The visible hand in economics

Do economists ignore workers?

Posted on: August 11, 2008

Over at Econospeak

There appears to be a fair amount of disdain in his post about the mathematical nature of economics. However, I will forgive him for this – he is a heterodox economist after all, so his very discipline is focused on critiquing areas where mainstream economic thought makes a wrong turn. Although I do not share the mis-trust of mathematical theory (infact I believe it is a very useful way to organise ideas (sort of like writing them down), I do agree with the concept that an over reliance on technical models, without an understanding of the underlying assumptions, can lead to spurious conclusions in economics (however, as we have said before, this is a problem with the subjective application of a model – it is not invalidate the model in of itself).

Anyway, the authour appears to believe that economists ignore the idea of a worker. Fundamentally, I get the impression that he is believes economics discusses the rights of capital owners in far more detail than we talk about the rights of workers. However, I’m not certain that I agree – let me try to explain:

The worker in economics

Now I feel that the authours belief that economists ignore the worker stems from the fact that economists historically treat workers like a input to the productive process, in the same way as land, capital, oil etc. The capital owner purchases a bunch of labour etc and it creates a product, it then goes off to market, sells the product, and retains the surplus.

However, we can broaden the way we view this productive process. Contract theory gives us a way to view this relationship.

Fundamentally, the worker is willing to work for a certain amount of money. This “reservation level” depends on the possibility of other work, the price they put on leisure etc. The capital owner, knowing the cost of other inputs, and knowing how much they can sell the product for has a maximum price they are willing to pay to hire the worker. If they reach an agreement, the capital owner pays a certain wage to the worker in order to get the work done – which depends on their relative bargaining power.

Now economists, specifically labour economists, have studied the determinants of the workers bargaining power and the reservation wage in great detail – as a result, any belief that economists “ignore the worker” seems misplaced, they own a very special place in the productive process.

Excuse me – his fundamental concern is about working conditions, you appear to have missed that!

It is true that I have not mentioned working conditions. However, this comes from the fact that I believe these factors are implicit in the discussion I placed earlier.

Fundamentally, if workers have sufficient bargaining power (or a higher reservation wage), employees will improve working conditions, lift wages etc.

Now, I have no doubt that there is a substantial debate to be had about what level of bargaining power is fair, and what is the best mechanism to create the “best” outcome. However, these normative debates are outside of the scope of strict economics. It is the economists job to describe what is going on in reality, and describe how A affects B – in the strictest sense economists are not there to tell us what outcome we SHOULD have, but instead to tell us what outcome we WILL have given a certain set of policies.

As a result, if economists decide to add a bit of the “we should” to their policy discussions we should realise that this is the opinion of the economist – not of the economics profession. The dislike that the authour of the linked piece seemed to have for Martin Feldstein should be seen as a critique of Dr Feldstein’s value judgments – rather than a criticism of the way economists discuss the make up of the economy.


I felt that the idea that “economics ignores workers” is mis-placed. Potentially, many economists may undervalue the worker – however, this is a critique of those individuals, not the economic method. In fact, the economic method does provide a clear and transparent method for evaluating the process whereby wages and working conditions are determined.

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14 Responses to "Do economists ignore workers?"

I think that as an economist you can’t know what it feels like to be a (vulnerable worker).An analogy might be a surfer waiting for a wave versus a person who can only dog paddle (where the sea is the economy). Imagine the buzz of getting your doctorate and now imagine the opposite: a difficult birth (say) and struggling with algebra etc, etc.

Why does everyone assume they know what economists are all about? Really, people havent got a clue.

This idea of hardship giving insight is bullshit.

“You dont know anything about car safety until you have lost a child in a car crash.”


“You dont really know about workers unless you have been one yourself and been laid off.”

Now I am willing to admit that different life experiences can help people view things in a different way, and that could lead to a greater understanding. But over ruling that possibility is the probability that it just clouds peoples judgment.

Bad laws are written, bad rules of society are created, basically bad decisions are made when people’s judgment is impaired. But the above is an argument I see everywhere, especially from politicians who rely on emotive arguments to win power (see the Greens for a perfect example).

“I think that as an economist you canโ€™t know what it feels like to be a (vulnerable worker).”

Interesting. I’m getting sick of this criticism, so I better discuss it.

I grew up in a household where, for a while, the only income earner was on the sickness benefit – as one parent was ill and the other had to stay back to look after him. Of course the government cut that for about a year as well – so we were extremely poor.

Then when I went to university I had to work at the Warehouse in order to pay my bills – as it is pretty much impossible to move down to Wellington and live without taking out the full student loan and working a good number of hours. My hours were incredibly variable – not what I would want, but I don’t see why the firm should have been acting as a welfare agent. As a result, if I had to work an 80 hour week to build up a little savings a week before exams I’d do it. Furthermore, as I was on a casual contract I could be sacked at any point.

None of these experiences changed my view that economics is a good way of describing how the economy works (a view I’ve held since I’ve been about 14, and I learn’t about economics being the study of choices) – they change the value judgments I make, and they change the weight I put on different outcomes, but they don’t imply that the fundamental description economics provides is wrong.

For some reason, a number of the most left wing people commenting here, along with some policy makers, have decided that the economic model is “wrong” because they don’t like the conclusions some economists come up with. However, this thinking is wrong headed. Ultimately, the economic model can explain anything – it is the subjective value judgments you place in it (such as – how much bargaining power does the benefit give the poor?) that is the issue that is up for debate.

It is fine if you criticise the subjective assumption I have made, but if people want to say I am wrong because I assume people make choices based on a set of values/preferences (which is fundamentally what the economic model is) then I want them to show me an alternative way of thinking of how social situations work.

“Bad laws are written, bad rules of society are created, basically bad decisions are made when peopleโ€™s judgment is impaired”

Completely agree Kimble. Ultimately, I find it annoying that people just make arguments based on their opinions, and act like they are as good as (if not better) than arguments based on logic and actual evidence (not just a paper that they found on google that backed up their prior position ๐Ÿ˜› )

What I meant was not necessarily that economists haven’t experienced hardship or a working class upbringing (or imagine sufficiently to create a model), but basically how it feels to hit an internal brick wall (“dumb”) and so the different value that economic events such as a tightening labour market may have. I was struck by the comment in a book I read The Investment Biker where Jim Rodgers praises Bangkok as a vibrant place of opportunity whereas my reaction was “thank God I don’t live there”.
Having said that you have tools such as the analysis of job satisfaction .

I’m not qualified to criticize economists other than I have doubts about the limits to growth and the lack of ability of economic models to factor in the not so material aspects of life (as taught in evolutionary psychology).

“Having said that you have tools such as the analysis of job satisfaction”

“I have doubts about the limits to growth and the lack of ability of economic models to factor in the not so material aspects of life”

Economists have admitted the limiting factors to growth since the profession started – economics is the study of choice given scarcity after all ๐Ÿ˜‰

Furthermore, economics creates a framework to analyse issues – it does not place specific value on issues. In the case of job satisfaction, and the pain of losing a job, economists recognise that there are issues here – however, it is the policy makers that have to place a subjective value on these things, economists merely present them with a framework where they can do this.

The thing to remember is that there is a distinction between the descriptive (positive) and subjective (normative) elements of policy. Economic model are meant to provide a descriptive starting point, but you can’t get any policy out of them without making subjective value judgments.

The investment banker you mentioned isn’t the economics profession, it is one person. He has different subjective values than you – and that is fine. However, none of this provide a critique to the economic model – which is what I’m defending in the post. An economic model tells us that if X occurs we can expect Y – it does not tell us the value or cost associated with Y.

Actually, I should have a post out at 1pm that briefly talks about this stuff – working off the premise that philosophers are best placed to make subjective judgments. I would enjoy your comments there as well ๐Ÿ™‚

One man’s frankness is another man’s vulgarity.KevinSmithKevin Smith

“Economists have admitted the limiting factors to growth since the profession started – economics is the study of choice given scarcity after all”

I read a discussion on the limits to growth between Professor Julian Simon and (maybe) Herman Daly (Roger Kerr also quotes Julian Simon). Oil becomes scarce, the price goes up alternatives are found (and it is a relatively smooth process). I gained the impression (wrongly it seems) that all economists believe in (eg) the infinite substitutability of resources .

“Oil becomes scarce, the price goes up alternatives are found (and it is a relatively smooth process). I gained the impression (wrongly it seems) that all economists believe in (eg) the infinite substitutability of resources”

All economists believe there will be some sort of substitution yes – once oil runs out we can’t keep using it ๐Ÿ™‚

However, some economists believe that any alternative to oil will be very expensive, and so economic growth will suffer sharply, while other economists believe technology will completely save the day – ultimately these differences are based on the individuals value judgments.

Economics, in of itself, is a way of framing issues – the way people use the tools of economics to analyse these issues is their own problem ๐Ÿ˜›

Thank you very for commenting on this snippet from my book. I think that the subsequent snippet will make my position clearer.

“I think that the subsequent snippet will make my position clearer.”

Super, thanks for the comment ๐Ÿ™‚ . I’ll write another post at some point soon ๐Ÿ˜‰

I often to post some sort of remark recently, it also hasnโ€™t exhibited way up. That i think about your own junk mail sift may very well be busted?

magnificent post, very informative. I wonder why the other experts of this sector don’t notice this. You should continue your writing. I am sure, you have a great readers’ base already!

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