The Political Consequences of Neoclassical Economic Theory: A Close Look at the Minimum Wage

By Bee Kinstle

The Minimum Wage Debate and the Failures of Neoclassical Economic Theory

Neoclassical economic theory can be found in most Economics 101 courses at nearly every higher education institution worldwide. The study of exclusively neoclassical economic theory can, and does, lead students into a circular style of thinking where the end result is a clear, black and white, solution. This can be seen through many different debates and discussions, but a prominent and relevant example is the discourse on partisan news channels, especially when discussing whether the minimum wage should be raised. Using this subject of debate, this paper will trace modern arguments back to their theoretical roots to identify the consequences of exclusively drawing upon neoclassical economic theory in scholarly debates. 

Marginal Productivity Theory

Marginal Productivity Theory (MPT), is the notion that wage rates directly correlate with productivity. However, “the top three charts (Finland, Sweden, and US) show widening gaps between the two variables.” Productivity has been growing over the last 40 years, and wages have remained relatively stagnant, the federal minimum wage rate remaining at $7.25 since 2009. Bee Kinstle Graph

Human Capital Theory

Much like MPT, human capital theory makes use of the production equation “treating labor as a produced means of production.” Both human capital theory and MPT ignore major political implications and effects on wages – human capital theory by excluding class and class conflict as a relevant influence on the labor market, and MPT by ignoring the role of bargaining power in determining wages. While human capital theory excludes class, it adds social institutions into its theoretical framework, taking things like education levels, and family background into consideration when calculating wage rates. Workers’ education is brought up frequently in newsroom discourse regarding the minimum wage; the subtext of these discussions is lined with human capital theory. 

Meritocracy

Meritocracy, built on the same foundation as human capital theory, “promote[s] the belief that anyone can get ahead if they work hard enough and are talented enough.” Much like the subtext of newsroom discussions, subtle meritocracy is inescapable in North American culture. A worker is worth the price of their labor, and, according to meritocracy, higher wages, a ‘ better’ job, a higher education level, etc. signify higher status. The blame imposed on lower class people for their place in the societal hierarchy strongly resides within the marginalized people themselves. “The mass of individuals, cut off from control of productive resources, are forced to sell their labor power to exist,” and if their labor power is not worth enough to employers, they will be paid a lower wage. 

Marginal productivity theory, human capital theory, and meritocracy all play a part in placing the blame of low wages, status, and income onto poor people, claiming that if they had more skills, talent, and drive to be productive they would not need to fight for a higher minimum wage, they would already have it. 

Against Raising the Minimum Wage

In 2009 the federal minimum wage was raised to $7.25 an hour, and in preparation for the 2016 presidential election, many candidates said they would push to raise it to $15. This conversation isn’t a case of ‘right’ or ‘wrong’, it’s a question of ‘why,’ and more specifically, it’s a question of theoretical framework. Those in favor of a $15 minimum wage argue that workers deserve to be above the poverty line and have a decent standard of living. Those against it argue that a $15 wage rate is not realistic for business owners, and raising the wage rate that high will most likely result in many people being laid off. 

The argument against raising the minimum wage often relies on what James Kwak refers to as “‘economism’—the misleading application of basic lessons from Economics 101 to real-world problems, creating the illusion of consensus and reducing a complex topic to a simple, open-and-shut case.”  According to economism, supply and demand curves prove that a minimum wage increase would cause unemployment to rise, economically injuring the low-wage workers it was supposed to help. In reality, supply and demand curves do not prove anything of the sort because the wage rate is not reliant on curves, but is instead created under a number of political influences. 

Fox News has multiple clips of anchors ‘debating’ the concept of a higher wage. When McDonalds’ employees were on strike to demand a higher wage, Tucker Carlson invited Mike Rowe onto his show to discuss. Rowe quickly shifted the conversation from ‘should working people be paid a wage they consider to be fair,’ to placing the blame of low wages onto the workers, saying “if you’re willing to learn a skill that has a preexisting demand then you don’t have to constantly negotiate and talk about a few extra dollars.” Rowe suggesting that workers learn a new skill to be granted a livable wage is inherently linked to human capital theory. “By abstracting from the social relations of production and the role of schooling in the reproduction of capitalism, human capital theorists have put forth a one-dimensional normative framework for the analysis of educational decisions, which has no reasonable relationship to human welfare.” Arguing that minimum wage workers should learn a new skill in order to make more money is blaming workers for the choices of their employer.

Another common talking point is the idea that without a low wage rate, people cannot and will not ‘advance.’ Gary Wolfram, author of ‘A Case Against the Minimum Wage’ published in Forbes magazine, argued that with a higher hourly wage rate, production costs would rise, thus incentivizing producers to reduce entry-level jobs. These jobs, he argues, teach American teens everyday skills, implying that a minimum wage job is merely a stepping stone for anyone who wishes to advance their career, nothing more than a blip. But in reality, over half of hourly wage workers getting paid at or below minimum wage are 25 years old or older, meaning they aren’t just teenagers trying to make some extra cash, but adults who could have their own household. 

Ludwig Von Mises, a prominent economist of the twentieth century, argued that “sound, value free economic reasoning leads one to favor laissez faire,” and demanded that “the state [should] make no attempt to eradicate inequalities.” These points go hand in hand with the argument against raising the minimum wage. Regardless of whether the person is a seventeen-year-old high schooler or a fifty-nine-year-old grandmother, if they are working a minimum wage job, they put themselves in that position, and it is on them to rise out of it. All of these points can be directly traced back to human capital theory which “provides an elegant apology for almost any pattern of oppression or inequality” as it “ultimately attributes social or personal ills either to the shortcomings of individuals or the unavoidable technical requisites of production.” These schools of thought make it too easy for employers or large corporations to blame low wage rates on employees. This is why, when modern-day debates delve into blame-shifting conversations it is important to dive deeper into their argument and determine what theoretical framework is their foundation, because human capital theory does not hold up. 

A neoclassical economic theorist like Ludwig von Mises would most likely argue against a federally mandated increased minimum wage by saying that “[the] market is taking care of it, [and] the government should get out of the way,” but Robert Hale, a well known Progressive Era thinker, would argue that “inaction is a policy and that the law is responsible for the outcome, at least in the abstract sense that the law ‘could have made it otherwise.’” The state is always present and chooses either to permit or prohibit unequal practices by business owners. The market is not a living being, and does not operate on its own accord. The government is not ‘getting out of the market’s way’ by not implementing a standard federal minimum wage in the same way it’s not getting ‘in the way’ if it does. The market is a profoundly political entity, and each political choice has an impact on the market.

The minimum wage debate is vast and complicated, and if one resorts to the teachings of Economics 101, they might believe there are simple black and white answers. There are not. But by tracing the modern-day arguments back to their original theoretical framework, it becomes easier to engage with them in an academic, scholarly way. The neoclassical theorists of the world will be happy to use a supply and demand curve like a Band-Aid on any major economic problem, but to properly understand them, one should refer back to Ludwig Von Mises’s theoretical framework and note the similarities. A $15 minimum wage will not be the cure for poverty and the answer to all questions, but the current arguments against it are built upon a foundation that crumbles easily. Until stronger, more credible arguments against raising the minimum wage become part of the common rhetoric, there simply isn’t enough academic grounds for a debate. 

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