I have learned over the last half-century that there are two litmus tests of an economist’s commitment to the idea of voluntary exchange as a means of increasing net productivity and net income. One of them is the doctrine of free trade. The other is the doctrine of minimum-wage legislation as a source of increased unemployment.
The first of these litmus tests goes back to Adam Smith’s Wealth of Nations (1776), and before him, over 20 years earlier, to the writings of his friend David Hume. Both of them took a stand against what today is called mercantilism: state coercion to increase national wealth.
Both of these positions — free trade across borders and free trade in labor relations — argue in favor of voluntary contracts between individuals.
The case for free trade is usually presented in terms of trade across national borders, but the same case can be made in terms of transactions across any border. Nobody raises the issue with respect to goods crossing state borders, county borders, and ZIP code borders, but the case is made with respect to national borders. This is because opponents of free trade discuss only national borders. This jurisdictional restriction is illogical, but that is because protectionism is illogical.
Minimum-wage legislation thwarts voluntary contracts between employers and employees. It reduces the number of these contracts, because it raises the cost of bargaining. It makes it illegal for individuals yo bargain over wages below the minimum wage, in exactly the same way that import quotas make illegal any contracts between individuals who live on opposite sides of a national border. The costs are raised by legislation, meaning the threat of negative sanctions. Therefore, the most fundamental economic law comes into play: at a higher price, other things being equal, less is demanded. If you deny this, you thereby deny all economic reasoning. If the price-quantity demanded relationship is not true, then the entire corpus of economic theory is not true. There is no consistent theory of economics if it is not true that, at a higher price, other things being equal, less is demanded.
Special-interest groups hire economists, who then argue that this price-demand relationship is not true in a particular case. Some business groups want higher tariffs and higher import quotas in order to secure a protected domestic market, and therefore higher prices, and therefore greater profits. They hire economists who argue that tariffs and quotas do not restrict economic growth. They do not argue that tariffs and quotas do not do exactly what tariffs and quotas are obviously intended to do, namely, restrict trade. But they argue that this restriction of trade is good for the nation as a whole.
In contrast, those economists who defend legislation to increase the legal minimum wage that an employer is allowed to pay an employee, actually argue that this legislation increases personal choice, increases the welfare of workers in general, and need not even hurt employers. This is nuts. There is no way to put it more accurately. This is nuts. This means that economics cannot have any coherence at all. Yet we find, year after year, that more and more economists come to the conclusion that minimum-wage laws are good idea. Over the last 35 years, the percentage of economists who believe that minimum-wage legislation creates unemployment for low-wage workers has decreased from about 90% to something in the range of 50% of all economists.
(To read the rest of my article, click the link.)