You might rightly accuse me of being a pedant when it comes to teaching students about price controls. One lesson I emphasize when teaching it is to ask students why they wish to intervene in particular markets and then to consider whether altering the incentive and informational signals embedded in prices is the right way to accomplish it. I suspect that in a majority of cases, the popular desire to fix prices derives not from some fundamental desire to correct a market “imperfection.” Not at all. It seems to me that folks imagine that messing with the price system is the only way they have to implement other social goals and distributional goals that have little to do with the markets themselves.
For example, the desire to control rents or to impose minimum wages does not derive from some argument that there are massive externalities that are not being priced in the labor or housing market. Nor do I suspect that folks have monopsonistic models in their head when they favor minimum wages. Rather, it seems to me that the problems of poverty or poor life choices get revealed by the troubles some people have in labor markets and housing markets. And that all of us like to imagine ourselves in the situation where we cannot afford the housing that we want or obtain the wages that we want. And it is just much easier to say, “make housing cheaper” than it is to understand why housing is unaffordable for people in the first place.
If this is the mindset, and if the mindset of folks is that markets simply are not competitive, then no matter how I teach the economics of rent control and minimum wages, the analysis is always going to be deemed my opinion or a biased presentation of the material. Why do I say this? Because I am regularly accused of it, even as I give caveat after caveat about these observations. Students want to believe what they want to believe.
With that in mind, I think the new strategy to teach about rent controls and minimum wages is to flip the arguments. We should start by asking students to think about how they would feel if the government passed a law that did not allow buyers of apartments to purchase them for anything less than a government mandated price floor. In other words, rather than teaching about rent controls as price ceilings, teach about them as if they were price floors. Would students think that forcing rental prices above “market” prices would encourage more people to want to rent apartments? Would students think that forcing rental prices above market prices wouldn’t induce lots more people to want to sell apartments? Would students think that no mechanism would emerge to “clear” the imbalance that would be created by the surplus of housing that would be generated? Why not?
Similarly, rather than teaching about minimum wage laws, we should ask students to think about how they would feel if the government passed a law that did not allow sellers of their labor services to obtain any more than the government mandated price ceiling. In other words, rather than teaching about minimum wages as price floors, teach about them as if they were price ceilings. Indeed, the medieval guilds and WWII US economy both are illustrations of where this happened, with ugly consequences. Would students think that forcing wages below “market” wages would not discourage workers from wanting to sell their labor? Would students think that forcing wages below market rates wouldn’t induce lots more firms to want to hire workers? Would students think that no mechanism would emerge to “clear” the imbalance that would be created by the shortage of jobs that such a policy would generate? Why not?
I suspect you know the answers to those questions. So we are left wondering how our “critically thinking” students could somehow accept the idea that minimum rent laws cause unintended (negative) consequences but that minimum wage laws do no such thing. And we are left wondering how our “critically thinking” students could somehow accept the idea that maximum wage laws cause unintended (negative) consequences but that rent controls could do no such thing. I don’t think it’s any mystery why we observe these particular outcomes, the mystery rather is why we pretend that this sort of thing is not common. We’ll address this in future posts.