DRI-438: Oh, Yeah? Prove It!

One of the unique American strains of thought is pragmatism. Confronted by a problem or a matter in dispute, the ancient solution was to rely on tradition or religion to settle it. The founding of America changed this. Our enshrinement of freedom and discovery of economic growth gave us a practical bent. We didn’t take someone’s word on faith or follow tradition blindly. We looked for demonstrable answers.

This has been characterized in various ways. Harry Truman said, “I’m from Missouri and you’ve got to show me.” Economist Donald McCloskey expressed the same basic insight differently but with equal bluntness by posing the “American question:” “If you’re so smart, why aren’t you rich?”

Economics provides a logic of choice. Many illuminating implications can be developed from it. Below, we use them to test the truth or falsity of conventional thinking. In each case, a nugget of conventional thinking is subjected to a classic American test of skepticism.

When somebody says something outrageous, a reflex response is: “Oh, yeah? Prove it!” This becomes more than mere reflex when economics suggests that a valid burden of proof can be placed. We do this below. “Oh, yeah? Prove it!” (hereinafter, OYPI) is the challenge we issue to convention, using economic logic as our engine of proof. In each case, a familiar claim is followed by the OYPI challenge that, if taken up, could prove or disprove it.

Employment Discrimination Against Women By Men

#1: “Women earn a mere 77 cents for every dollar earned by men. This ‘gender gap’ is the result of discrimination exerted upon women by men.”

OYPI: Hire women, in order to profit risklessly from the productivity differential implied by the “gender gap.” The word “discrimination” implies that women receive less monetary remuneration for equally productive work effort. This means that employers can automatically earn more profits for a given less of output than competitors (who practice discrimination against women), simply by hiring women.

Of course, the source of riskless profits from female hires cannot last indefinitely. The profits earned by the firms that hire women will attract attention and imitation from other firms. Even if we assume that the misogynistic obsession with discrimination continues to overshadow any desire or need to earn profits, financial capital will still flow to the firms that do hire women. Those firms will expand. Eventually, the wages and salaries of women will be bid up. As long as any differential unrelated to productivity remains, the process of female hires and bidding up of women’s compensation will continue. The “equilibrium” position is the outcome toward which a competitive market will gravitate and the only one consistent with long-run stability. It will produce one of two possible results. Either wages and salaries for separable, identifiable groups of people will be equal, or they will differ according to variations in productivity between the groups or differential hiring costs associated with the groups.

Since exponents of discrimination theory insist that there are no systematic productivity differences between men and women – as opposed to differences between individual men and women – they are insisting, in effect, that riskless profits lie on the table waiting to be scooped up by employers who hire women.

The reflex response of discrimination theorists (DTs) might be that males (hard-core DTs would probably refine this to “white males”) pervade and dominate higher echelons of business. First and foremost, this is false – there are some female CEOs and numerous large and small businesses headed by women, such as the multi-billion real-estate empire founded by Barbara Corcoran. Even more to the point, women control an estimated 51% of the nation’s wealth. Presumably, they would be delighted to bankroll a venture that would earn supra-normal profits by exploiting the under-utilized talents of women in business. Techniques might be as simple as employing women for hourly wages or as complex as backing a fund that owns shares of female-headed businesses.

If discrimination theorists really, truly believe their own claims with their whole hearts and souls, they will cheerfully put their money where their mouths are, even to the extent of mortgaging their net worth. If they succeed in earning the riskless, supra-normal profits whose potential is implied by their claims, they have proved their case. If not, they have proved themselves wrong.

And if they refuse to take up the challenge, it will mean that they don’t really believe their own rhetoric and all their talk of discrimination against women was a sham designed to obtain through deception what women could not earn through their own efforts.

Supra-Normal Profits Earned by Big Oil Companies

#2: “Big oil companies continually earn obscene, windfall, record profits by gouging American consumers, charging exorbitant prices for oil and oil-derivative products.

OYPI: Buy shares of publicly traded big oil companies in order to recoup real income by earning the obscene, windfall, record profits in the form of dividends and capital gains. No American citizen can fail to notice periodic bemoaning of oil-company profits by news media. These lamentations note “record” profits of firms such as Exxon/Mobil and lavish pay for executives.

Since most of the biggest oil companies are publicly traded, the indicated course of action would be for detractors to buy “a piece of the rock” by purchasing shares of the offending companies. This would tend to more-than-offset any dip in real income associated with higher oil prices.

Broadly speaking, there are two possible outcomes of these projected purchases. One possibility is that the oil companies do indeed possess the market power to realize the monopoly profits claimed by critics. If so, these profits would be passed on pro rata to those critics, who are now shareholders. Of course, the critics would not be obligated to retain them. They could distribute them to the poor, invest them in programs to support alternative energy or donate them to the government, at their discretion.

The second possibility is consistent with the decades of analysis devoted to oil companies by the economic specialty known as industrial organization. Economists know that it is absurd to evaluate profits, market power and structure in terms of absolute dollar magnitudes. For most of the last 30 years, ExxonMobil has been the largest private company in the world. In order to provide a competitive rate of return on the gigantic volume of investment capital advanced by its owners, the firm has had to earn a huge volume of profit. That huge volume of profit, however, delivers a rate of return to its investors that is satisfactory but hardly spectacular. Critics who take themselves seriously enough to buy shares will discover this homely truth, doubtless to their chagrin.

While this may be unfortunate from the standpoint of somebody who expects to get rich quick, it could hardly be any other way. The rate of return on any investment depends on the price paid for the asset. Any asset that promises a stream of above-average profits will be avidly pursued. This will drive up the asset’s price until the asset’s rate of return is no longer supra-normal in magnitude but instead merely commensurate with the risk taken in generating the profits. The jargon term economists use to describe this state of bare sufficiency is a “normal profit.”

All this is second nature to economists but journalists betray no sign of familiarity with it. Obscene Profit Theorists have dominated the popular landscape since the 1970s. If journalists and activists believe their own stories and op-eds, their logical course of action is to buy shares in companies such as Exxon/Mobil. Their professional code of fidelity to truth demands that they then report the results of their purchases to their readers.

If they actually receive the supra-normal, monopoly profits that they claim the oil companies are earning, they can document this via their rates of return on financial statements and increases in their net worth. If not, they can print retractions of their long-running vilification campaigns against big oil.

And if they ignore the challenge, they will have to explain why they passed up a simple opportunity to make money and make their case at the same time.

The Ostensible Advantages Enjoyed by Illegal Immigrants

#3: “Illegal immigrants receive free health care and welfare benefits. Their children are entitled to in-state (or free) tuition rates for education. They are treated better than native-born citizens.”

OYPI: Renounce American citizenship, cross the border and re-enter illegally. Live as an undocumented alien and meticulously document the daily facts of that life.

The premise behind much opposition to immigration – whether legal or not – is that the sum of entitlement benefits available to immigrants exceeds that attainable through work as a low-skilled worker. Indeed, some claim that illegal immigrants receive a larger real entitlement income than do native-born American citizens.

This belief, coupled with the corollary belief that immigrants cross the border with comparative ease and legal impunity, creates a stylized narrative of immigration with two key conclusions. First, immigrants come here for leisure, not work. Second, their benefits come at our expense; immigration is a net cost that makes us worse off than we would be in its absence. (Immigration opponents often insist that they oppose illegal immigration while approving, or at least tolerating, legal immigration. This is why we preserve the legal distinction here, even though there is no economic difference between the two.)

This narrative is hotly disputed by supporters of immigration, particularly economists. Given this, it would seem that Anti-Illegal-Immigrationists (AIIs) could not only prove their case but increase the living standards of the poor among their ranks by assuming the identity of the illegal immigrants they deplore.

If things go as the AIIs anticipate, they will have refuted the pro-immigration claims of their opponents. They will have powerful evidence to support a ban on immigration, or a reform of the practice. Of course, this would require a certain amount of work and intestinal fortitude on their part, but if they really, truly believe their own words, the sacrifice would be modest and the potential gain would be significant. After all, they needn’t work, since their central conclusion is that immigrants can earn more than a subsistence living simply by living off the fat of the land.

It seems only fair, though, to point out that the AIIs claims are somewhat inflated. Begin with the border passage itself. If the crossing is as easy as AIIs claim, how can smugglers command a four-figure fee for conveying illegals into the U.S. from Mexico? Why do so many illegal immigrants risk their lives crossing deserts and rivers? Why do hundreds lose their lives annually in the process? Well, we needn’t speculate on the answers to these questions, because AIIs will soon supply them from first-hand experience.

Another point on which AIIs can enlighten us is how illegal immigrants can hope to receive welfare benefits for which they do not qualify. The bureaucratic red tape that must be cut prior to receipt of federal cash or in-kind benefits is legendary. Illegal immigrants are legally ineligible for them. It is true that hospital emergency rooms must treat all applicants, whether citizens or not. But recipients are presented with a bill, and the hospital is just as entitled to collect from illegals as from citizens. Moreover, since illegal immigrants are actually somewhat more likely than low-skilled citizens to hold a job and earn income, the chances of collecting from illegals are probably better.

Receipt of low- or no-tuition public education is not a differential advantage for immigrants; it merely means they have a shot at the same lousy education as American citizens. Of course, it is true that illegals do not pay many of the taxes paid by Americans, such as income and property taxes. But they also do not receive many of the services and benefits we enjoy.

It should be noted that even if AIIs should turn out to be wrong about the relative advantages of illegal status, their acceptance of the OYPI challenge should yield highly useful information. One of the few demonstrable Congressional accomplishments of recent years was welfare reform in the 1990s. But that reform affected only one of the six categories of welfare benefits. It is probably a very bad idea to sever the link between receipt and payment of medical and educational services, both for Americans and immigrants. The OYPI challenge would shed additional light on these matters.

The most dramatic effect of this OYPI challenge would result if AIIs should take up the gauntlet only to die of thirst in the Mexican desert or suffocate crammed in the back of a truck full of illegal immigrants. Not only would they fail to prove their argument, they would fail to survive. But they would not die as hypocrites, but as honest men, however misguided.

On the other hand, if they refused to take up the challenge, they would remain alive. And they would live the rest of their lives with the realization of their own hypocrisy.

The Demand that Companies Pay Living Wages and Provide Health-Care Benefits

#4: “Companies should give their employees generous packages of health-care benefits and pay a ‘living wage.'”

OYPI: Form a company organized around the policy of industry-leading health-care benefits and guaranteeing wages and salaries sufficient to enable purchase of specified market baskets of goods and services.

For many years, left-wing commentators have opined that the “social responsibility” of business demands that companies meet certain threshold levels and forms of compensation to employees. Provision of health insurance and the offer of a “living wage” are the two best-known indices of this degree of compensation.

Certain axioms are planted deep within these demands. These are seldom, if ever, made explicit. The most fundamental is that companies can survive after meeting these standards. The presumptive basis for this claim is that worker productivity will rise sufficiently to offset any increased costs to the firm arising from the necessity to incur higher payroll costs or pay higher wages.

If adherents of Social Responsibility Theory (SRT) really believe this, then their course is clear. They shouldn’t wait around for business owners or managers to succumb to their persuasive arguments. Instead, SRT adherents should start businesses and do exactly what they demand of currently-existing businesses.

Provide generous health-care benefits to all employees. Pay a “living wage” to everybody, regardless of what employees earn currently.

SRT is perhaps the preeminent example of what the great black economist Thomas Sowell calls “volitional economics.” That is, our actions are governed not by constraints imposed by market prices and quantities but rather by our wishes. If we want a certain outcome to result, all we have to do is aim directly at that outcome, and it will eventuate. The failure to achieve it is attributable directly and simply to our unwillingness to try for it.

If we really and truly believe in SRT, then we should demand of SRT adherents what they demand of us. They should have to start businesses and live by the rules they craft for our use. After all, nobody has a stronger incentive to bring about the outcomes demanded by SRT than its own followers. If they can’t do it, it’s safe to assume that the job can’t be done.

If that is the case, it will be because businesses do not exist for the express purpose of providing real income for employees. A business is merely an intermediary between input suppliers and consumers; it allows the former to specialize in their highest-productivity occupation and the latter to receive goods in final form instead of dealing with each input supplier and then assembling the good themselves.

In order to maximize their real income, consumers want to buy each good they consume at least cost. Consumer demands discipline business behavior, forcing businesses to cut costs to the bone. This means that businesses pay wages and salaries based on the employee’s productivity, not on the employee’s needs or wants. In a competitive market, a business that based its hiring and employment decisions on fuzzy-minded notions of generosity rather than on the constraints of market prices and wages would go broke.

The consumers who ruthlessly punish any business that increases wages or benefits in excess of productivity are the same people who yearn for wage or benefit hikes. In effect, consumers are saying, “Raise my real income, but don’t you dare do the same for other people.” Of course, this is a logical contradiction. But every worker is also a consumer; everybody benefits from the cost consciousness created by marketplace competition.

SRT adherents do not believe this, or at least pretend not to. Which gives us the right to confront them with the classic American rebuttal: Oh, yeah? Prove it! Start your own company and practice what you preach. If you succeed, you have made your case. If you fail, your argument fails with you.

And if you ignore the challenge, you have deliberately passed up the chance to prove yourself right.

The OYPI Challenge

The common denominator linking each OYPI challenge is the fact that the popular assertion implies an opportunity for making money is being overlooked. In order to defend the assertion, it is necessary to show the existence of this opportunity by seizing the opportunity and making the money. If this cannot be done, then the assertion is disproved – to the extent that any statement can be disproved.

And if the challenge is ignored, that means that the authors of the statement didn’t really believe it. They were trying to gain by lying.