Given this definition of ‘discipline’, under what condition do you stop believing your intuition? What would you observe that would cause you to drop your belief in price-factor equalization, or, assortative mating?
Coincidentally, Josh Zumbrun writes,
Why would a company pay someone $80,000 if most people with an identical background—clones, in the paper’s parlance—earn $40,000? Conversely, why would someone with that background stay in the job earning $40,000 if another company will pay $80,000 for the same work?
The puzzle is that worker pay increases are highly correlated with the rate at which profit increases at the firms that they work.
My thoughts:
1. I tend to distrust the ability of economists to know more than a firm what the firm’s workers ought to be paid. Imagine an economist trying to tell Google that, based on your regression equation, it is paying its programmers more than the market wage. Google might reply that its programmers earn more because Google has selected better programmers.
2. The article offers the theory that firms with monopoly power will pay workers more. Perhaps, but a monopolist still has an incentive to avoid paying an above-market wage to its workers. In any case, if Google pays more because it has monopoly power, how pervasive is this? Do they pay above-market wages to janitorial staff? Above-market prices for office supplies? When Google employees travel, does Google pay more than the asking prices for hotel rooms and airline tickets?
3. Suppose that we grant that two workers who appear to be identical to someone running a regression equation are in fact identical in practice. It could be that each worker made a long-term commitment to a firm, and one chose a firm that happened to succeed and the other chose a firm that happened to fail. That might lead to factor-price non-equalization.
As you can see, I am very reluctant to let go of factor-price equalization. But if more evidence against it accumulates, I will be willing to change my mind.
However, in Specialization and Trade, I make the point at length that economic propositions are not falsifiable. If you want to stay committed to a proposition, you can. I say that economics deals with very few falsifiable hypotheses and many non-falsifiable frameworks of interpretation.
I can tell from the comments on previous posts that my position bothers some people enormously. They strongly oppose the situation as I describe it. Perhaps it will help to say that I have nothing against rigorous falsifiability in science, I just do not think it can be carried out in economics.
I hope you can appreciate that this is the situation with history. I doubt that we will ever be able to prove that wars are caused by X or that revolutions are caused by Y. Still, there are useful interpretive frameworks that tell us something about these issues.
I believe that all of the disciplines that deal with human society are going to have to live with this. If someone is really attached to their interpretive framework, it will be difficult or impossible to dissuade them. The best that one can hope is that people will not be so unreasonable as to assign 100 percent credibility to any information that supports their view and 0 percent credibility to any information that opposes it.
I think that we naturally try to fight back when one of our views is threatened, as mine are by the research cited above. The ideal would be for us to fight back when a study supports our views and be more accepting of studies that threaten our view, but it is difficult to live up to that ideal.
Franchise value. When a firm earns excess returns (economic rents) due to franchise value built up within the business that monopolistic position is often inherently unstable. It “belongs” to the residual claimant (equity-holder), but inheres in the particular assemblage of assets, employees, culture, market-position(s), and activities of the firm. In practice, this means employees of companies enjoying a superior franchise are worth more in their current seats (even inclusive of training costs etc.) than at an alternative firm. In frictionless theory the employees should only extract their marginal productivity in their best alternative employment. In practice, the franchise firm pays them a portion of the productivity premium derived from the franchise in order to maintain the employee critical mass and morale that preserves the franchise.
People develop institutional knowledge that is in the interest of the firm to maintain in house as a competitive advantage.
We may never be able to say wars were caused by X, but we are increasingly able to say they were not caused by X through the gathering of data that is either consistent or inconsistent with such hypotheses. It requires formulation of theories, gathering evidence, and a mind open to the possibility of being wrong. Even when not grossly wrong, we can often learn more about the process from the data we collect and refine our ideas.
“The article offers the theory that firms with monopoly power will pay workers more. Perhaps, but a monopolist still has an incentive to avoid paying an above-market wage to its workers. In any case, if Google pays more because it has monopoly power, how pervasive is this? Do they pay above-market wages to janitorial staff? Above-market prices for office supplies? When Google employees travel, does Google pay more than the asking prices for hotel rooms and airline tickets?”
Isn’t there a whole literature on rent-sharing?
Regarding Point 2, I seem to remember an article that found secretaries in financial firms made more money than similar positions in other industries. The authors believed that it was a sign of excess rent paid to financial firms.