People have messaged me multiple times asking for my recommendation for a great course in economics. Hands down, your best option for learning economics, political theory, American History, and World History is Tom Woods’ Liberty Classroom.
Due to my current work situation, I am unable to continue writing weekly articles critiquing the latest Crash Course Economics video.
Fortunately, Crash Course Economics itself said that they were finished with “textbook economics” weeks ago, and the episodes are now delving into more sociological/behavioral economics subjects, which relate to economics, and are probably worthy of criticism in their own right. But since we’ve covered the basic economics principles already, and economics is just following those principles to their logical conclusions, I think the Crash Course Criticism readers are very well-equipped to analyze the Crash Course videos on their own.
The purpose of this blog is to analyze how Crash Course explains economics to their very large audience of mostly young people. I think we did a good job of that; we took Crash Course’s own arguments to their logical conclusions and showed what kind of predispositions to the different schools of economic thought that the Crash Course writers showed in their work.
Thank you to all of you who read, commented, or wrote me personally. It’s been a blast keeping this blog running, and I’m glad you could join in on the fun. If you’d like to stay informed on what my next project is, please sign up for the newsletter at http://www.crashcoursecriticism.com/newsletter/
This is the episode you’ve long awaited for: the minimum wage. I’ve been excited for this one since episode #20, where Crash Course talked at length about the dangers of price floors, and ended with this:
The vast majority of economists consider price controls counter-productive. But there is one notable exception: minimum wage. The minimum wage is a really complex issue that we’re going to address in a future video.
And finally, here we are. Let’s see if Crash Course explains why the dangers of price floors do not apply to labor. Here we go:
Crash Course’s does a fantastic job in explaining the labor market. The entire segment is spot on, from how wages are determined to how the demand for labor affects wages. There are also some great nuggets of wisdom:
Engineers are in high demand because they produce the products that many consumers want and their supply is limited because the training for these jobs is pretty difficult. Social workers and historians, aren’t paid as much, even though their work is important, because demand is relatively low and supply is relatively high. It’s not rocket science.
While the supply and demand of labor play a major role in determining wages, I wish Crash Course had included a reference to the marginal productivity of labor. In other words, the market creates a natural ceiling on hourly wages: the amount of revenue one employee can create per hour. If an additional employee at a Pretzel Shop can only create an additional $9 in revenue per hour, the employer cannot possibly hire him from $10 an hour.
The Debate on the Minimum Wage: Bargaining Power
The economists that support a minimum wage argue that real life labor markets aren’t as competitive or transparent as classical economists suggest. They believe that employers have the upper hand when it comes to negotiating wages and that individual workers lack bargaining power.
Let’s imagine this scenario as described: an employer has an opening for one job at the Pretzel Shop. There is a long line of applicants who want the job, which gives the employer the pick of the litter. It looks like the employer has the upper hand here, since he doesn’t have to think about what wage to offer the applicant in their negotiation, and there are a lot of applicants to choose from.
Now imagine if there weren’t a minimum wage. The employer would be under a lot more pressure to offer the appropriate wage for the employee’s approximate skill, and offer a wage that is higher than other potential employers in town. With more jobs available around at below-minimum-wage levels, employees have a lot more options for employment and a lot more in bargaining power when finding new employment.
The point here is that employers have a greater bargaining power because of the minimum wage, not in spite of it, so I don’t see why this argument favors having a minimum wage.
The Debate on the Minimum Wage: The Nuts and Bolts
If a grocery store wasn’t required to pay $7.25 an hour, and the grocery store was the only place hiring, they could likely squeeze individual employees to accepting lower than market value. In this interpretation, minimum wage isn’t interfering with competitive markets, as much as it’s correcting a market failure.
This is strange, because back in episode 21, Crash Course taught us that a market failure is when the free market does not produce some good on its own, so it must be implemented by government (they use the examples of national defense and schooling).
In this week’s episode, it appears that a market failure is just something that happens in a free market that you don’t like.
Whether or not a grocery store is the only place hiring (something that’s very unlikely) wages are still determined as they always are: applicants compete on the bases of price and value provided. If the grocery store is the only place hiring, why should the grocery store be punished because of it? What about the businesses that aren’t hiring anyone?
Crash Course is also very peculiar in their wording of the above paragraph: Employers “squeeze” individual employees, while governments “correct” market failures. It seems that Crash Course is trying very hard to avoid using the word “force,” and for obvious reasons. In reality, employers never force anyone to accept the job, regardless of the wage, while governments do force employers to pay employees the minimum wage or more.
The Recently Developed Argument for The Minimum Wage
[Economists] argued that raising the minimum wage could have a small benefit to the economy. Workers, with their newly increased wages, would spend more. This would increase demand, and perhaps help stimulate employment.
This argument is a very popular one that I’ve only heard in the past few years. It sounds rather compelling, but it fails to account for a very important point of economics.
Crash Course did not flesh out this argument, but those who do argue it say that money, while in the hands of the employers/businesses, stays idle and doesn’t help the economy. On the other hand, if more money is given to the employees, the money is more likely to be spent and circulated, which is better for the economy.
Regular readers of Crash Course Criticism have heard me mention this in somanyposts, but saving and spending both play an important role in an economy. By artificially shifting the economy from saving to spending, the economy does not benefit or “create jobs” because of it. Money in savings is lent out by banks to entrepreneurs and small businesses, which also creates jobs. Shifting money from savings to spending would help create jobs in consumer goods (spending), but always at the expense of capital goods (savings), and the economy is no better off because of it.
Crash Course Neutrality
Crash Course has been surprisingly free market on some issues, and more pro-government intervention in other parts. This episode, unfortunately, very clearly supports having or increasing the minimum wage.
In the episode, before explaining the reasoning of both sides of the debate, Adriene quotes research from the Brookings Institute, a left-leaning think tank that supports raising the minimum wage:
The Brookings Institution estimates that an increase in the minimum wage likely wouldn’t just impact that small slice of the labor market. It would also drive up the wages of people who make just above the minimum wage. According to Brookings, that ripple effect could raise the wages of nearly 30% of the workforce.
Right off the bat, Crash Course is asserting that raising the minimum wage would raise the wages of 37 million working Americans. No negative effects mentioned, and certainly not a competing quote from a classical economist that would cite how many Americans could face unemployment because of the rise in the minimum wage. And when Crash Course eventually does summarize the classical economists view, they introduce it with “their logic goes something like this…“, phrasing it so that the audience knows that this theory is not well-reasoned logic.
Another annoying phrasing occurs right after Crash Course has summarized both sides:
I’m not going to tell you what to think, but think about it like this…
In other words, “I’m not going to tell you which theory is correct, but the following theory is correct…”
Wrapping Up The Episode
Crash Course finishes with citing some carefully-selected studies on the minimum wage, including a widely-discredited study in New Jersey:
If economics was a pure science, we could just test these ideas under controlled circumstances. We could have one state set a significantly higher minimum wage than its neighbor and see what happens. It turns out that happened in 1992, and economists David Card and Alan Krueger studied it.
First of all, since Crash Course taught us in episode 14 that Economics is not a pure science, they should know that a number of factors are at play for any employer anywhere at any time. Even if you look at two businesses across the river from each other, they are each subjected to infinite factors that could play into each business’s employment and wage decisions.
Additionally, Crash Course selects the one minimum wage study that has received the most negative criticism to my knowledge for its use of seriously flawed employment data. If you look into how the study was conducted, it is really astounding that this study was published after peer-review.
Crash Course started off the episode great with their discussion of labor markets, but the episode really took a turn for the worst when discussing minimum wage. Far from a balanced look at the minimum wage debate, Crash Course had its political bias out in full force. Despite its promise in episode 20, Crash Course did not explain why the economic laws of price floors do not apply to labor, and they did not attempt to rebut classical economist arguments.
But then again, if they did everything an Economics Crash Course should do, then we wouldn’t have Crash Course Criticism!
Thanks for reading, and you can look forward to a new episode reviewed every Thursday! And don’t forget to join our newsletter and our facebook group, and comment below!
Tom Woods and Bob Murphy talk about Monopolies and Competition in their podcast this week. There is a lot of overlap with our post this past Thursday, and they explain antitrust law much differently (and perhaps, more persuasively) than I did, so do check it out here:
This week, Crash Course talks about monopolies and competition. This episode was a mixed bag with plenty to comment on. Let’s get to it:
Crash Course’s Episode Introduction
Before beginning each episode, the hosts of Crash Course give a quick introduction to the subject of this week’s video, followed by the opening credits. This week’s introduction was a little confusing:
Today we’re going to talk about monopolies! Which are terrible, illegal, and only serve to exploit helpless consumers, except when they’re delivering essential services that competitive free markets kind of fail to deliver.
So from this definition we can figure out that 1) monopolies would not occur in a free market and 2) monopolies are good for delivering essential services because free markets fail to provide them. We’ve already talked about the concept of Market Failures in Episode 21. In short, sometimes markets, despite being more efficient than the public sector, do not provide certain goods because governments already provide them for “free” (see: tax revenue). For example, why would you pay for a more efficient private fire department when you’re already forced to pay for one? The “free” public option distorts eliminates the incentive for entrepreneurs to enter the market.
The Good: Barriers to Entry
The true power of a monopoly comes from its ability to keep competitors out of the market. Monopolies are able to erect obstacles that economists call barriers to entry.
Most economists would agree that the monopolies themselves cannot erect the barriers to entry; existing barriers to entry are just a fact of the market. However, governments can and do create barriers to entry, sometimes with influence from the monopolies. Crash Course gives a great example of how this is done:
Imagine a city where there are a limited number of licenses for food trucks, and I own all of them for my fleet of artisanal macaroni and cheese trucks. I also know the mayor, since he’s a big fan of artisanal macaroni and cheese. If I can convince the mayor to ban traditional push cart food vendors, with their shwarma and their bacon-wrapped hot dogs, I’ll have a monopoly on street food.
I’m not increasing profit by producing more stuff. I’ve influenced government regulations in such a way that anyone who’s hungry, but doesn’t want to enter a building, has to buy food from me. This is sometimes called crony capitalism.
Crash Course’s example does not show the monopolies themselves creating barriers to entry for competitors, but rather using the power of the government regulation to crush competition.
The Bad: Freewheelin’ Monopolies
Monopolies can restrict output and charge higher prices without worrying about competitors. This is why most economists support anti-trust laws that promote competition and outlaw anticompetitive tactics.
This is the quick-and-easy justification for antitrust laws. However, some schools of economic thought take issue with this.
These schools argue that as a company with monopoly power increases its prices (or restricts supply arbitrarily), the greater the incentive for a competitor to enter the market to provide the good for a lower price. For example, if Google Search (which has a dominant market share) started charging $1 per search, it would encourage Bing, Yahoo, or a new competitor to move into that market. This would apply to monopolies as well as oligopolies, so it does not matter how much market share a company has in the market, since there is always the threat of a new competitor entering, even if there are high barriers to entry.
In the above scenario, we are assuming that the companies are functioning in a free market, and that there are not any legal barriers to entry for the other companies. If there is a law that there can only be so many search engine licenses, this would prevent new competitors from entering the market.
Examples of Bad Monopolistic Behavior
In the late 1990s, Microsoft was accused of pressuring PC manufacturers to pre-install Microsoft’s web browser, Internet Explorer, and exclude their main browser competitor, Netscape. Regulators busted them, and almost busted up the company.
Companies in different markets often make deals with each other. For example, Pepsi and Taco Bell agreed that only Pepsi products would be sold at Taco Bell. Is this also monopolistic behavior? And if Microsoft had a main browser competitor, then they wouldn’t be a monopoly, would they?
Even Toys R Us! It’s gotten in trouble for conspiring with toy suppliers, like Hasbro and Mattel, to stop the manufacturers from selling certain toys to other stores.
Examples of exclusive deals between companies are numerous and simply a part of business relationships. From Crash Course’s explanation, I do not see the difference between corporate contracts and bad monopolistic behavior.
Natural monopolies are special situations where it is more cost effective to have one large producer rather than several smaller competing firms. The best examples are public utilities in markets such as electricity, water, natural gas, and sewage. They may be privately owned or publicly owned but either way, they remain a monopoly because the government limits competition.
The better definition of a natural monopoly is one that exists because of high fixed or start up costs. They are highly regulated and often completely managed by government. Competition in these markets are usually not allowed.
I mean, if there were three competing electric power companies in one city, that would mean building three different power plants, and running three sets of power lines through the streets. The result would be higher costs. So, in this case, it would be cheaper to have one electric company because they have economies of scale.
I’ve mentioned this before, but since we don’t know what a free market in power would look like, everything is speculation. Especially today with more people going off the power grid, we are seeing how the power market free from government monopolization would be, and it’s not as horrific as many speculate.
Competition encourages cost-lowering efficiency. With an active market in power, companies would be competing with providing the best service for the cheapest price. In the current market, the main incentive is to not attract any negative attention from the regulators.
that would mean building three different power plants, and running three sets of power lines through the streets
Are people really concerned with how many power plants exist or how many power lines there are? If the argument is that fewer competitors creates a better market, these arguments are really grasping at straws here. Why not make the same argument for automobiles?
Right now there are multiple factories producing cars and motorcycles, with multiple dealerships taking up space in every town. Why not pass a law that only allows for one automotive producer? It would save so much in cost!
While Crash Course did have some good nuggets in this episode, it failed to explain a coherent standard for when a central power should allow monopolies, create them, or destroy them. As with most subjects, Crash Course sums things up with “monopolies are sometimes good, sometimes bad, but it’s complicated.”
The use of government force to regulate or manipulate businesses activity is significant, and there should be a division between “natural monopolies that occur in a free market” and “government-created monopolies” because the way an economist looks at them will be different depending on the monopoly.
Thanks for reading, and you can look forward to a new episode reviewed every Thursday! And don’t forget to join our newsletter and our facebook group, and comment below!