it could be that there is a third factor that causes both the changes in minimum wage and the changes in employment. Example: leftist politicians both increase the minimum wage and enact other labor regulations. Even if the minimum wage has exactly 0 effect on employment, looking at the data without controlling for other variables will result in estimating negative employment effects. Another example is recessions: if the minimum wage tends to be increased in the middle of a recession (say, due to political reasons), the effects in the data could be due to the recession, not the minimum wage (Dube mentions this here).

A particularly egregious example of this is the following image, which has been circulating on Facebook:



Not only does this argument present a whopping 4 data points, but one of them is followed by a slight uptick in labor force participation, while two are fairly close to the beginning of recessions. Furthermore, there could be an underlying downward long-term trend in labor force participation that could in part explain the decreases in labor force participation. One idea: perhaps we’re becoming wealthier as a society, which means teenagers no longer want/need to work. Is this true? I don’t know. But the fact remains that without controlling for additional factors, we can’t know (from empirical observation) whether the declines are 1) bad 2) due to the minimum wage.

What should you do instead? Either stick to theory that counters pro-minimum wage arguments or present better empirical studies that do control for at least some confounds. Whether the confounds controlled can ever be enough is open to debate. But whether confound control is needed is not.


For both sides of the debate:

1) Both sides claim the weight of the evidence is on their side – you’re not special - If you make the statement that most studies agree with your position, be prepared to back this statement up, because everyone is pulling this card nowadays. It’s your job to link to a review of literature that takes stock of all relevant studies, weeds out the ones with bad methodology, and tallies up the score for both sides. This review of literature should also explicitly explain why the methodology of the rejected studies was inadequate (and make sure that the studies that it chose to retain do not make the same mistakes). Not only this, but you should present the main arguments of this review of literature within your own article; don’t expect readers to do it themselves. Readers too often take claims at face value; be responsible and at least give them the meat of the argument without overwhelming them.

So if you say “the evidence clearly shows,” be prepared to either throw your article in the garbage or provide serious theoretical backup for why the other side’s evidence should be ignored.

2) Producing a letter signed by hundreds of economists backing your side also doesn’t make you special - First and most importantly, neither science nor economics is settled by vote. 51% doesn’t win. Beyond that, as Greg Mankiw points out, there are literally hundreds of economists signing letters for either side of the debate. If you’re going to parade your letter around, make sure to also parade that of your opponents.


For theoreticians:

1) Give compelling justification for your model and a compelling critique of the opposition model! - For the left, this means critiquing the perfect competition model of the economy and backing up your preferred model. If this is the dynamic monopsony model, for example, explain why you think dynamic monopsony provides a convincing description of how the low-skill labor market functions and provide evidence that the dynamic monopsony model is good enough to explain the effect seen in the data. If, on the other hand, you think the minimum wage does not reduce employment, explain why you think the dynamic monopsony model is inadequate and defend your own model (whether it’s perfect competition or something else).



If your entire article consists of making social justice arguments, citing Card and Krueger’s 1994 study, claiming the evidence for yourself in passing, and pointing to a letter signed by economists, save it.

If you critique the C&K 1994 study, show some superficial data, and state that the evidence agrees with you, as do some economists who signed a letter, shelf it and read it back to yourself when you feel down.

These two types of articles neither add something new to the debate nor make rigorous arguments. Perhaps they could have earned a passing grade in middle school social studies; not so in the real world.

Seriously. Move beyond Card and Krueger, and if you’re going to use empirical studies, use ones that control for as many relevant factors as possible. If you don’t, then don’t expect any response other than a link to this article.


Notes and References:

[1] I know, I laughed too.

[2] I have an example of this in mind, although I am not sure how good it is: it’s the Miron and Tetelbaum (2007) paper “Does the Minimum Legal Drinking Age Save Lives?” I am not well-acquainted enough with the literature to be able to tell whether Miron and Tetelbaum’s review of previous literature is correct, but if we take their words at face value, it appears that they have identified a serious flaw in previous research that resulted in an incorrect estimation of the effect of minimum legal drinking age laws. While I am still hesitant to take their results as true (as I am with any econometric study), they present convincing evidence that, at the very least, the previous research was way off the mark.

[3] I’m open to the suggestion that these controls aren’t enough.


Views expressed are not endorsed or put forward by Turning Point USA.

Biography Michael Tontchev

I am an Economics and Computer Science double major at the University of Maryland, College Park interested in microeconomic government interventions, libertarian property theory, and private educational innovation.

Illegal Immigrants are a Disgrace to America

The fact that we have millions of illegal immigrants in this country and that more are entering illegally every day by breaking the law is, in my eyes, an abomination. It is one of the greatest and most urgent tragedies facing America, and one that must be faced head-on without any compromise. I agree with my fellow economics student Milo King, with whom I write for our Gains from Trade blog, that we should target a policy to eliminate illegal immigration entirely. So join me in making the case for open borders.

“Don’t Use ‘Illegal Immigrants’!”

On my campus, we have posters that attempt to foster attitudes of inclusion toward various out-groups. One of the phrases we’re told we shouldn’t use, out of political correctness, is “illegal immigrant,” because apparently it’s offensive. That’s one that always makes me wonder why in the world the phrase is offensive. In fact, I think that not using the phrase “illegal immigrant” is offensive. Contrary to the words of Nobel Peace Prize winner Elie Wiesel (“no human being is illegal”), these immigrants in the US are indeed here illegally. To deny that fact is to deny the existence of the terrible laws that are enacted to keep them out. By refusing to call them illegal immigrants, we’re sweeping the problem of the illegality of their stay under the rug – we’re denying that the law is depriving them of their pursuit of happiness and we’re forgetting the most important part of the discussion – that the laws must change. It’s not enough to apply band aids to the problem while having their status remain, at the end, “illegal.”

Americans believe in the rule of law. They believe in peace, order, and stability. These are indeed very desirable characteristics of a society. Unfortunately, somewhere along the history of US, the citizenry was tricked into believing that believing in the rule of law meant believing in the actual legislation passed in the US. If we are to accept that legislation defines what is moral in the US, then it indeed makes sense to rally against illegal immigrants as outlaws. It is then that the argument “illegal is a crime” takes on meaning. It is for this reason that pro-immigration leftists are afraid to call these people “illegal” – because it implies that they are somehow bad people. Yet this is not so – it is in fact our moral judgment that informs the content of the laws, and not the other way around. Therefore, saying “X ought to be decried because X is illegal” is intellectually dishonest at best, and obfuscatory and fraudulent at worst. It begs the question: “why is the legality of something the determinant of its morality?” The answer: it’s not.

Allow me an example: Imagine that a hopped-up government made Christianity or homosexuality illegal (or anything else that is especially dear to you – take your pick). Would the American right come out in large numbers to protest against the “illegal Christians?” They wouldn’t even need to change their signs – just reuse “Illegal is a Crime” [1]. But of course we see that this would be an absurd law completely out of line with most Americans’ understanding of morality. As such, breaking this law might not be just perfectly okay, but it might even be an admirable deed, for an unjust law is no law at all [2].

If we deny this principle, then we are confronted with the question of whether violating Jim Crow laws was a bad thing, since, after all, they were the law. The answer is a resounding no. I applaud the brave people who fought against government-mandated racism. The people who violated the laws could properly have been called “illegal integrationists” since they were breaking the law, in accordance with their and our conscience.

I claim, then, that the outrage directed at calling people “illegal immigrants” should not be directed at the phrase itself, but at the people who created the policies that led to the need for such a label.

The Case for Immigration (Or, Rather, Against Restrictions)

Of course, so far I have not made the case for why immigration is a fundamentally acceptable action (morally and otherwise) – as opposed to the current state of affairs, where immigration is considered immoral by default and only allowable in a few cases the government deems appropriate (as if it could decide on the “proper” amount of people who need to be let into the country). I will begin by making a direct case for the morality of immigration and then address some counterarguments.

We begin by asking what immigration is. Immigration is the movement of people from one country to another for the purpose of living there. Immigration restrictions prevent immigrants from moving from one country to another. What immigration restrictions do is they prevent willing property owners in one country from allowing people from other countries to enter their property and work for them. There is no proper moral foundation for this government control.

The Direct Case

Do we believe the government can legitimately prevent a neighbor from coming onto our yard? No. Why are immigrants different in any way? They would be coming to the US and living in an apartment they rent from someone willing to rent it out to them. No problem there. They would be signing a voluntary contract of employment with an employer who is willing to hire them. Nothing wrong with that either. A person who believes that the government shouldn’t be able to prevent two willing adults from cooperating with their resources for peaceful ends can provide no moral foundation for immigration restrictions.

Muh Jobs!

“But they are taking our jobs!” No, they’re not. It’s an unfortunate that in our language we can label jobs as “ours.” Jobs do not “belong” to anyone – you don’t have a property title to your job. Your employer can (or at least ought to be able to) end your employment at will. Your neighbor in the US can “take” your job perfectly morally. Your employer can replace you with a machine. You have no title to the job. As such, even if immigrants were to come here and indeed “take” your job, you’d have no moral claim to it. It is not in any sense “yours” besides the fact that you chose to work there and your employer agreed. To claim otherwise is to claim that the government has the right to dictate the hiring practices of businesses. In either case, the argument that immigrants lower American wages or take their jobs is shaky on economic grounds [2]. Plus, how come the government suddenly knows the “correct” amount of labor that each sector of the economy needs? When did it gain such powers? When did the right begin believing in the economic powers of socialist policies?

But Crime!

Opponents of free immigration argue that immigrants tend to have higher rates of crime. This argument is mainly taken up by the political right, so I will ask them an analogous question about gun control. Suppose that some guns are related to crime. That is, while most gun owners are peaceful, if we allow for gun ownership, then some of the guns that are bought legally might eventually be used in a crime. Therefore, we should ban guns. Does this sound fair? No. So why should it make sense in the context of immigration? Most immigrants do not want to come to the US to cause crime – they want to come here to work to achieve the American Dream (often harder than some Americans – but don’t tell those Americans, or they’ll get so offended they’ll want to use government guns to prevent the immigrants from coming into the country!).

Furthermore, even if we accept that the current illegal immigrants tend to have higher rates of crime, it must be noted that black Americans have an even higher rate of crime. If we ought to deport illegal immigrants for their tendency to crime, then we should want to deport black people back to “wherever they came from” even faster! [3] I’d like to note that the policy of deporting an entire group for the crimes of a small sub-section is a form of collectivism, where the individual is judged by statistics pertaining to his ethnic/racial/social group.

They Threaten Our Culture

Some people are worried that if we open up immigration, we’ll be flooded with people coming from God-knows-where who cook weird-smelling foods, talk in languages we can’t understand, hang rugs on their walls, and dry their clothes on clotheslines. Scary stuff.

The first question I suggest asking is that if America is truly as exceptional as we believe it is, then how is its culture so prone to dilution? It seems that opponents of immigration argue that Americans themselves will see the shish kebobs the neighbors are cooking and forget about their own good American burgers and mashed potatoes.

It also must be noted that there is no “right to a culture.” That is, if another culture influences or even takes over your own, there is no moral justification for using guns to prevent this (for that is what government intervention ultimately is – the use of coercion to prevent the peaceful actions of individuals). To claim otherwise is fairly scary.

Aha, but They Mooch Welfare!

A seemingly good argument against immigration could be made by arguing that immigrants want to come to the US and become dependent on the welfare state. This has several flaws, however.

First of all, this is a fault of welfare policy, not of immigration. One possible solution is to simply not give welfare benefits to immigrants. Another is to remove the welfare state entirely, or to cut it back drastically. To argue that immigration should be restricted because the welfare state is too big is confusing the harm in the situation, which is the welfare state. In fact, the right, if it so wills, could use immigration as leverage to cut back welfare and achieve three things at once – the third being immigrants being thankful to them.

If all else fails and you really insist on keeping the welfare state, then giving immigrants proper documents and making them jump through the same hoops as Americans to receive welfare should solve that problem.

But the logic of immigrants as welfare moochers is seen as truly bad when we apply it to states within the US. Shouldn’t we also restrict movement of citizens from poor states to richer states with larger welfare systems? They might want to get welfare! (oh, and remember that they will also steal their jobs!)

They’ll Be Communists Who Vote in Crazy People

Perhaps the immigrants will come in and have crazy ideas about how the country should be governed – they’ll be crazy commies or something!

This, too, is on shaky ground.

First off, if we take the criticism seriously, then we should also ban movement between red and blue states, so that the dirty hippies/commies/right wingers/those-people-you-don’t-like can’t come in and change our state. This is not negotiable. Accepting the “bad politics” critique of immigrants must lead to an acceptance of intrastate movement bans. Furthermore, many immigrants come to the US specifically because they want to work hard and earn a living [4].

They Should Just Go to the Back of the Line

Why? If we’ve worked to show that the line is illegitimate in the first place (as is shown in this article), why send them to its back?

This an argument for which I used to be in favor, in fact. My parents and I are here on a visa (full disclaimer!), and so my parents have often gotten angry at amnesty proposals which would make illegal immigrants be able to stay in the US legally. “Why should they, who hopped the fence, get to stay and we should have to live in fear that we might not be able to renew our visa in a few years? We’ve stayed here legally all this time and we’re spurned by the law!”

Sadly, this is the sort of thing that government intervention does to various groups in society – it sets them against each other, as government action tends to be a zero-sum game.

Simply because the government has been violating a legal immigrant’s rights by denying them the ability to peacefully stay in the US, it doesn’t mean that it should also do so for illegal immigrants. Imagine a policy that mandated that all people with black hair must have their arms broken. The black-haired people then say “but this isn’t fair, what about the blond-haired people? We’ve had to suffer, why not them too?” Would the logical conclusion be to bust their arms as well? No! It’s a pity that the legal immigrants in this country have often taken a back seat in the public view, but to take this out on the illegals makes no sense. I wish not to restrict the freedoms of my neighbor simply because my own have been denied! This same logic is exhibited by the right when there were calls against the 47% who do not pay federal income tax. Much of the right, which is supposedly anti-tax, saw this as disastrous – so many people who are getting a “free ride!” But that’s not the conclusion to reach. It’s not that the people who have not been harmed need to start getting harmed – it’s the people who have been harmed that need to stop being harmed. It’s for this reason that, when asked about half of Americans not paying federal income tax, Ron Paul smiled and said “we’re half-way there!”

Again, an analogy: Imagine that there is a group in society that has been denied their rights, and to regain them they must stand in “The Line.” One day, Congress decides to take a portion of this violated group and grant them their rights immediately. Should we reject this in the name of equality? In the name of equal violations of rights? Not at all – lucky them! Let’s pass the same law for everyone in the violated group!


The main thing to ask oneself when thinking about immigration is whether the reasoning used to argue against immigration, if applied to people in the different states or counties, might sound unreasonable. For a great example, see “Save Fairfax”. As I have shown, the argument against immigration fails on all grounds. If you are still not convinced but are interested, I highly recommend browsing the website, which is chock-full of useful information, including the estimate that open borders could very well lead to a doubling of world GDP.

It’s time to end the disgrace that is “illegal immigration” – and to make it just “immigration.” I will not stop using the phrase “illegal immigrants” – every time I use it, I will think of the honorable men and women who come to the US to secure a better life for themselves peacefully through hard work – the American way.

Notes and References

[1] I do not mean the entire right – I’m sure there are some people on the right who aren’t using these signs.

[2] See Suppression of Native Wages

[3] This argument is unfortunately not my own creation, but was taken from Deportation to Africa

[4] In the interest of full disclosure, there was a recent study that showed that foreign-born residents of the US tend to have less-libertarian views than Americans themselves: U.S. Immigrants’ Attitudes Toward Libertarian Values

There are a few words of caution I would give about this. First of all, the study looks at some political opinions that might not be representative of the overall libertarian mindset. That is, the questions asked do not include a lot of things about which libertarians care.

Furthermore, it is reasonable to expect that the attitudes of some immigrants may be shaped by the attitudes of some Americans toward immigrants. For example, if it is the American left which favors increased immigration, immigrants might be more favorable to leftist ideas. If the right began to be greater supporters of free immigration than the left, the views of immigrants might shift right.

Also, it is questionable that the views of the immigrants are bad enough to want to ban them from entering. And, once again, I am sure we can find divergences of opinion between states, which would suggest we ban movement of unfavorable individuals across state lines.

Views expressed are not endorsed or put forward by Turning Point USA.

Biography Michael Tontchev

I am an Economics and Computer Science double major at the University of Maryland, College Park interested in microeconomic government interventions, libertarian property theory, and private educational innovation.

Greed: The Ultimate Enemy of Racism

When I got the idea to write this article, I decided to look up the keywords “greed” and “racism” together online to check whether someone had not already beaten me to the punch and written the same article in a style more eloquent than mine. I was surprised to find that all the results I received equated racism with greed. If I had to pick a representative quote from the sea of anti-greed-and-racism ones, it would be “racism is motivated by greed.”

It is difficult to see why so many websites equate the two characteristics together besides the fact that a lot of the opponents of the writers (real or imagined) possess both qualities. I hope to show that after reading this article, you will have even more reason to question the connection between greed and racism.

Basic Definitions

It is useful to define the terms as they will be used here.

Racism in this article will signify discriminatory behavior based on the idea of inherent and significant differences in the abilities of the races.

Greed will mean a love of profits (and of money more generally.)

Basic Economics

In economics, we generally assume that businesses are profit-maximizing. That is, they strive to produce such quantities and choose prices at such levels that they can maximize their potential profits. The theory of the firm can be extended by saying that some businesses also care about the racial composition of their workforce. If an employer dislikes black people for some reason, he will have a preference for not hiring them.

Assume for this discussion (without loss of generality) that there are only white and black people, and that an employer is currently hiring workers to fill his positions.

The objective of a non-racist employer is to maximize profits.

The objective of an employer racist against black people is to maximize not just profits, but profits minus his distaste for black people.

Begin, of course, with the assumption that there are no inherent differences in productivity among races. That is, black people and white people can produce the same amount of goods per hour. Let’s say that we have 100 firms in a market who are all racist to some extent. We know from economics that the higher the demand for a good, the higher its price, other things being equal. Since racist firms would prefer to hire white people, they have a lower demand for black people, and in equilibrium (or the resting state of the market), black wages will be lower than white wages.

Does the story end there? Not at all. One day, one of these firms looks at the market conditions and realizes something: “I’m making some good money and all, and I am hiring as few black people as possible. But, you know, these wages of white people ($10/h) are just a lot higher than those of black people ($5/h). Hiring all these white people is hurting my profits. If I were to switch to hiring more black people, I could have higher profits.” And so this firm swallows its discriminatory pride and switches to hiring more black labor, since it’s cheaper. This results in significantly higher profits for the firm, giving it an advantage over other firms. These other firms, after some time, realize that they’re losing customers to the less-discriminating firm down the street, which can sell products more cheaply since it buys black labor. Not wanting to lose out, they decide to also hire the cheaper labor to lower their production costs. As this process continues, demand for black labor is pushed up, increasing wages.

At this point, it is useful to stop and consider what happened. The initial employer who decided to hire more black people did so not because he is suddenly a much more civilized and modern person. He did it out of a love for money. I repeat: the profit motive caused this employer to reign in his racism and to further integrate his firm. Firms that decide to indulge in their racism and not hire many black people have to pay for their racism. That is, racism is expensive under capitalism. We could have predicted this outcome from the basic behavioral observations made in the beginning: non-discriminating firms are profit maximizing. Discriminating firms do not maximize profits. This, by definition, means that they earn lower profits due to their discrimination.

In the long run, competitive markets tend to drive profits of firms in a market down toward the cost of production. Firms which are very discriminatory and give up a lot of profits, therefore, will have to go out of business in the long run, since their profits will be negative due to their racial distastes, for which they have to pay [1].


The conclusion to be reached is that if we want to fight racism and increase integration, we should be fans of “greed.” The more employers love money, the less they will be willing to pay for their racism and the fewer racially-motivated decisions they will take. And since, as I assume the readers will grant me, racism is something we are taught rather than something we are born with, greater voluntary integration will lead to future generations that are more tolerant.

To give a face to the theory, I will give an example of “greed” fighting racism. Kentucky had a law on the books that mandated segregated rail cars for whites and blacks. Some railroad companies decided to ignore the law, since it placed extra burdens on them – racism was expensive. They were sued by the state and the law was upheld, contrary to the profit-maximizing wishes of the firms [2].

So how can employment racism persist in the long run? When the enforcement of the racial separation is enforced not by the market, but by the government. When a law is passed mandating separate treatment for whites and blacks, firms no longer have to fear that their competition will undercut them by taking advantage of the untapped pool of black labor – it is now illegal. Hence, they externalize the burden of their racism on society (which will now face higher prices for goods), and the racism will continue as long as the law is in place.

For a good analysis of how racist firms have taken advantage of government power to force their views onto society by means of non-market forces, read economist Walter E. William’s article “In Greed I Trust” [3] – it might just surprise you. Jennifer Roback also has some work on the effects of Jim Crow laws on opportunities for blacks – once again, government-propagated racism. If you want an in-depth look at the economic theory of discrimination, begin with Gary Becker’s seminal work The Economics of Discrimination.

As a parting note, I do hope you do not misunderstand my intent in this article. I am not a person who enjoys singing the praise of big business or money. I do not think that these should be placed on an altar as a symbol of greatness. I am merely pointing out an economic truth: it is most likely inconsistent to believe that greed and racism go hand in hand – and if you want to eliminate racism, greed is your friend. The more we care about profits, the less race enters the picture.

I will add my voice to that of Dr. Williams: In greed I trust [4]. Capitalism is, and always will be, the enemy of racism.

P.S. I also wanted to take a few lines to counter a common point I had noticed in my initial search for articles. Some websites seem to have decided that capitalism created racism in order to justify slavery and colonialism. This cannot be farther from the truth. A capitalistic system is predicated on a respect for individuals’ property in their body and possessions. Slavery is the epitome of the denial of these individual rights. Capitalism and slavery are mortal enemies.


References and notes

[1] Some readers may point out that certain frictions may cause racism to be less-than-fully eliminated in the long run. This is true, but is outside the scope of this article. I’m also limiting the analysis to employer discrimination, not employee or customer discrimination – though there are mechanisms by which these are mitigated as well.



[4] Greed, of course, as expressed through the market system. If greed is given the reins of government power, find the deepest hole you can – because at that point greed can become the most destructive tool in the world. For on the market, greed is restrained by the voluntary nature of transactions. In the sphere of government, which is by definition a tool of coercion, greed has no restraints on its power.


Views expressed are not endorsed or put forward by Turning Point USA.

Biography Michael Tontchev

I am an Economics and Computer Science double major at the University of Maryland, College Park interested in microeconomic government interventions, libertarian property theory, and private educational innovation.

A Comparative View of Market Failure

There are many markets in the world, which means that there are many ways for markets to fail. In the first part of this article, we will look at a case study of market failure to see just how bad the situation can get. We will then look at the theoretical arguments for why markets fail, and then decide on real-world institutions to achieve outcomes that are most desirable.

A case study of a dystopian market

The country in question was split into states, much like the United States, with individual population sizes being comparable. The market, after some time in operation, had settled into a strange equilibrium (or final state) that many people would call undesirable. Here is what happened.

Firms in this market did not specialize at all. Each firm began to produce all goods and services it could think of – food, schoolbooks, martial arts classes, heart surgeries, waste disposal services, and so on.

Furthermore, the market was structured in such a way that customers had to pick only two firms to produce for each state. That is, given the entire range of preferences an individual had, she could only pick two firms to frequent, and no others. She had to buy everything she wanted from these two firms.

These firms were beyond the wildest nightmares of economists who study monopolies. Not only was there a strict limit of two firms at which a customer could shop, neither of which specialized in the production of goods that they were good at producing, but most of the firms that contended for these two spots had never worked as such mega-firms before. They had never produced this impossibly huge array of goods. From supplying water to making safe cars to erecting buildings – these firms had never previously engaged in such activities. The firms could have advisers to help them in the production processes, but that was it – they themselves had never produced the products and services which they were expected to produce. They had never employed the appropriate management structures and they were unfamiliar both with the costs of production and with the capital structure necessary to create the products.

Moving from the static picture to the dynamic one – that is, from looking at a snapshot of the market in time to looking at how it changed over time – the situation was not any better. The firms did not exist forever – it’s true. However, the high market concentration continued. If a customer was unhappy, he would get a chance to change which firm filled each of the two slots less than two times per decade – sometimes just once.

There were strange externalities in the system – one person’s choice of his two firms affected everyone else’s choices. The equilibrium here, just as was the case with the market concentration mentioned above, involved enormous inefficiencies. What happened is that every person didn’t actually get to have his choice of two firms. That is, it wasn’t possible for different people in the neighborhood to “bind” themselves to a different firm if they wanted to. Instead, the outcome could be thought of in the following equivalent way: everyone in every neighborhood, county, and city of a state got together in one big convention (this often involved millions of people). Then, people who supported each firm grouped together, and the firm with the most people in its camp was awarded the ability to be one of the two that produced everything in the state economy.

Not only was the market highly concentrated and stagnant, but the firms that won the two spots were typically the ones that ran better advertisements than the ones which were better at producing some of the products they were supposed to. Furthermore, once selected, the firms rarely produced what they promised to the customers – both in terms of quality and in terms of the actual products ordered for delivery. They still received the money for the products the customers tried to order, though.

The firms chosen for a state often had to work with other firms chosen in other states to determine national production processes. The decision-making process was similar to how the firms were chosen individually. There were often situations where the national process of production was chosen by a little over half the firms, which themselves were chosen by a little over half the people in their respective states, leading to products made for the public which only a quarter of the population had actually asked for. Moreover, taking into account the fact that a customer had to choose two firms per state to produce everything, there was a reasonable chance that the firms would decide to produce things very few people wanted at all. If a customer had to buy all products from just two firms, chances are that he or she made his or her choice based on something like the top ten items for which they cared. So the firms could have had almost any choice of production for the millions of other products as long as they made the preferred coffee or bagels of half the population – or, at least, promised to do so.

When people were asked why they adhered to this system as part of a survey, nearly all replied that a few hundred customers had gotten together over two centuries ago and signed a contract that bound all their children, grandchildren, and so on to be future customers in this system.

To recapitulate, individual customers with thousands of preferences over products and product quality had to choose two firms to produce everything, and all these individual choices were averaged with everyone else from the state. The two firms selected rarely produced what they promised, and the individual choice got diluted even more when production had to happen at the national level.

Theoretical underpinnings of market failure

In what country did the free market have the disastrous results described above? Hopefully, some readers – economists or otherwise – have had red flags furiously flying around while reading the above case study about the free market. If they had, then they were spot on. It’s not at all a free market in any country. It’s the United States Senate.

Millions of individuals in a state have thousands of preferences about public policies, which they must boil down enough to be able to fit into two senators. Furthermore, all these immensely-reduced preferences are then averaged out with the preferences of at least half a million other people (and sometimes as many as over 37 million – I’m talking about Wyoming and California, respectively) [1]. The politicians (senators) chosen have no experience with almost anything for which they make laws [2]. They often fail to deliver what they promised [3]. They can be switched out only once every six years. And the reason why people stick to this system is because it was agreed to by people hundreds of years ago. If readers are not convinced, they can re-read the initial description and see that it is faithful to how the political system actually works. The House of Representatives is not all that much better.

What is my point, then? If we took what the government does and replace “government” with “market,” “politicians” with “firms,” and a few other words to make the disguise complete, most people would be appalled by this free market. Such an awful, monopolistic outcome doesn’t exist in even the worst models of monopoly. If a market resulted in this real-world situation, markets would lose all credibility for millions of years to come. Yet this is literally how government works, and it’s accepted as normal.

This is a shocking idea. The government, when we strip out the words “government” and “politicians,” engages in actions that would be unacceptable to anyone. Yet we’ve taken this sub-optimal state of affairs and explained it away with “well, it’s the government” – when this is, in fact, no legitimate justification of its actions.

For those who look for a more detailed analysis – and also one employing anointed mainstream economic jargon – it begins here. What follows is an economic analysis showing that the institution of government is inherently inadequately equipped to solve most (if not all) problems in society relative to the (imperfect) market. That is, even if markets fail, government fails worse.

The underpinnings of market failure (this time for real)

Economists usually begin with a very simplified model of the market called perfect competition. This model shows that markets are, in most instances, the very best institution we can have. The problem, however, is that the simplified assumptions of the model never exist in the real world. Hence, the conclusion too often reached is to disregard positive market mechanisms that do exist and jump to the conclusion that since markets aren’t perfect, this automatically legitimizes a large variety of government interventions. Anyone who still believes that markets work well despite their supposed failures is accused of believing in the silly world of perfect competition.

There are four ways in which markets can deviate from perfect competition: imperfect information, barriers to entry, externalities, and market frictions.

Imperfect information

Perfect competition assumes that every single actor has “perfect information” – they know all prices that all firms offer and the quality of their products. Real markets clearly don’t have perfect information.

Barriers to entry

Perfect competition assumes that it’s costless to enter and exit a market. This means that there is no equipment that is prohibitively expensive that would prevent new firms from starting up. This is obviously false in the real world.


Externalities occur when a person or firm places a cost on a non-consenting third party. An easy example is pollution of the environment: a consumer buys a product that requires the emission of pollution in order to be produced. He harms himself with this pollution in the process, which is fine, since he made the choice to buy the product in the first place. Yet the cost placed on his neighbor is not justified since it was not agreed to.

Market Frictions

Loosely put, just as friction slows down physical objects moving in their direction of motion, so market frictions are features of the economy that prevent markets from reaching equilibrium immediately. Market frictions create deviations from the predictions of perfect competition. They may include fixed costs and imperfect information.

What about government?

If economists are to begin by assuming markets are perfect, then they should also assume that government is perfect. It appears that they very much do so. However, it is too often forgotten that the assumptions of government’s ability to solve problems are more fictitious than real. Therefore, let’s apply the perfect competition assumptions to government and see how real government compares to perfect government. The final question, then, will be to ask whether the free market deviates from perfection more or less than government. If the free market is closer to “perfection,” then market constructs ought to be chosen over government institutions [4].

What is perfect government?

Let’s first define the system within which we are working. In our analogy, politicians are firms and voters are consumers. The product being bought and sold is public policy.

Perfect government, then, will be a system with perfect information, no barriers to entry, no externalities, and no frictions [5].

So how does government fare?

Perfect information

In the “government marketplace” of citizens buying policy through politicians, perfect information is definitely lacking. That is, voters are not perfectly informed about the abilities of politicians, the issues at hand, the policies proposed, and the policies’ economic impact [6].

There is a chance that this is not a fatal problem, however. The next question is whether voters have inherent incentives to acquire information to alleviate the problem of their imperfect knowledge. In markets, after all, customers know that a lack of information could lead them to buy products that are too expensive or of low quality. In other words, customers pay for their imperfect information – and hence have an incentive to acquire more of it until reaching their optimal personal level. In this way, imperfect information in markets is not fatal and is alleviated over time due to the incentives inherent on the market under imperfect information.

Is there something similar in the case of government? Do voters have inherent incentives to inform themselves politically over time? Unfortunately, the answer is no. Knowledge of public policies is what economists call a public good. That is, it’s a good that, once produced, can be enjoyed by everyone without the non-producers paying for it (it’s non-excludable). However, the cost of production lies entirely on the producer. One example is national defense. It’s argued that voluntary payment for national defense would be unlikely, since a person could realize that she can get the benefit of national defense without paying for it – since there is no easy way for her to be excluded when national defense is being produced. When everyone in society thinks in this way (this is called free-riding), the good doesn’t get produced at all.

Information about public policy meets the same fate. When a voter learns about the issues in the election, he creates a benefit for everyone else in society. His informed vote makes other people better off. However, it has little real benefit for him – the final outcome of the election is mostly not determined by his specific vote (public choice theory teaches us that even in very small elections, an individual vote has a vanishingly small impact on outcome). The choices facing the voter, then, are as follows: he can spend years learning about all the issues, challenging and changing his old viewpoints (which takes effort and determination), buying books, watching debates, and so on and then make an informed decision on the political candidate; his individual vote will have little impact. Alternatively, he could not do all of those things that would require thousands of man-hours and instead sit back and let the other voters take care of the problem. There would still be millions of people voting – it’s just that there would now be one less. Many voters make this decision and don’t vote. Very many others simply don’t put very much effort into learning about the issues (or, in fact, any at all). The result is a poorly-educated public giving opinions on issues about which they don’t know much.

It is true that there exist special interest groups that want to spread information about issues to further their own ends. Even assuming that all this information is accurate (which is doubtful, considering sometimes diametrically-opposed proposals that come out of these groups), the fact remains that voters still have no incentive to actually acquire this information. Whether Jane is an informed voter or not, the election outcome will be the same. Hence, she either doesn’t vote or votes with severely limited information.

Moreover, even if voters do attempt to become informed, they cannot very well put the information they have learned to the test in the same way they can test consumer goods they buy. If a consumer buys a bad electrical product from a company, it is often relatively easy to see that it doesn’t work as advertised. The consumer can take note of this, tell his neighbors and friends to not buy this brand, and then carry on with his life, knowing to buy another product next time. When a voter chooses a politician to make policy, the matter is very different. The voter, first of all, has to compromise on the actual policy he wants (since the current system doesn’t allow each voter to have the specific laws he desires but must live with the politician selected by the process). As such, whatever the outcome of the election, the voter does not get to test his policy [7]. Furthermore, there are complex interactions of policies that voters will not be able to disentangle and make sense of (was the downturn of the economy the result of bad monetary policy, tax policy, shocks to the price of oil, etc.?). Therefore, they cannot see how their hypothetical desired policy affected the country. Also, it’s costly to change one’s opinion – it requires learning more information and admitting that one was wrong (which hurts one’s ego). In the market, on the other hand, consumers often get to directly test the product they are buying, can often return it if it’s imperfect, and find it relatively less costly to change their opinions (and, indeed, find it costly to not change their opinion when they were wrong – they would keep buying a bad product!).

Economist Joseph Schumpeter put the matter elegantly when he wrote

“The picture of the prettiest girl that ever lived will in the long run prove powerless to maintain the sales of a bad cigarette. There is no equally effective safeguard in the case of political decisions. Many decisions of fateful importance are of a nature which makes it impossible for the public to experiment with them at its leisure and at moderate cost. Even if that is possible, however, judgment is as a rule not so easy to arrive at as it is in the case of the cigarette, because effects are less easy to interpret.” – Schumpeter, Capitalism, Socialism and Democracy

In short, the self-corrective mechanism of fixing imperfect information that naturally exists on the market due to its incentive structure is lacking in government. The government system has no inherent tendency toward improving the information of the participant voters [8]. Consumers act under constant, intense, and debilitating imperfect information.

Barriers to entry

If we consider elections to be another type of market, then there are high barriers to entry in the candidate market. That is, it is very difficult to become a viable candidate for congressional office. What is often needed is many connections and a good amount of money. Candidates should also be relatively handsome or otherwise charismatic. Furthermore, the attention of the voters is also limited – they can’t keep track of dozens of possible candidates. If barriers to entry in the free market lessen competition, barriers to entry in the government model trim it to the base.

Also, on the market, a business can start out very small, and, if successful, can grow over time. A senator, however, cannot start out as a “small-time senator,” a “mom and pop senator,” or a “garage senator.” No, local elections and state elections do not count, since the policies local politicians will be creating are quite different from national-level policies. We see, then, that even if a given market has a relatively high barrier to entry, the candidate market is worse – since a firm in a market can often start small and expand upon success, while a senator has no such luck. Either she wins the state vote or she doesn’t. If markets had such outcomes, they would be deemed awful.


The government system also has pervasive externalities.

Besides the negative externalities we’ve introduced so far, there are also positive externalities – cases in which a market transaction has benefits on third parties. Since the market participants buying and selling don’t consider these extra benefits, they don’t provide as much as is optimal for society (so the argument goes). Applying this concept to government, politicians have no ability to internalize the benefits of their superior production. That is, if a politician consistently chooses good laws, he doesn’t increase his salary – he gets a constant check every month (and maybe a feel-good feeling). If a firm chooses good production processes, it directly benefits from their superiority through higher profits – and hence has an incentive to adopt such production processes. It is true that a politician’s choices affect his reelection down the line. However, the effect could be as far as six years removed. Also, only his average policy choice will matter – not all of them. Bad choices will be averaged in with good ones (weighted according to the public’s interest in each policy issue) and the voter will decide in this way. A firm, on the other hand, suffers directly from each bad choice, and has an incentive to minimize all bad choices – not just their average.

Another externality problem in government is that voting is essentially a pure negative externality. That is, when Voter Victoria chooses for government to adopt a policy, almost all costs of the policy are placed on the rest of society – not Victoria. As such, Victoria chooses an excessive amount of government programs, since she pays a low part of the costs for any given policy. Since Victoria neither feels the costs of the policy she chooses nor directly reaps the benefits of getting educated (besides a feel-good feeling), she will make a very poor choice. The analogy to the market, here, would be if every consumer good suddenly became free. Consumers would neither feel the costs of their consumption nor the benefits of choosing to not waste consumer goods. They would tend to fail to conserve resources and would instead make firms produce way too many goods. [9]

A similar problem exists in the reverse direction. Not only are good laws difficult to pass, but bad laws that benefit small groups at the expense of everyone else are difficult to repeal. Repealing a federal program that subsidizes a corporation to the tune of $30 million per year will save taxpayers a little over 10 cents each. As such, there is little incentive to end it. The corporation, on the other hand, would lose $30 million upon repeal – and will hence have a strong incentive to lobby to keep it in place.

As a bonus, we can include a discussion of one of the more modern focuses of externality theory – network externalities (specifically, positive ones). Positive network externalities work as follows: The desirability of some goods is determined not only by the usefulness of the goods themselves, but also by the number of other people who own the same type of good. The more people own the good, the more valuable it is. An example is a telephone. A telephone is probably useless if you are the only person to own one. The more people own a telephone (and purchase telephone service from a firm that connects them to everyone else), the more useful a telephone is. In markets, network properties can create a sort of barrier to entry, since a startup doesn’t typically have a large user base, and hence might get passed over by consumers in favor of a larger firm. The political candidate market also has a network externality: how often do you hear voters say “I like the lesser-known candidate, but he has no chance of winning, so I am choosing the lesser of two evils”? In fact, this is actually used as an attack by Republicans against Libertarians – “Our candidate would have won if you had voted for him. A vote for a Libertarian is a vote for the Democrat in the race.” Voters massively fall prey to these network externalities and do not vote for the candidate they would prefer, fearing he will not ultimately win, and hence resulting in them having no say in the outcome of the race. Instead, they choose the “lesser of the two evils” – who is, in the end, by definition, still an evil – despite fairly widespread public agreement that alternative candidates are needed.


Frictions, being features of the system that prevent it from adjusting to changing conditions and from smoothly continuing along its path, are easily observable in government. One need only note that voters get to switch out a given senator (through the highly imperfect voting system discussed above) only once every six years. Imagine having to choose a brand of bread (without having tried the available brands before) and only being able to switch after six years; only that we’re not choosing brands of bread, but a collection of hundreds of policy stances that have massive nationwide and worldwide impacts – which can be changed once per six years per senator slot. If markets had six-year time lags in the transmission of signals, things would be very bad indeed.

It is becoming clear that whatever imperfections markets have, they are far fewer in number and lesser in intensity than government imperfections.

How can government be fixed?

To fix government, we would have to decrease externalities by internalizing them, lower barriers to entry, and reduce frictions.

How is this achieved?

To reduce externalities created by government, we should move toward a system where a person feels the costs and benefits from her choices more directly. When this happens, she has a greater incentive to get educated to make correct choices because she bears the costs more directly. This would both decrease the costs a person places onto others and would increase the incentives to decrease the imperfection of information.

To eliminate the externalities on the side of politicians, we need to find a way to make the people who create policy feel the consequences of both their negative and positive actions more directly. That is, choosing good policies should make them better off (which would incentivize them to make more good policies), and choosing bad policies should make them worse off (making them choose fewer bad policies) to a greater extent than happens presently.

To lower barriers to entry to creating policy, we need to decrease the blocks to having people try to create policy. More people need to be able to get a voice and to have a chance to create good outcomes.

Lastly, to reduce frictions, we should make policymakers be able to be switched out more often. The length of time a politician stays in office should somehow be related to how well he or she performs.

What political reform would this entail? The task seems daunting, but there is an easier answer than a reader might expect. For each of the policy ideals proposed above, the more of the reform we get, the better off our institutions will be. Hence, we should try to make all decisions be internalized by voter as much as possible – have them reap both benefits and costs personally – and have them be imposed onto no one else. The same goes for politicians – good moves directly influence the politician who made them – and only that politician. We should lower barriers to entry by allowing a voter to choose any person who proposes a better allocation of resources and who can prove that his plans are realistic by creating a prototype. Finally, allow voters to choose between these people whenever they want and be able to switch fluidly.

What system in the world could achieve this?

Every single improvement in the political system described above is a move toward a pure free market society. When individuals buy products on the markets, they bear almost all the costs and benefits of their products directly. Firms who use resources wisely – in a way that society is willing to part with money for their products, showing their desire for them – gain more profits. Firms which make incorrect choices suffer from them. Having people freely be able to start firms creates new options for the creation of policy all the time. And having customers being able to switch between firms in the future as they wish decreases frictions.

Allow me to reiterate this. All of the problems of government outlined above – problems that cause the system to deviate from perfect government – can be solved by changing the institutions of society from mandated government ones to voluntary market ones. Reread each of the government failures and try to imagine a market operating under them. It would essentially be useless as a means of allocating resources. Yet this is the reality of government.

Sure, the market is still open to the four critiques presented initially. Yet only partially so, and only in specific instances, while government action always deviates strongly from the perfect government assumptions. We see, then, that the move toward better governance of the public is in fact the move toward lesser governance of the public – because the market has the incentives that the government lacks.

In conclusion, when people look to a certain problem and think “it’s too important to be left to the market” – I encourage you to consider that, in fact, “it’s too important to not be left to the market.”

Government and the incentives it creates inherently lack the mechanisms necessary for optimal functioning. The market, as imperfect as it might be in some instances, wins out.

I leave any reader still skeptical with the following parting questions: What would your evaluation of markets be if they exhibited the same exact failures outlined above that government exhibits? Would you trot out these pieces of evidence as fatal against the case for markets? And if so, why do they not have the same consequences for government action, which is what they actually characterize?

References and notes

[1] For why the median voter theorem doesn’t solve this automatically, see Bryan Caplan’s “Myth of the Rational Voter” –

[2] As mentioned in the description, politicians indeed have advisers, but then that raises the question of how to choose advisers when they can’t very well choose the best advisers without knowing the subject matter. Someone might object that the same happens when a customer has to choose a company in her personal life, yet the two are very different. Customers are choosing from companies that are subject to profit-loss tests – if they produce bad things consistently, they will go out of business due to a lack of repeat customers. Political advisers, on the other hand, don’t have their specific policy proposals tested in a way that directly sends signals back to their job position – an adviser can consistently make bad choices and get selected again (or, at least, advisers having the same ideas). This last claim can easily be proved by looking at the real world. Given that there are opposing ideas in the political arena that have survived centuries, this shows that politicians, needing advising, constantly choose advisers who must have incorrect policy views. I say incorrect because it’s impossible, for example, for the best policy to be to both increase and decrease a given tax at the same time. If one side is best, then the other side holds an incorrect view. Such views tend to not get culled very effectively. An explanation of why can be seen later in the article. The present point being that advisers for politicians (or even expert bureaucrats) are not enough to have politicians make good laws that affect thousands if not millions of products.

[3] For those who are meme-savvy: You really think a politician would do that? Just get into office and tell lies? The joke had to be made.

[4] An astute reader might note that even if the market beats government in the aggregate, government might win in some limited cases when results are disaggregated. I hope to convince the reader that the critiques of government action are present in all government action, while market imperfections can be fairly limited.

[5] I realize that “no externalities” and “no frictions” are not prerequisites for perfect competition, but since economists treat all four aspects mentioned as market imperfections, they might as well consider externalities and frictions to be parts of a “truly” perfectly competitive market.

[6] I doubt that, upon reflection, an honest reader would disagree with this statement. Just in case, I will briefly cite some evidence to support each claim:

- Consider the Nixon-Kennedy debate, when Nixon was sick and ghastly-looking. People who listened to the debate on the radio thought Nixon fared much better than people who watched the debates on TV and saw a sick Nixon.

- Consider single issue voters, who don’t know much about unappealing issues that may affect them significantly. Examples of such issues may be monetary policy, foreign policy, tax policy, or drug policy.

- Consider the widely different reactions of people to Obama’s healthcare law when it was called “Obamacare” and when it was called “the Affordable Care Act.” It also wouldn’t stretch the imagination to say that many politicians themselves were uninformed as to the specific content of the law.

- Consider the fact that most voters do not study economics, which would allow them to gauge the impact of the legislation being considered, and moreover have systematically incorrect policy views on certain important economic matters, such as free trade.

[7] A cynical joke is that there are two things that one should never see in his lifetime: how sausage is made and how legislation is made. In the present context, what this means is that the final policy chosen isn’t close to almost anyone’s desired policy. This means that it’s difficult for voters to test their specific beliefs about policies. Sure, some enlightened voters could decide that their political pick was rotten, but this doesn’t necessarily propagate the error signals back to their own policy views.

[8] Note that not only do voters have little incentive to become informed, but the same holds for politicians. While politicians do get impacted by their policy stances (unlike individual voters), they are being tested for how much they match up with the public’s viewpoints, not with how much they match up with the optimal policy. As such, politicians have no inherent pressure to adopt better laws.

[9] Even this analysis ignores the fact that American voters also externalize costs onto other nations. One such example is non-defensive wars.


Views expressed are not endorsed or put forward by Turning Point USA.

Biography Michael Tontchev

I am an Economics and Computer Science double major at the University of Maryland, College Park interested in microeconomic government interventions, libertarian property theory, and private educational innovation.

Will Jakob Thorn Himself Take His Dose of Realism?

Turning Point USA columnist Jakob Thorn recently penned an article titled “When Will Libertarians Stop Kissing up to Liberals?” [1], where he asked readers “When will Libertarians stop kissing up to liberals and join the party that actually espouses their values?” He alleges that Libertarians ignore the “real” political issues such as taxation, federal spending, and healthcare – and yet pay attention to “petty” social issues such as marijuana legalization. According to Thorn, Libertarians’ refusal to vote for Romney put Obama into office; instead, he argues, they should have aligned themselves with the Republican Party and their candidate – Romney. Why? “For all intensive [sic] purposes, Romney was a a [sic] champion of fiscal responsibility.” With “a small dose of realism, Libertarians can become a major force for economic conservatism and free-market principles in the next election cycle.” Unfortunately for Thorn, it is he that needs a dose of realism.

Before we begin our discussion, we must note that there is a difference between capital-L Libertarians and lowercase-l libertarians. Capital-L Libertarians are members or supporters of the Libertarian Party. Lowercase-l libertarians are people who believe in the libertarian ideology – which may or may not be the ideology and politics of the Libertarian Party. In fact, libertarians often accuse Libertarians of thinking within the system too much and of not pushing for truly alternative policies. I will assume that Thorn’s discussion is of lowercase-l libertarians more broadly.

Besides this small aside, I do not even know where to begin with Thorn’s article. Perhaps, then, it would be best to start at the top and work my way down.

Many of Thorn’s assertions are completely baseless and belie a fundamental misunderstanding of political reality. Libertarians do not ignore fiscal issues at all – and in fact academic libertarians are criticized for keeping their heads stuck in economics and property rights theory too much. To claim that libertarians do not care much about taxation, spending, and regulation is to ignore the actions of major libertarian institutions such as Students for Liberty, Young Americans for Liberty, Cato, the Ludwig von Mises Institute, and the Institute for Humane Studies, which regularly and extensively cover economic issues.

Furthermore, who is Thorn to claim that social issues such as marijuana legalization are “petty?” Perhaps they are to him, yet the fact is that there have been around 9.5 million marijuana arrests in the US since 1995 – with drug convictions in the justice system being significantly higher for blacks, despite comparable rates of drug usage. According to a survey by the U.S. Department of Health and Human Services, between 95 and 100 million Americans have used marijuana in their lives, with 15 million having used it in the past month at the time of the study [2]. If the government were to take marijuana prohibition seriously, then millions of Americans would be arrested merely for smoking a plant.

Consider, though, another scenario. Imagine that the Democrats, for whatever reason, ganged up and decided to ban religious items such as crosses in schools. Surely the cross is not the difference between going to Heaven or not, they argue hypothetically. My prediction is that the Republicans would (rightly) raise a veritable storm over this. Yet does this really impact our economy and the “real” issues such as fiscal policy, according to Thorn? Surely not! So shut up about it, say the Democrats, and let’s talk about whether the money we steal from the public should go to the poor or to the rich. I doubt that Thorn appreciates his logic when it is applied to non-fiscal issues Republicans typically care about.

Moreover, if this is the Republican Party libertarians are supposed to join, then I deem it fairly useless to join a cause that has embraced the idea of “freedom for me, but not for you.” Unfortunately, it appears that the Party has indeed rejected one of the fundamental concepts of liberty – as stated by Herbert Spencer, “However insignificant the minority, and however trifling the proposed trespass against their rights, no such trespass is permissible.”

And have we forgotten the enormous cost of the Drug War itself? Does that not merit consideration? Surely fiscal conservatives such as Thorn should scorn a program that has wasted a combined total of $1 trillion, if not more [3]. Taking into account the families destroyed and the careers ruined, the economic impact of the war is likely much higher. It is thus especially interesting that opposition to a libertarian focus on the drug war comes from a person who values family and economics as highly as Thorn [4].

Yet besides the importance of social issues, it has to be noted that the Republican Party, its rhetoric notwithstanding, is not very much the party of economic freedom. Yes, its platform does indeed bear many of the marks at which libertarian policy aims. However, in the words of an Italian proverb, tra il dire e il fare c’è di mezzo il mare – a sea lies between what is said and what is done. Actual Republicans in Congress have repeatedly allowed for government expansion. See, for example, Medicare Part D, which was labeled by former U.S. Comptroller General David Walker as “the most fiscally irresponsible piece of legislation since the 1960s” [5]. Furthermore, regulations, contrary to common belief, did not shrink, but in fact grew under the Bush administration. We can also look at the wars of the early 2000s, which won the government a nice pile of debt. And if this still leaves readers unconvinced, perhaps they should consult the bailouts which were accepted by the Republicans.

Now we can turn to the question of whether Romney, the Republican presidential candidate in 2012, was indeed a “champion of fiscal responsibility.” I usually tend to stay out of politics, since I believe that most of it involves petty squabbles over moving the line of big government a few inches to the left or a few inches to the right. Still, political debates do create a spark in me, so I watched Obama and Romney’s performances. What really drove the final nail in Romney’s coffin for me was his comment on regulation, banks, and garages:

You couldn’t have people opening up banks in their — in their garage and making loans.

Here Romney completely gave away his lack of understanding of how markets work. There are two devastating problems with his statement.

First off, I somehow doubt how many people would see a “garage bank” and say “oh hey, that’s totally not sketchy – I’ll give my money to those guys!” To think otherwise is to lose all faith in the power of the free market to do just about anything.

Secondly, many of our biggest firms in the world have actually started in garages – among them HP, Apple, Google, and Amazon [6]. And, in theory, why couldn’t a bank start in a garage? So even contrary to the point I mentioned in the previous paragraph, a legitimate garage business with a sound business model could actually take off and provide some of the services currently provided by major banks.

It is apparent, then, that Romney neither understands the regulatory mechanisms that exist in the market itself nor the entrepreneurial process of the creation of businesses to cater to the public’s needs.

On the discussion of realism, it’s relatively fruitless for Thorn to tell libertarians to stop focusing on “fabricated social wars,” since it’s likely that it is exactly this which holds back the GOP. The nation is decidedly moving in a socially liberal direction. Whether this is a good or a bad thing is irrelevant to the current discussion – the political reality is that the GOP is falling behind [7].

Furthermore, his claims that libertarians must abandon their ideology which is “hardly practical” (given the current political climate) are off-mark. To achieve the goal of economic freedom, what the country needs is cultural education about the economics and philosophy of free markets. Until the public cannot understand what it is that fundamentally makes markets work and why they’re most consistent with common moral understandings, free markets will not make a definitive appearance in the US. Sure, we could shave taxation off a few percent or remove a few extra regulations here and there, but in the long run, without a shift in political culture, the tug-of-war between the phony left and right will generally lead to a growing government and a shrinking individual, as it has done over very much of the history of the US.

Do not, however, misunderstand me; this cultural shift does not mean that libertarians want to create their own version of the “socialist man,” who is an unrealistic ideal citizen that must populate the earth for socialism to work. Instead, libertarians take people as they are – with all their flaws and imperfections – and propose a social solution that best leads to cooperation, tolerance, and growth. All that must be done to score a big win for liberty is to give the public a better grasp on the workings of the free market. This cannot be done through political compromise, but instead through teaching of fundamental principles.

Perhaps, as an afternote, it should be mentioned that one of the most influential and successful libertarian politicians – Ron Paul – did indeed play on the Republican team. I am not opposed to doing this out of political necessity. However, Dr. Paul’s goal was to reinvent the American right into a party truly committed to the protection of individual freedom in the social and economic spheres – and not just the pretend opposition to the left that it is now.

The conclusion is inescapable – it’s Mr. Thorn who needs a dose of realism in order to stop kissing up to either major political party. I warmly invite him to consider the case for principled libertarianism.


Views expressed are not endorsed or put forward by Turning Point USA.

References and Notes


[2] “Marijuana Prohibition Facts” –

[3] “AP IMPACT: After 40 years, $1 trillion, US War on Drugs has failed to meet any of its goals” –

[4] After all, Thorn claims it is one of the three central “tenants [sic]” of the Republican Party platform, which he appears to proudly support.

[5] “Republican Deficit Hypocrisy” –

[6] “Mitt Romney Is Wrong: Garage-Based Businesses Are Great” –

[7] For the record, from a political perspective, moving to the “left” on social issues is a good thing, in my view.

Biography Michael Tontchev

I am an Economics and Computer Science double major at the University of Maryland, College Park interested in microeconomic government interventions, libertarian property theory, and private educational innovation.

The Less-Sexy Side of the Global Warming Discussion

When we think of climate change, we imagine spirited activists with a twinkle in their eye boldly organizing international conferences to address concerns over our warming planet. There’s no denying that the left has dominated the discussion – at least on the East Coast, where I live. Putting the science aside for the moment, we have to note that they have the sexier side to defend – a romantic, fantastical vision of a dystopic, dying planet polluted by the waste gases of greedy businessmen. The only hope rests in the courageous young men and women who can save it by building a coalition across boundaries to unite for a common cause – to unite for what’s right – to unite for our future and our children’s future!

I beg you to not misunderstand my position – I love internationalism, I dislike rigid national boundaries, I enjoy uniting for a shared cause, and I have nothing against saving a dying planet. I will even admit that I do not feel qualified to judge the scientific case for or against the existence of man-made climate change. I’ve attended a class which taught me the evidence in favor of the theory and I’ve found it decently convincing. Then I’ve done some outside discussion with people who do not see the situation as being as clear-cut as is presented, and their argument has also been intriguing. Perhaps with some more reading I will form a stronger opinion on the matter, but for now, let the world know that I am no climate scientist. I do not know whether anthropogenic global warming is a threat to our future. There.

What I do know is that while the public’s attention has been focused on the climate science (or at least what bastardized version of it trickles down to us through our inadequate media), what has been largely neglected is the non-sexy part of the discussion – the economics. And if, as the left claims, the science behind climate change is a settled fact, the economic case for government action against the alleged disaster is far from clear-cut.

Let’s assume that the Intergovernmental Panel on Climate Change (IPCC) models are correct for the moment (and that we generally do not want to make the Earth uninhabitable) and begin our analysis from there.

Tax credits for renewable energy projects, direct subsidization of green energy, Renewable Portfolio Standards, car emissions regulations – there exist many proposals to curb our CO­2 emissions – where do we begin? Each of these policy proposals has its supporters, but economists are generally united against piecemeal regulations of this sort. No, the government doesn’t have enough information to be able to micromanage the economy to that extent. What would be best (assuming the science is solid) is to find a way to set a general goal and to let each firm decide how to best achieve this goal by itself. Firms know much more about their own production process, and can hence find the most painless way to get in line with the mandated policy (though this still takes its toll, of course). This is called market-based environmentalism, and involves having the government impose a final goal on the market and letting each firm adapt to the goal.

The two market-based environmental proposals to cut CO2 emissions are the carbon tax and the carbon emissions trading plan. The carbon tax unsurprisingly involves having the government place a tax on each ton of CO2 emitted – say, $30 per ton. Carbon emissions trading (popularly known as “cap and trade”) entails having the government put a limit on the total CO2 that may be emitted into the atmosphere in the country, issue “permits to pollute” to various firms, and then allow firms to trade these permits. This way, if a firm is able to reduce its carbon footprint, it can sell its surplus permits to a firm which has not emitted less carbon, and hence a market for permits is created.

Economists generally support a carbon tax over a carbon emissions trading scheme, so that is the plan on which I will focus.

In the idealized world of simplified neoclassical economic theory, the carbon tax is the perfect policy to counteract climate change [1]. But once we unpack the proposal and introduce some real-world factors into the analysis, the case for the carbon tax is weakened at best, and erased completely at worst.

When proposing policy, economists perform a cost-benefit analysis, looking at the negative and positive effects of a given plan. In the context of climate change, the cost-benefit analysis yields the “social cost of carbon” – or the dollar value of the harms to society that occur as a result of climate change. For example, if 10,000 homes are destroyed, and each home is priced at $100,000, the cost of this destruction will be $1 billion. So if we can calculate this social cost, then choosing the right policy should be fairly easy, right? Well, not quite.

As it turns out, a large part of the benefits of curbing carbon emissions occur in the distant future – 50, 100, or even 250 years out [2]. When economists look at events in the future, they must be concerned with the “discount rate” that they use in their calculations. Simply put, for various reasons in economic theory, a benefit that occurs in the future is less valuable than the same benefit that occurs today. Hence, future benefits must be “discounted” – or reduced in value – to be able to be compared with present benefits (or costs). Combining this with the fact that the social costs (and benefits) of carbon are spread out over centuries, the discount rate is central to the discussion. The higher the discount rate, the lower the cost of carbon turns out to be. Conversely, the lower the discount rate, the higher the social cost of carbon.

What does economic theory tell us about the correct discount rate to use? Are you ready for this? Drumroll, please… Economic theory tells us – nothing at all. That’s right – the discount rate, a crucial factor in the analysis, is a completely subjective (and, hence, political) factor in the calculations. What’s so troubling about this is that depending on the discount rate we choose to use, we can receive social costs which are extremely high, costs which are very low – or, in fact, social benefits! An economist churning out calculations using the exact same mainstream IPCC climate models can give completely opposing social cost numbers [2].

This is merely the first drop in the bucket. What is even more troubling is yet to come. The executive branch has guidelines on what discount rates to use to present estimates of the social costs of carbon – one of them being 7%. That is, reports are required to give numbers based on these discount rates. However, the Obama administration’s Working Group omitted the 7% discount rate [2]. Why is this troubling? Because given their calculations using the other discount rates, there is good reason to believe that the 7% discount rate would actually spit out the result that CO2 emissions will actually be giving us net positive benefits – not negative! Once again, this is not some “right-wing nut” talking here – these are economic models based on IPCC data on climate change.  The implications of this are staggering – the administration violated its own rules by willfully omitting the calculation that would wipe out the case for action against climate change.

But wait – there’s more! Another one of the guidelines states that the social costs must necessarily be reported for Americans, with global social cost reporting being optional [2]. That is, how much global warming will hurt Americans. What did the Working Group decide to do? Deciding to switch its clear instructions around, it reported only global estimates, ignoring the rule of having to report domestic impacts. Why does this matter? Because their estimated social costs of $33/ton at the global level fall down to $2/ton at the domestic level. And even that doesn’t take into account the 7% discount rate, which, if used, could likely give the Obama administration the awkward result that carbon emissions should be subsidized, not taxed. Glad we dodged that bullet!

An opponent at this point might argue that America shouldn’t be a jerk and disregard how climate change hurts the rest of the world [3]. Hence, global estimates are important. And I definitely agree – taking a global outlook is very important. However, there are two problems with this.

First off, the Obama administration clearly violated their own guidelines, and it still is important to know the costs to the US compared to the costs to the rest of the world.

Secondly, the US by itself absolutely cannot solve the climate change issue. The Cato Institute has created a “Handy-Dandy Carbon Tax Temperature-Savings Calculator” [4], which allows the user to play around with a few variables and see how much temperature increase is avoided under various emission-cutting schemes. Once again, these are based on IPCC models, not some crazy CATO conspiracy that the left wing loves to hate. Quoting the page,

Assuming the IPCC’s value for climate sensitivity […] and completely stopping all carbon dioxide emissions in the U.S. between now and the year 2050 and keeping them at zero, will only reduce the amount of global warming by just over a tenth of a degree (out of a total projected rise of 2.619°C between 2010 and 2100).

What do all those numbers mean? It means that if we take all the official global warming data and if we assume that the US emits no carbon whatsoever after 2050 (note: not “no increases in carbon” – no carbon at all, which would completely obliterate our economy), then we avoid an increase of a little over 0.1°C (a little less than 0.25°F) by the end of the century. This means that instead of increasing by 2.619°C, the temperature will increase by 2.482°C – if we have no economy.

The conclusion is that for any climate change proposal to work, it must be a global push. This creates very many problems for policymakers, since instituting strong anti-carbon measures on a global scale is very difficult – and maybe close to impossible. Top-level bureaucrats know this.

The fun doesn’t end there, however. Robert S. Pindyck is a professor of economics at MIT, an author of a widely-used microeconomics textbook, and also a proponent of a global carbon tax (who is doubtful that it would be feasible at the global political level). He has written a peer-review paper upcoming in the Journal of Economic Literature that offers a devastating critique of current economic-climate models. The abstract uses surprisingly strong language for an academic paper by an economist of his caliber:

These models have crucial flaws that make them close to useless as tools for policy analysis […] the models’ descriptions of the impact of climate change are completely ad hoc, with no theoretical or empirical foundation […] IAM [Integrated Assessment Models] -based  analyses of climate policy create a perception of knowledge and precision, but that perception is illusory and misleading. [5]

So why are these models so bad, besides the subjective nature of the discount rate? Well, they include certain “damage functions,” which describe GDP loss as a function of temperature increases – that is, how much production will be hit due to a given increase in temperature. If this sounds like a tall order to the reader, he or she will be on the same page as Pyndick, who blasts these models as completely unfounded:

Weitzman (2009) suggested the exponential-quadratic loss function…which allows for greater losses when T is large. But remember that neither of these loss functions is based on any economic (or other) theory. Nor are the loss functions that appear in other IAMs. They are just arbitrary functions, made up to describe how GDP goes down when T goes up.

The loss functions in PAGE and FUND, the other two models used by the Interagency Working Group, are more complex but equally arbitrary…[T]here is no pretense that the equations are based on any theory.

In short, these functions that economists are using are literally made-up and based on no fact or even theory in economics [6].

And not only are the types of functions made up, but their parameters (crucial numbers in the function which determine how the function handles given inputs) are also made-up. Parameters in science are usually “calibrated” (or, adjusted) by using known data to see which parameters in the function best describe the data that we have already observed. The problem, though, is that it turns out that, as Pyndick notes, “[t]heory can’t help us, nor is data available that could be used to estimate or even roughly calibrate the parameters.” Trying to salvage their models, “[s]ometimes these numbers are justified by referring to the IPCC or related summary studies….But where did the IPCC get those numbers? From its own survey of several [Integrated Assessment Models]. Yes, it’s a bit circular.” What does this mean? It means that the people making the economic models justify their numbers with the IPCC figures, which, in turn, were taken from these same models to begin with. Such circular arguments have no basis in reality.

To make matters worse, there exists another drawback to a carbon tax – the tax interaction effect. When there exist previous distortionary taxes in the economy, adding a carbon tax on top of that increases the harms caused by the other taxes even more. This disproportionately hurts the poor. Estimates in the economic literature suggest that for all taxes on carbon underneath $50/ton, taking into account the distortionary effect of the rest of the tax system, the optimal carbon tax would have to be edited down to be $0/ton [7]. That is, all carbon taxes under $50/ton are actually useless. To offset some of the costs imposed by the taxes on the poor, some have proposed to then use the revenue raised by a carbon tax to give refunds back to the public. Unfortunately for them, the economic literature doesn’t find evidence to support the benefits of these “tax swaps” [8][9].


Going to conventions in exotic places to protest against an increasingly-polluted world is fun, trendy, and sexy. Unfortunately for those who enjoy doing it, the very much non-sexy dismal science (economics) has to come in and spoil the party by pointing out that even if all the science is spot-on, carbon taxes, as implemented in political reality, could be a huge failure. Current economic analysis (which, in the end, is what matters) is based on made-up functions calibrated to non-existent data and discounted with arbitrary discount rates (regarding which the administration violates its own guidelines). If the science of climate change is solid, then the economics behind averting it is like chunky, slimy snake oil. The US should not pursue policies based on the models we have today.



It turns out that Pyndick has been notified of the reaction to his paper, and has come to the defense of carbon taxes [10]. This is not surprising, of course, given that, as was mentioned before, he is a supporter of this policy. His attempts to save it from his own indictments, however, somehow fall flat, since he presents a solid case for why the current models are inadequate and fail in important theoretical ways. On the flip side, I must agree with part of Pyndick’s sentiment – the critique of current models isn’t a critique of all future models. However, the present article has discussed not only problems with the best models to date, but also theoretical issues ones that affect all possible models – such as the discount rate.


Views expressed are not endorsed or put forward by Turning Point USA.

References and notes

[1] For thoughts on the validity of neoclassical externality models, see a compiled list at LibertyHQ:

[2] “IER’s Robert Murphy Testifies on Social Cost of Carbon” –

[3] I happen to think that the government shouldn’t ever pass policies that benefit Americans at the expense of the rights of foreigners. That is, all humans on earth have the same inviolable rights. People who say that the government shouldn’t be a jerk to the rest of the world by disregarding global impacts of climate change, however, quite possibly hold conflicting views that do support the violations of the rights of foreigners – tariffs, non-open national borders, etc. As such, they must either drop their support of taking into account global impacts or they must embrace a removal of all tariffs, a complete opening of the border, and other very-libertarian policies. I do embrace these goals. Do they?


[5] “Climate Change Policy: What do the Models Tell US?” -

[6] “MIT Economist on Bogus Climate Damage Functions” –

[7] ‘Carbon Taxes and the “Tax Interaction Effect”’ –

[8] “MURPHY: Using the CBO Report to Critique a US Carbon Tax” –

[9] I’d like to add on as an endnote another observation. Economic models of climate change assume a social welfare function – in short, an addition of all the happiness or satisfaction of people over time. Such a social welfare function glosses over the fact that interpersonal utility comparisons are impossible. That is, it’s impossible to add up the happiness of two people – not just because of limitations of technology, time, and money – but even theoretically. Social welfare functions flaunt this fundamental fact and pretend to be able to aggregate people’s utility, or happiness. As such, the results they give are highly questionable, if not untenable.

[10] “Robert S. Pindyck in his own words (and yes, he read and agreed with this blog)” –

Biography Michael Tontchev

I am an Economics and Computer Science double major at the University of Maryland, College Park interested in microeconomic government interventions, libertarian property theory, and private educational innovation.