More on Government as Useful Irritant: Why Are Economists Stupid About Innovation?

Martin Feldman, a Harvard professor of economics and former advisor to President Reagan, is against a hike in the minimum wage. One of his arguments:

When low-skill labor becomes more expensive, employers have a greater incentive to mechanize or outsource their work.

He — like most economists — ignores the point that an increase in the minimum wage, by forcing employers to reexamine familiar practices, will increase innovation. (I have seen non-economists make this point.)

How you can hope to understand economics without understanding innovation is beyond me. I realize that economics is a job — that academic economists try to write papers that make incremental improvements in understanding and innovation is not always important. Yet the whole profession seems stuck in a world where it is okay to ignore innovation and okay to try to increase productivity yet not acknowledge that productivity and innovation are often at odds. (For example, almost all foreign aid programs ignore innovation.) I have never heard or read an economist make this simple and obvious point. The situation reminds me of a friend of mine. When she was in first grade, she had a lot of pennies. Now and then she would spend some. She knew how to add but not subtract, so after she spent some she had to count them all again. At least she got the right answer eventually. Economists, not understanding the effect of Policy X on innovation, really cannot predict the effects of any policy that affects innovation.

It isn’t just economists. Epidemiologists seem stuck in a world where it is okay to ignore the immune system. They act as if the immune system does not exist, except perhaps when someone asks them why smoking is so bad and they reply “maybe it reduces immune function”. Statistics professors seem stuck in a world where it is okay to ignore the question of how to generate an idea worth testing, except to grant that making graphs is helpful.

Psychology professors, at least the ones who do experiments, are also stuck that world. With few exceptions, they have no idea how to generate ideas plausible enough to be worth testing. You can read a thousand psychology textbooks and ten thousand psychology papers and end up knowing no more about how to do that than when you started. It is a methodological question, yes, but maybe you have to be a psychology professor to grasp how disabling it is to not have a good way to generate ideas (ideas plausible enough to be worth the cost of testing). It is like having a car — psychology professors know a lot about how to do experiments to test ideas — but no fuel.

Something is making a lot of very smart very capable people ignore the obvious. I have a theory of why these vast areas of ignorance — easily noticed, yet rarely acknowledged — exist. It is because science is slow and difficult and suffered great damage.) Distant observers, including granting agencies, university administrators, journalists and the general public, have a hard time telling the difference between real climbing and pretend climbing.

10 Replies to “More on Government as Useful Irritant: Why Are Economists Stupid About Innovation?”

  1. The problem is that innovation to solve an artificial problem (such as unskilled labor being too expensive because of government fiat) is often wasteful. If the government passed a regulation requiring all manufacturing workers to work with their dominant arms tied behind their backs, you’d see a lot of innovation in the field of one-armed manufacturing processes, and this would substantially mitigate the harm caused by the new regulation. But the new equilibrium would almost certainly have lower total productivity.

    You can make an argument from complacency, i.e. that employers don’t bother innovating when the status quo is good enough, and the supply shock caused by a higher minimum wage would wake them from their complacency and spur them to innovate in ways that would result in a more productive equilibrium. Maybe that’s true, and maybe it’s not, but it’s not at all obvious, especially since many low-wage industries are highly competitive and unlikely to encourage complacency. And this argument for a higher minimum wage becomes an argument for any kind of negative supply shock.

    Seth: Of course innovation is “wasteful”. We need such waste. It is inevitable. It is the price you pay for innovation. Thorstein Veblen made exactly the same mistake over and over and over. Complaining about wasteful decorations, for example. He failed to see the value of “useless” decoration and could do nothing but make fun of it. It was a serious limitation of his understanding. I agree that innovation is never obvious — it is never obvious that Change X will produce innovation.

  2. There are economists talking about innovation, but they are talking about intellectual property and how your useful irritant is strangling innovation.
    When economists talk about minimum wage laws they usually talk about the poor people who are being screwed in the name of helping poor people. The irritant frames the debate, so to speak.

  3. The previous comments say it well. Like all government programs, the stated goal is one thing but the outcome is another thing which creates more “need” for more regulation rather than just remove the old regulation that caused the problem in the first place. It is more about controlling other people than anything else, power hunger.

  4. I’m completely convinced economists, in particular, are so stupid because they are so obviously lying. It is a one party system (Keynesian) used to give a cover story so that bankers and govt can rip-off the productivity of the middle class. To sell a pack of lies takes some effort and is inevitably going to have some contradictions to deal with. Trying to paper over those contradictions with yet more lies is going to make one sound stupid. If you’re job was to defend pre-Copernician astronomy, you’d sound stupid too.

    Also, it’s interesting you mention innovation because the 20th century had massive innovation which should have made the middle class incredibly, almost unimaginably wealthier. There’s no denying in a lot of ways it has, however, in quite a few others and relative to those in the banking and govt classes, it’s been a disaster. The reason is, the system has been set up to skim a large part of the wealth generated by innovation to the banking and govt classes. They control the money supply and get first dibs on it. This is all well-known, but there’s a series of institutional lies used to justify it. Nowadays almost anyone that questions it is lampooned and dismissed, without even honest debate of the merits. It’s treated like questioning the lipid theory of heart disease some 20 years ago. Anyone attempting that case would be labelled a kook and completely ignored by those that owned the megaphone and set the agenda.

    The internet has broken their monopoly on the megaphone, but they are still maintaining their grip on the real financial power. They’ve set up the system to have too much divide and conquer for dissenting voices.

  5. Coyote blog does a good job explaining why looking at the bare numbers of unemployment after a minimum rage hike doesn’t make sense. Basically, he talks about how businesses plan ahead and cut jobs/hours months before the actual implementation of the minimum wage (since they are announced well in advance). Also, that only 3% of workers work at minimum wage, so, if the minimum wage lowers employment by 10% of those 3% of workers, that is not that much.

  6. I would like to see more differentiation between useful and useless or wasteful irritants.

    Let’s frame this problem as an optimization problem, i.e. always looking for the highest mountain in a given map. It’s very easy to find a local optimum: just always move upwards. But you get stuck at local optima very easily. Now you can throw an “irritant” at the system, i.e. move randomly downwards sometimes. This might lead you to discover a higher optimal point at another place on the map.

    In optimization theory people spend a lot of time tweeking these sorts of problems: how often should I move downhill, what should my step size be, and so on. (They will use different methods from this simple search, also, of course.)

    If you move downwards to little, it does nothing to find a new optimum. If you move downwards to fast or to often, you might not even find an optimum.

    It all depends on the structure landscape. If we assume for there to be just one optimum, all we need is productivity methods, i.e. moving upwards the hill.

    So, the relevant questions are:
    – Do we assume that there are not enough irritants already?
    – If it is, is the probability to small or is the step size to little?

    The minimum wage or any other of your given strategies might well be the wrong perscription. You might increase the frequency of irritants, when you “should” be adding magnitude, or you might add irritants to an overirritated system.

    These conditions should be elaborated quite a bit. Sounds interesting, though.

    Seth: I agree. It would be helpful to look at examples of each (government stifling innovation, government causing innovation) to see if there was a way of distinguishing the two. However one way that governments create innovation is that they disgust/mistreat people so much that they leave — move to America, for example. No one will ever argue that governments should mistreat people, yet in the past that really has increased innovation.

  7. A profession that busies itself in writing footnotes to Smith, Ricardo and Keynes may simply not understand what innovation is.

  8. Yeah, remember how, when we had a high minimum wage like in the 60s, it created mass unemployment? Me neither.

    Just like with capital gains tax, there’s a record of policy implementation here that the libertarian types in this comment section steadfastly ignore.

    Seth: I am puzzled that Australia, with a high minimum wage and exceptions for teenagers, is ignored.

  9. Do successful anti-smoking campaigns reduce the population’s level of intelligence?

    Other researchers point out the positive impact of smoking on the major advances and artistic creativity that have taken place in Europe and the U.S. over the last few centuries. A large number of writers and artists have been known as a passionate smokers, and geniuses like Niels Bohr and Albert Einstein have praised tobacco positive effect on their thinking.

    The English psychology professor Bruce Charlton asks on his blog ; “Are we sacrificing genius and great inventions with anti-smoking campaigns in favor of longevity?” His answer: Maybe …

  10. I think saying government interventions are good because it causes innovations is a similar argument to the proverbial “broken window” fallacy. Yes, breaking the window will make the shop owner by a new one (and maybe one that is shatter proof) but it will also cause the shop owner from putting the money towards something that could be even more innovative and useful that more people would rather enjoy. If it wasn’t for all the government “irritants” maybe we would be putting that money to more interesting projects and maybe we would be flying places instead of driving or maybe we would be living on Mars by now.

    Seth: I’m not saying ALL government intervention is good. I’m saying the effect of government intervention is more complicated than what libertarians have said and more complicated than what other economists have said — because all of them (libertarian and non-libertarian) ignore the effects on innovation. In general, economists ignore innovation. They advocate this or that policy without grasping even a little what the effects on innovation will be.

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