By John Hood
RALEIGH — I once found a $20 bill on a sidewalk in Washington, D.C. I picked it up, thus ruining the punchline of an old joke.
Two economists are walking along when one points to a $20 bill. The other shakes his head. “That’s not really there, because if it were someone would already have picked it up.” They keep walking.
The joke works on two levels. For certain advocates of the “efficient markets” hypothesis, which argues that professional money managers can’t outperform market averages over time, the joke satirizes the idea that any chance of making an extra $20 is always snapped up quickly by “the market.”
Regarding public policy, critics tell some version of this joke to ridicule what they understand advocates of free enterprise to be asserting: that markets always produce the best-possible outcomes. No government intervention is required because markets are, in effect, perfect without it.
This is a silly caricature of what most free-marketeers actually believe, however. We recognize that markets are highly imperfect — as are all human institutions. They are imperfect because human beings are imperfect. We have biases. We make mistakes. We yield to temptations.
The real reason to be skeptical of government “fixes” is that the actual human beings who craft and carry out public policies are themselves biased and fallible. Markets do not render perfect outcomes, but attempts to second-guess them often result in government failure.
I think debates about the minimum wage represent a telling case. Over the decades, I have heard many advocates claim that businesses themselves will be better off if government raises the minimum wage. Why? Because if businesses paid much higher wages, that would reduce turnover and make their employees more productive.
Responding to this argument does not require me to insist that all businesses are currently paying all their workers the “right” amount of money. I am willing to grant that some employers could make themselves better off by paying their employees more. What I am not willing to grant is that most employers are so uninformed, so foolish, or so inattentive to maximizing their profits. Minimum-wage advocates are essentially suggesting that the sidewalks of the labor market are blanketed with $20 bills that these uninformed, foolish, inattentive employers refuse to pick up.
If you truly believe that, why waste time arguing with me? You should go pocket those piles of cash. Not only would you personally benefit, but you’d also improve the lives of all those oppressed workers.
Of course markets aren’t perfect. They also bear little resemblance to the economists-on-the-sidewalk joke. Markets are in constant motion. The closer we get to them, the more details we can pick out — but even then our knowledge is constrained.
The reason most industries with lesser-skilled workers don’t already pay $15 an hour is that they see details the politicians and political activists can’t see. They know some of their youngest, least-skilled workers don’t generate anywhere close to $15 an hour in output. If forced to pay them more than their labor is worth, some businesses will let them go. Others will respond by adjusting hours, non-wage benefits, and working conditions in ways that many employees won’t like. Still others will raise consumer prices to offset their higher payrolls.
There are, in other words, real costs associated with picking up “free” $20 bills.
By the way, that $20 bill I saw in Washington was near the front door of a restaurant. I picked up it, took it inside, and left it with the manager, assuming that one of his patrons had accidently dropped it on the way out and might come back to claim it.
Why not pocket it? Because I want to live in a world where dropped cash gets returned to its rightful owner. In a free society, we need not accept any current state of affairs. We always have the power to act to make it better. But that doesn’t require we force our preferences on others.
John Hood is a John Locke Foundation board member and author of the new novel Mountain Folk, a historical fantasy set during the American Revolution (MountainFolkBook.com).