In a debate, [David] Friedman attempted to counter this analysis [that human desires need not be considered “simple”] as follows:
Suppose that consumers dislike the idea of consuming the services of low paid workers — tastes, after all, are neither rational or irrational. Further suppose that consumers have no low cost way of determining how much a particular worker, say a waiter in a restaurant, is being paid, so individual employers don’t have the option of paying their workers more in order to appeal to their customers’ preferences.
The minimum wage is increased. Customers now know that workers in various low skill industries are being paid more. So the demand for the output of those industries goes up. Employment goes up instead of down.
It doesn’t strike me as a very likely story, but it isn’t logically impossible and without knowing some facts about people’s tastes you can show it isn’t true.
That’s one example of my more general point. As long as you are completely agnostic about utility functions and production functions, neither of which is given by economic theory, any behavior can be explained by some assumption, possibly an implausible one, about what those functions are.
The particular example of the effects of minimum wages that Friedman uses is illegitimate. The reason is that economics presupposes that people neither hate nor love each other as perhaps some ends in themselves. Instead, each person considers every other person and by extension society as a whole to be a special tool that he can use to further his “self”-interest. In making use of other people, one (Smith) realizes two things. First, that human nature is distinct from the nature of rocks and machines. Second, that other people think of him in turn as their own tool and would not allow Smith to privilege himself in such a way that Smith can use them but they cannot similarly use Smith. E.g., this symmetry means that any exchange benefits not only Smith but the other exchanger, as well. Insofar as Smith derives pleasure from watching low paid workers get higher wages, he ceases to treat other people wholly as means to his own ends.
We can speculate why he holds such valuations. He might consider it a holy moral duty on the part of the employer to pay his workers more.
He might prefer greater equality.
He may be an advocate of a “living wage.”
But any answer will betray in him (in our case illusorily) a higher humanity in a manner of speaking in which other people are now more than merely some peculiar devices whose most efficient use is described by economic theory. In other words, economics is a science of social cooperation. But the cooperators are equal in status and indifferent to each other’s welfare. Friedman’s example violates this last assumption.
Let Smith give Jones a gift G. Smith agrees to let Jones allocate G according to Jones’ own values. Jones decides what to do with G. But why would Smith part with the item, unless Jones’ pleasure were in some way his own, unless Jones’ values were his, also? Only if Smith loved Jones. Love’s effects are union, mutual spiritual indwelling, or, in economics-speak, a merging of individual values scales. Jones is part of Smith.
When Smith loves, the beloved’s values are his, and vice versa if the love is requited. There is an intertwinement of wills. (Such a union obviously does not entail that property ought to be communized.)
It follows that if we allow love of friendship in economics, where people’s values are shared, then we have to ditch methodological individualism. And that is far more trouble than it is worth. Hence, the assumption. (SAtK, I, 14)