A word on Don Boudreaux, marginalism, and reductio ad absurdum

Reductio ad absurdum has very narrow uses in economics, in my opinion. It is very good for ruling things in, but very bad at ruling things out. I want to share a good example and a bad example from this blog and from Don Boudreaux.

For example, in this recent post Jonathan responds to me about "sustainable" levels of economic activity (we're discussing Garrison's PPF): "I don't think you can push consumption to an "unsustainable" level. Consumption is what decides the degree of capital intensiveness. I think investment is the specific part of expenditure which may be unsustainable."

I then respond to him with a reductio ad absurdum of sorts. I ask him to consider a situation where 100% of income goes to consumption. Is this sustainable? Of course its not sustainable. You cannot sustain 100% consumption at current production, so this is clearly "unsustainable". Consumption certainly has sustainable and unsustainable levels given productive technology and preferences, just like investment does. I used the reductio ad absurdum to provide a stark example of why you couldn't rule that out.

Don Boudreaux regularly does something very different. He uses reductio ad absurdums almost exclusively to rule things out. I'll reproduce an "open letter" he had on his blog in full:

"Dear Mr. or Ms. FedupwithHayek:

You write: “You [Don Bx] wrong[ly] assume workers don’t want more job security. They do. They don’t appreciate trade lowering that security.”

I disagree, at least with the implication that the value to workers of greater job security exceeds the costs of supplying such security. Consider:

Nothing prevents a firm – say, Acme, Inc., a hypothetical chain of hair-styling salons – from offering the following sort of deal to consumers: “Acme will cut your hair, but only on condition that you agree to buy at least six haircuts each year from Acme for the next 25 years.” If Acme gets enough customers to buy haircuts on this condition, then it can offer more job security to its stylists, receptionists, and other employees than can Acme’s competitors who do not condition the sale of haircuts on customers’ willingness to sign such contracts.

Obviously, consumers won’t buy haircuts from Acme on these terms unless Acme makes these terms worthwhile to consumers – say, by offering haircuts at much lower prices.

But to operate profitably while charging much lower prices, Acme would have to find enough employees who value job security so highly that they’re willing to work for wages far below what they would earn by working elsewhere.

Because I see no such successful attempts by firms to cater to the alleged demand that workers have for greater job security, I conclude that workers in general are not willing to pay the cost of securing more job security. In short, the value to workers of greater job security is less than is the value to them of higher wages today.

Securely yours,
Donald J. Boudreaux"

The emailer is talking about - and Don starts to talk about - trade-offs. On the margin, there is a trade-off between income and security. Both income and job security cost employers money so they can't provide increases in both at the same time. You have to trade it off on the margin. A marginal increase in security for a marginal decrease in pay, etc.

But then Don abandons this marginal thinking and reaches for the extreme. One extreme way to guarantee job security is to demand complete customer loyalty. Then you can be assured of consumer demand, which means you can guarantee labor demand. This is an absurdity, clearly. It's a very extreme example. This is what economists call a "corner solution".

When you first learn constrained optimization you're always taught to check the "corner solutions" first, to see if any extreme option solves the optimization problem. When you rule those out, though, you don't say "well I guess there's no solution" - you then solve for an interior solution. You find the point at which the marginal cost is the same as the marginal benefit and you're at a trade-off point that satisfies all preferences of everyone involved. There is a some optimization point and there is some trade-off that workers will make for more job security. It will be a marginal trade-off. Excessive strategies for guaranteeing job security such as the one that Don offers are not in the cards because the employer and the consumer has to make these trade-offs as well. Wage rates, benefits packages, prices, hours, etc. change all the time to respond to these changes in preferences. Don should have agreed with the commenter that there may be demand for job security (makes good sense in this economy) and he should have laid out the concept of marginalism and constrained optimization and assured the commenter that market exchange will adjust to these changes in preferences. Instead, he sees some sort of threat, he grabs for his old stand-by - the reductio ad absurdum - he completely drops marginalism in the process, and because of this poor analysis he makes very bad claims like "Because I see no such successful attempts by firms to cater to the alleged demand that workers have for greater job security, I conclude that workers in general are not willing to pay the cost of securing more job security."

The scariest thing is, Don also recently shared with us that he's teaching a graduate level microeconomics course. All economists should think on the margin. It is perhaps the single most important hallmark of "thinking like an economist". Reductio ad absurdums are almost always used to obscure marginal thinking. Reductio ad absurdums are - not exclusively, but often - very, very, very bad economics. When you are tempted to use one think like an economist about what it is you're using. You're referencing a corner solution. Think about when it is appropriate to reference corner solutions and when it isn't before you go too much further. If a corner solution doesn't seem to make sense, don't assume there's no solution - look for an interior solution. If any students of Don's in the micro class read this, I'm curious how this stuff gets taught in practice. Does he resort to reductio ad absurdums a lot in class? Feel free to leave a comment.