How to argue with a conservative, pt I

[I've aggregated this series into a single essay, so you may want to pass on reading this and go straight to this paper.]

Cost minimization Let me start off with an interesting fallacy often assumed by many conservatives: that if an organization has no profit motive, then it will be inefficient. A business has a simple directive---maximize sales minus costs---and a business which fails in that directive will lose out to other businesses which do a better job of it.

The first part of the argument, that an organization which isn't maximizing profits has no motivation to be efficient, is simply false. The reason is that profit maximization is equivalent to cost minimization. We could cast the problem of the business as finding the cheapest way of producing its product; similarly, we could characterize the goal of the bureaucracy's manager as finding the cheapest way to achieve whatever its goals may be. If the manager isn't minimizing costs, then there's something s/he could do to save a few bucks and then apply that toward achieving the bureau's goals. Why would the manager of a government department eschew such a savings, while a business manager wouldn't?

Of course, there's still the problem of defining the goals of the organization, and here government excels in the provision of things where the goal is ambiguous. The goal of a public energy utility is to provide citizens with reliable and cheap power, while the goal of a private company is to maximize profit for the owners of the company by providing citizens with power. It'd be nice if these incentives aligned perfectly, but they clearly don't, which means that privatization often leads to disasters in the provision of public goods (e.g., everything associated with Enron).

Bear this point in mind when the privatization harpies come after you: profit maximization and cost minimization both encourage efficiency, and neither magically produces efficiency.

zero profits The second part of the fallacy, the Darwinian part, assumes that if you're not perfectly optimal, you'll lose money and will go out of business. But anyone who has ever worked in a company's office will attest that abject, persistent inifficiencies happen every day througout the business world, and yet these companies continue to keep their heads above water. Liberals and conservatives alike agree that `big government' in the sense of `over-bureaucratic' government is a bad thing, and if there's a more efficient way to achieve existing goals, then that's a good thing. But the same could be said of IBM.

Some folks used to tell me that zero-profits-plus-efficient-market means that racist hiring would eventually disappear, since a racist manager is imposing a restriction on his choices, which will therefore lead to suboptimal hiring on a regular basis, which will lead the company to go out of business. Maybe racist businesses go under more frequently than non-racist businesses, but a few centuries have shown us that no, having racist policies does not immediately condemn a company to bankruptcy. Similarly with any of a number of other mean, irrational, and destructive policies that the businesses of today engage in all the time. Also, we've seen that laws that force people to not be racist also don't lead to businesses closing down all over.

Theoretical economists assume that all businesses are on the verge of bankruptcy at all times because they always assume that firms are all competing to produce widgets that are exactly alike in every way---and there are often an infinite number of firms. But the assumption of zero profits really doesn't work in real life, as you can see by the fact that businesses exist, and this means that any healthy businesses can afford to operate in a manner that society deems acceptable without going bankrupt, meaning that they can conform with laws about accounting, treatment of workers, or environmental care.

Yet when a new regulation is put in place, the chorus of capitalists all shout out in unison, `I'm barely making ends meet and will go out of business.' Sometimes the response is a bit more moderate: `I'll have to lay a few people off and reduce production,' or `If you pass regulations that I don't like, I'll just take my ball home and pout.' After all, they're right on the verge of bankruptcy, so any new costs will put them under.

The reality of the situation is much more complicated. For example, New Jersey raised its minimum wage one year, while Pennsylvania didn't. Card, Katz, and Krueger took this to be as good a natural experiment as you'll ever get: the economies are closely linked, the passage of the new law was quick and sort of a surprise, and C, K & K managed to get a good before and after picture of fast food joints on both sides before and after the law took effect. The end result: there were more jobs created in New Jersey after the law was passed than in Pennsylvania. It wasn't much (and I don't recall if it was statistically significant), but it was definitely not a loss of jobs. Why were there more jobs in NJ? Maybe people spent all their new minimum wage earnings on fast food, or maybe more people entered the labor market, or maybe all those truckers carting in goods which used to be produced in NJ factories needed a place to eat. Regardless, the moral is that a new rule can often change all sorts of things in the economy, some good some bad, so reducing it to a simplistic one-liner like `higher wages means less jobs' is stating a falsehood. [For the theorists, here's the moral: never trust a partial equilibrium model.]

Regulations can be burdensome and annoying, just like not being able to pee in the street is often burdensome and annoying, but somehow, we all manage it. However, not all burdensome regulations are destructive regulations, and if a conservative forgets that there's a distinction, be sure to remind him/her/it.