Opinion: No matter how good AI gets, it won’t beat markets

The economy isn't a vast set of equations. It's a complex discovery process done in real time. Even the best computers aren't up to that

By Peter Boettke. 

"Whenever we see big leaps in computation, would-be central planners come out of the woodwork, claiming this finally makes it possible to organize the economy better than markets do — optimizing tax rates, producing enough to meet our needs, and allocating resources in a way that maximizes well-being for all.

Such arguments gained theoretical prominence in the early 20th century, saw a resurgence with the mid-century advent of modern computing and operations research, and have emerged again with the impressive advance of artificial intelligence (AI).

But this line of thinking rests on a false premise: that an economy is nothing more than a computational problem to be solved with accurate equations and enough data and processing power.

As I argue in a recent paper for the Montreal Economic Institute, this error was understood as far back as the 18th century by Adam Smith (1723-90). In his Wealth of Nations, which just had its 250th birthday, Smith observed that producing even simple goods requires the co-operation of so many different hands that the full network of exchanges would “exceed all computation.” Even the making of a woollen coat, for instance, required farmers, spinners, dyers, merchants, shippers, and so on just to get from raw materials to market.

Such complexity doesn’t stop the coat from being produced. But Smith’s point is that there is no single mind directing every step of production, from raising the sheep to selling you a brand-new peacoat. Instead, it is through the spontaneous co-operation of the many hands and minds that make up the “invisible hand” of the market that such production is possible.

In the late 19th century, Italian economist Vilfredo Pareto (1848-1923) expanded on this point, observing that co-ordinating even a modest economy and matching resources to uses and preferences would soon cause an explosion in the number of equations to be solved. But today’s computers can handle quintillions of computations per second, more than Pareto could possibly have imagined. Doesn’t that make a difference?

This is where Nobel laureate economist Friedrich Hayek (1899-1992) comes in. Hayek explained that the problem is not merely that the relevant knowledge is decentralized — spread out across millions of individuals — but that it is often tacit. Local shopkeepers’ understanding of their customers’ buying habits cannot be translated into one data point to feed into an AI or any other kind of model. Nor can we predict the emergence of an entrepreneur dreaming up a product that did not exist before.

Most important of all is the phenomenon of prices — indispensable signals that guide our decision making. Prices are neither set in stone nor arbitrarily fixed. Instead, they emerge from real exchanges. When the price of wheat rises, it is because buyers and sellers are competing for a limited supply. This price increase signals something about relative scarcity. It also provides an incentive to adjust consumption and conserve the resource, to look for a substitute, to increase production and to innovate.

In short, prices are not lying around in the wild, waiting to be harvested and fed into an algorithm. Rather, they are the result of constantly evolving discovery. Without this process of discovery, the knowledge embedded in a price simply doesn’t come into existence.

Hayek called the price system, with its ability to generate knowledge in the market, a “marvel.” He described competition as a “discovery procedure” that does much more than allocate resources. When entrepreneurs bring new products to market, for instance, they are making informed bets. If they’re wrong, they bear the cost. If they’re right, they reap the rewards. Through this process, we all learn a little more about what is possible, what is valued and what works.

As for AI, it can process truly vast quantities of historical data to detect patterns, forecast trends and optimize within given parameters. But it can only look backward to find data, whereas economic life is forward-looking and creative. The growth of the social-media influencer market, to choose but one example, could hardly have been predicted by an algorithm 20 years ago. In the same way, today’s algorithms can’t accurately predict what or how much we’ll consume tomorrow, since much of what will matter tomorrow hasn’t been imagined yet.

As powerful and helpful a tool as AI can be to improve logistics, better manage inventories and analyze markets, it remains just that, a tool. It can help us gain a better understanding of markets but only markets themselves can predict and co-ordinate the results of the billions and billions of voluntary exchanges that take place every day."

Taxpayers Spent Billions Covering the Same Medicaid Patients Twice

When recipients signed up in two states at once, insurers often got paid by both; ‘it definitely is wasteful’

By Christopher Weaver, Anna Wilde Mathews and Tom McGinty of The WSJ. Excerpts:

"Health insurers got double-paid by the Medicaid system for the coverage of hundreds of thousands of patients across the country, costing taxpayers billions of dollars in extra payments.

The insurers, which are paid by state and federal governments to cover low-income Medicaid recipients, collected at least $4.3 billion over three years for patients who were enrolled—and paid for—in other states"

"The biggest Medicaid insurer, Centene, received $620 million in duplicative payments between 2019 and 2021"

"Insurers said it is up to states to verify people’s eligibility, and to disenroll them if necessary."

"The Medicare and Medicaid agency doesn’t screen for the double payments, leaving that to the states. State officials said identifying people who moved is difficult, and that recoveries of improper payments from managed-care companies are limited."

"The federal government’s emergency pandemic rules made it much harder for states to disenroll beneficiaries."

"double payments nationwide increased from $814 million in 2019 to $2.1 billion in 2021."

"When an enrollee leaves one state and signs up in a different one, though, the first state isn’t automatically informed." 

"it is difficult for states to claw back payments from managed-care companies for covering relocated enrollees, largely because it can be unclear exactly when they left."

"taxpayers were wasting about $1 billion a year"

"it can be difficult to verify where people are living" [this reminds me of Hayek saying that the central planners don't have local knowledge so they can't run the economy very well] 

The Wrong Road to Freedom

A Book Review of The Road to Freedom: Economics and the Good Society, by Joseph E. Stiglitz

By David R. Henderson. 

"Introduction

Columbia University economics professor Joseph E. Stiglitz has recently published a book titled The Road to Freedom: Economics and the Good Society. In it, Stiglitz, who shared the 2001 Nobel Prize in economics with George Akerlof and Michael Spence, criticizes what he calls “neoliberalism” and singles out Milton Friedman and Friedrich Hayek as two prominent neoliberals.

Stiglitz argues that Friedman, Hayek, and others failed to recognize the importance of market failure and were too optimistic about how competitive an economy would be without government intervention. Whereas Friedman argued that economic freedom is a necessary, though not sufficient, condition for political freedom, Stiglitz turns the argument on its head. In his view, the kind of economic freedom that Friedman advocated would lead to less political freedom. Interestingly, though, Stiglitz himself advocates less freedom of speech for people with certain views and he claims that it was good for governments to have suppressed what he thinks of as misleading speech about the COVID-19 pandemic and masks.

Throughout the book, Stiglitz makes strong assertions with little or no evidence. Although the book is heavily footnoted, the footnotes are mainly to explain some of his ideas further or to reference other books or articles, disproportionately written by Stiglitz. There are few hard numbers, and he makes little attempt to cite writings by those he criticizes. He also shows a stunning ignorance of economic history and, in discussing price gouging, shows no awareness of the downside of price controls. His criticism of communism doesn’t even mention the millions of deaths it led to. At times, as when he discusses climate change, he is completely one-sided and seems completely unaware that he is. Moreover, Stiglitz is not shy about engaging in stunning personal attacks on Friedman and Hayek. The result is a book that preaches only to people who (1) already agree with him and (2) don’t need to see good evidence or arguments to support their views.

Neoliberalism and Trickle-Down Economics

In his Preface, Stiglitz defines neoliberalism as “the belief in unregulated, unfettered markets.” In a footnote he promises to provide a “more extensive definition” in the first chapter, but a careful reading of that chapter shows no such attempt.

Stiglitz, like many other critics of free-market economists, uses a term to describe them that almost none of them uses. The only economist I know who calls himself a neoliberal is EconLog co-blogger Scott Sumner. And the only evidence of Milton Friedman mentioning the word “neoliberal” was in a 1951 essay in a Norwegian magazine. Even there, Friedman didn’t claim the label for himself. In none of his subsequent non-academic writing—and I have read virtually all of it—did Friedman call himself a neoliberal.

Similarly, Stiglitz refers to people on the “Right” (he capitalizes the word) as advocates of “trickle-down economics.” They argue, he says, that “if we made the economic pie larger, all would eventually be better off.” (italics in original) Yet, I’ve never been able to find people on the “Right,” whether classical liberal, conservative, or libertarian, using the term “trickle-down economics” to refer to what they believe in. When someone uses terms to describe people’s beliefs, terms that those people never use to describe their own beliefs, we should be suspicious.

While we’re discussing it, though, it’s important to point out that the last two centuries of economic growth completely justify the idea that steady economic growth in a society does make virtually everyone better off. J. Bradford DeLong, an economist at the University of California, Berkeley—and certainly no one whom Stiglitz would regard as a “neoliberal”—beautifully documented that fact in a 2000 National Bureau of Economic Research study aptly titled “Cornucopia: The Pace of Economic Growth in the Twentieth Century.” This isn’t trickle-down economics; it’s gush-down economics.

Economic Concentration and the 19th Century Trusts

In criticizing Hayek and Friedman, Stiglitz claims that they thought that markets on their own would remain competitive without government intervention and forgot or ignored “the experiences of monopolization and concentration of economic power that led to competition laws” in the late 19th and early 20th century. There are two problems with this claim. First, both Hayek and Friedman did favor some version of antitrust. In his 1962 classic, Capitalism and Freedom, Friedman wrote, “The Sherman antitrust laws, with all their problems of detailed administration, have by their very existence fostered competition.” And in his 1979 volume 3 of his Law, Legislation, and Liberty, Hayek wrote that monopolists’ ability to price discriminate “ought to be curbed by appropriate rules of conduct” in cases where “market power consists in a power of preventing others from serving the customer better.” It’s not clear that Hayek had in mind antitrust statutes, He more likely was thinking of common law rules against monopolistic private-market actions. I don’t completely defend Friedman’s and Hayek’s views. I simply defend them from Stiglitz’s false charge.

Second and more important, Stiglitz shows his own ignorance of how competitive the “trusts” of the late 19th century were. In a pathbreaking study that Stiglitz doesn’t mention, economist Thomas DiLorenzo showed that in the six “trusts” he examined, between 1880 and 1890 real output increased by 175 percent at a time when the trusts were gaining market share and the economy’s overall output increased by only 24 percent. In his article, “The Origins of Antitrust: An Interest-Group Perspective,” published in the International Review of Law and Economics, DiLorenzo found that real prices in these industries were falling. Although the consumer price index fell 7 percent in that decade, the price of steel fell 53 percent, refined sugar 22 percent, lead 12 percent, and zinc 20 percent. The only price that fell less than 7 percent in the allegedly monopolized industries was that of coal.

What about oil, which was produced by that famous trust, Standard Oil of New Jersey? In his 1987 book, A Theory of Efficient Cooperation and Competition, Lester Telser, a University of Chicago economist, noted that during that same decade (1880-1890), the output of petroleum products rose 393 by percent and the price fell 61 percent. The only conclusion consistent with those facts are these two sentences from Telser: “The oil trust did not charge high prices because it had 90 percent of the market. It got 90 percent of the refined oil market by charging low prices.” But you won’t find any mention of this in Stiglitz’s book.

Stiglitz’s Personal Attacks

While we’re on the issue of false, or at least specious, charges, it’s worth pointing out Stiglitz’s personal attacks on Friedman and Hayek. In his Chapter One, Stiglitz writes, “Friedman and Hayek, like many other conservatives, have an unfailingly dismal view of human nature. It may have been because of deep introspection that they arrived at their extreme views about individual selfishness, which they the generalized to everyone.” I can’t speak for Hayek. I spent about a week at a conference with him in June 1975 and didn’t get to know him well, but I certainly didn’t observe an obviously selfish person. The main thing I observed was his utter delight in finding young economists who were more free-market-oriented than he was.

I did know Milton Friedman well, though, having interacted with him on numerous occasions between 1970 and the early 2000s. What I observed was a man with a large generosity of spirit. That simply doesn’t fit Stiglitz’s image of someone generalizing from his own selfishness to that of people in general.

On a related note, Stiglitz accuses Friedman of having been “a key adviser to the notorious Chilean military dictator Augusto Pinochet.” This claim has been refuted countless times. Friedman himself noted—and no one contradicted his claim—that Friedman spent about 45 minutes talking to Pinochet. Does that constitute key advice? And what is one to say about Stiglitz’s own close consulting relationship with Venezuelan strongman Hugo Chavez?

Price Gouging

One thing that tends to separate economists from non-economists is the economists’ understanding of the positive effects of allowing so-called “price gouging.” For purposes of this discussion, I’ll define price gouging as raising a good’s price quickly and substantially when the demand for the good suddenly rises or the supply suddenly falls. A 2012 poll of prominent economists found that only 8 percent agreed or strongly agreed with the idea of passing a law preventing price gouging during “a severe weather event or emergency” while 51 percent disagreed or strongly disagreed.[1] Weighted by confidence in their views, the results were even more lopsided. Only 7 precent agreed or strongly agreed while 77 percent disagreed or strongly disagreed.

Why do so many economists think that allowing price gouging is a good idea? For three main reasons. First, even if higher prices don’t elicit higher output, they do cause the suddenly scarcer good to be sold to those who value it most. We measure value by willingness to pay. That may sound problematic, but it’s not always true that the wealthier people are the ones who are willing to pay more. During a hurricane, for example, although the wealthier person will certainly get plywood to cover up the windows of his mansion, the person who lives in a trailer might outbid the wealthier person for plywood for his trailer so that the wealthier person doesn’t get the plywood for his tool shed.

Second, if suppliers know that they can raise prices when there’s a sudden increase in demand or decrease in supply, they are more likely to stockpile goods than if they know they won’t be able to raise prices.

Third, outside suppliers, if they can charge unusually high prices, will be motivated to ship goods into the area where there is a sudden scarcity. There are actual cases of lumber sellers in Georgia getting ready to ship lumber to Florida if they’re assured of being able to get high prices.

Where does Stiglitz stand? He’s in the 7 or 8 percent. In addressing the issue of umbrella prices during rainstorms, he advocates a “simple coercive rule—no price gouging when it rains.” His argument for that rule is that it will cause people not to invest in information about the weather. He thinks that’s good. But he doesn’t even bother addressing the issues I discussed above: the allocation of a given number of umbrellas, the incentive to stockpile, and the shipment of umbrellas from other areas. (This last, admittedly, is probably not important for sudden rainstorms.)

Climate Change

Stiglitz calls climate change “an existential threat.” He writes:

Climate change is about more than the heating of the planet a few degrees; it is about the increase in extreme weather events. More droughts, more floods, more hurricanes, more extreme heat and more extreme cold spells, rising sea levels and increasing ocean acidity, and all the dire consequences that will ensue, from dying seas to forest fires to the loss of life and property.

Such strong empirical claims cry out for strong empirical support. Stiglitz gives none. Yet physicist Steven Koonin, in his 2021 book, Unsettled: What Climate Science Tells Us, What it Doesn’t, and Why it Matters, presents solid data, much of it from the federal government’s National Climate Assessment that undercuts claims like those quoted above. I discuss a number of these in my 2022 review of Unsettled.[2]

COVID, Masks, Censorship, and Communism

This same confidence without evidence infuses Stiglitz’s discussion of the efficacy of wearing masks during COVID. He claims that “[S]cientists found that, holding all else constant, masking and social distancing make a difference.” The good news is that he footnotes this claim; the bad news is that the footnote doesn’t give evidence for the claim.

More ominously, Stiglitz comes out strongly for censoring people whose views on COVID differ from his. He writes:

When individuals believe wrong information—when there is a demonstrable inability of many to identify laws and false information—there may have to be restrictions on its dissemination. We did that during the pandemic; it would have been foolish—socially harmful—if we had not.

That raises other issues. People acting on Marxist ideas, which were clearly wrong, put into power governments into power that murdered tens of millions of people. Would Stiglitz have censored Karl Marx?

I would bet that he would answer “No” and that part of the reason is that he doesn’t feel strongly about Communism. Here’s his summary statement about the downsides of Communism:

Communism succeeded in generating greater equality and more security in material goods but failed on other counts, including low economic growth, an absence of freedom in all dimensions, a concentration of power, and a greater inequality in standards of living than Communist rulers would admit.

Put aside the fact that there were great inequalities under Communism. As my co-authors and I pointed out in our article “The Hidden Inequality in Socialism,” Leonid Brezhnev, general secretary of the Soviet Communist Party and president of the USSR, “had Rolls Royce, Mercedes, Cadillac, Lincoln Continental, Monte Carlo, Matra, and Lancia Beta automobiles.”[3] Much more important, what’s missing? How about Joseph Stalin’s purposeful starving of millions of Ukrainians in the early 1930s. Has Stiglitz, a smart man, never heard of the Holodomor?

Getting Coase Wrong

One of the major players among free-market economists in the last century was the late Ronald Coase, who was even a player into the 21st century. Coase famously established that lighthouses in Britain, which so many economists—famously including Stiglitz’s own teacher, Paul Samuelson—assumed had to be provided by government, were actually provided privately. Coase never argued, though, that private producers could feasibly provide all public goods. Yet in a table summarizing various “neoliberal” views, Stiglitz writes, “[The] Coase theorem says that market will efficiently solve public goods problems.” Has he read Coase?

Is there anything to like?

There are so many other parts of the book to criticize. They include Stiglitz’s idea that the U.S. economy has deindustrialized—it hasn’t; an attack on Republicans for gerrymandering even though Democrats do so also; and a criticism of the idea of letting people sell their body parts in which he forgets to argue why they shouldn’t be so allowed. That is by far from a complete list of remaining weaknesses in the book.

I’ve been more critical of Stiglitz’s book than I normally am of other books by economists who are left of center. That raises a question: is there anything valuable in his book? Yes. There are two main things.

First, on immigration, Stiglitz criticizes the media for showing “waves of refugees trying to cross the border.” He claims that this occurs “relatively rarely.” I’m not sure he’s right. But I do agree that the showings on media probably exaggerate the problem. Even on immigration, though, Stiglitz misses an opportunity to make a bigger point. He writes:

The libertarian claims [about people deserving their incomes] are even weaker once we think about what their incomes would have been had they been born in a poor country, without the rule of law or the institutions, infrastructure, and human capital that make the economies of advanced countries work so well. It is not enough to have assets such as entrepreneurial talents. If you are born into the wrong environment, those assets mean nothing.

The way I’ve summed up that point in speaking to American audiences is to tell them that for most of them, the most valuable asset they have is their American citizenship.

But there’s a straightforward solution, one that many libertarians advocate but Stiglitz fails to: let more people immigrate. Throughout the book, Stiglitz expresses concern for people in poor countries. The quote above shows that he understands how to help millions of them. But he doesn’t bother to say so.

The other area in which he expresses some good thoughts is on trade policy. Stiglitz writes, “The US [government] talks about the international rule of law in trade, but nothing is done when Trump or Biden violate these rules, whether by imposing unjustified tariffs, by subsidizing its chip industry, or by passing Buy America provisions.”

But those are two rare points of light. Stiglitz’s book is, in short, full of important errors and deeply unsatisfying."

Notes on Hayek's "The Use of Knowledge in Society"

By David Henderson. 

"Because this is the 50th anniversary of the announcement that Friedrich Hayek was co-winner of the Nobel Prize in economics (the person who shared it was Gunnar Myrdal), it’s a good time to look closely at his 1945 article in the American Economic Review, “The Use of Knowledge in Society.”

When I used to cover the article in my classes about 30 years ago, the students had trouble following his argument. Part of it, I think, was Hayek’s Germanic writing style: lots of long sentences. So for a few years, I quit covering the article. But that wasn’t satisfactory. So instead, I sent the students detailed comments and questions on various paragraphs to guide them through the article. That worked well.

Each time I look at my notes, I update. So this morning I updated yet again.

Here are my notes.

Teaching Notes on Hayek, “The Use of Knowledge in Society”

http://www.econlib.org/library/Essays/hykKnw1.html

David R. Henderson

October 9, 2024

I think this article is one of the ten most important articles published in economics in the last 80 years. So, it’s worth the effort.

The most important paragraph in this article is the third paragraph and the most important sentence in the article is the first sentence of this paragraph:

The peculiar character of the problem of a rational economic order is determined precisely by the fact that the knowledge of the circumstances of which we must make use never exists in concentrated or integrated form but solely as the dispersed bits of incomplete and frequently contradictory knowledge which all the separate individuals possess. The economic problem of society is thus not merely a problem of how to allocate “given” resources—if “given” is taken to mean given to a single mind which deliberately solves the problem set by these “data.” It is rather a problem of how to secure the best use of resources known to any of the members of society, for ends whose relative importance only these individuals know. Or, to put it briefly, it is a problem of the utilization of knowledge which is not given to anyone in its totality.

Economists today who draw on Hayek’s insight often refer to this point about dispersed information as “local knowledge.”  Think about kinds of local knowledge you have about your job or other parts of your economic life, knowledge that would be unavailable to a central planner.  Now ask yourself how things would work if you had to get a central planner’s permission each time you wanted to act on this knowledge.  Think about your job and about other parts of your economic life.

In Section II, second paragraph, Hayek writes:

The answer to this question is closely connected with that other question which arises here, that of who is to do the planning. It is about this question that all the dispute about “economic planning” centers. This is not a dispute about whether planning is to be done or not. It is a dispute as to whether planning is to be done centrally, by one authority for the whole economic system, or is to be divided among many individuals.

When economists stared criticizing the idea of central planning early in the 20^th century, the comeback from some of those who wanted central planning was, “Don’t you think we need to plan?” That’s why Hayek has this paragraph.

Read and reread Section III, second paragraph. There’s so much in there. One example: Think of someone who graduates at the top of his/her class at Stanford, Yale, or Harvard Law School. On a scale of 1 to 10, what does he/she know on the first day at the job that will help him/her do the job? My guess is that’s no more than 4 and could well be 2 or 3.

In Section III, third paragraph, Hayek writes:

Even economists who regard themselves as definitely immune to the crude materialist fallacies [i.e., thinking in terms of material wealth] constantly commit the same mistake where activities directed toward the acquisition of such practical knowledge are concerned—apparently because in their scheme of things all such knowledge is supposed to be “given.”

About 15 years ago, our dishwasher was leaving our dishes streaky and so we called the appliance repairman. He came out—minimum charge $69.95—and in 5 minutes assessed the situation and told us we should use powder instead of liquid dishwash detergent. For a few minutes I was angry. Then I remembered Hayek.  Explain.  What did I figure out that is contained in this quote?

Read Section IV, fifth paragraph. Some economists who studied the Soviet Union and other centrally planned economies have claimed that the biggest failure of such economies was not in manufacturing but in agriculture.  Given Hayek’s reasoning in this paragraph, explain why.

In Section IV, sixth paragraph, Hayek writes:

It follows from this that central planning based on statistical information by its nature cannot take direct account of these circumstances of time and place and that the central planner will have to find some way or other in which the decisions depending on them can be left to the “man on the spot.”

No question on this: Just think about it.

In Section V, first paragraph, Hayek states the dilemma:

We need decentralization because only thus can we insure that the knowledge of the particular circumstances of time and place will be promptly used. But the “man on the spot” cannot decide solely on the basis of his limited but intimate knowledge of the facts of his immediate surroundings. There still remains the problem of communicating to him such further information as he needs to fit his decisions into the whole pattern of changes of the larger economic system.

This is the dilemma. So far, Hayek has explained why central planning can’t work. Things seem hopeless. Information constantly changes and each person has only his or her little bit of information. It seems as if things would end in chaos. Is there hope? Yes, which is why I call this next part, “Free markets to the rescue.”

Let’s see what solves it.

Carefully read Section V, fifth paragraph, another key paragraph. Hayek writes:

It does not matter for our purpose—and it is very significant that it does not matter—which of these two causes has made tin more scarce.

Why is it very significant that it does not matter?

In Section VI, first paragraph, Hayek gives an analogy between the price system and machinery.What is that analogy?

In Section VI, second paragraph, Hayek uses the word “marvel” to describe the price system and then explains in the third paragraph why he uses that word.Why?"

The UK’s Orwellian sounding Equality Act 2010 is strikingly Marxist

See Equality Act 2010 by Alex Tabarrok.

"The UK’s Orwellian sounding Equality Act 2010 is strikingly Marxist. It demands equal pay for work of equal value where these are defined as follows:

A’s work is equal to that of B if it is like B’s work, rated as equivalent to B’s work, or of equal value to B’s work.

A’s work is like B’s work if A’s work and B’s work are the same or broadly similar, and such differences as there are between their work are not of practical importance in relation to the terms of their work.

…A’s work is rated as equivalent to B’s work if a job evaluation study— gives an equal value to A’s job and B’s job in terms of the demands made on a worker

…A’s work is of equal value to B’s work if it is neither like B’s work nor rated as equivalent to B’s work, but nevertheless equal to B’s work in terms of the demands made on A by reference to factors such as effort, skill and decision-making.

In short, supply and demand have been replaced by judges and labor boards with the authority to deem which jobs are “equal” and therefore should be paid equally. And the labor boards do so based on vague and subjective considerations that do not change with changing circumstances. Imagine replacing “jobs” with “condiments” and having judges decide whether ketchup and mustard should be priced equally because they are similar, broadly comparable, or rated equivalent in terms of the effort, skill, and decision-making that went into their production.

You think I am joking. I am not. Here’s an example of a case just decided in the UK.

More than 3,500 current and former workers at Next have won the final stage of a six-year legal battle for equal pay.

An employment tribunal said store staff, who are predominantly women, should not have been paid at lower rates than employees in warehouses, where just over half the staff are male.

The tribunal ruled that retail workers and warehouse workers were “equal” and thus had to be paid equally. Next replied that they paid everyone market wages. Verboten!

Next argued that pay rates for warehouse workers were higher than for retail workers in the wider labour market, justifying the different rates at the company.

But the employment tribunal rejected that argument as a justification for the pay difference.

According to the tribunal’s ruling, between 2012 and 2023, 77.5% of Next’s retail consultants were female, while 52.75% of warehouse operators were male.

The tribunal accepted that the difference in pay rates between the jobs was not down to “direct discrimination”, including the “conscious or subconscious influence of gender” on pay decisions, but was caused by efforts to “reduce cost and enhance profit”.

It ruled that the “business need was not sufficiently great as to overcome the discriminatory effect of lower basic pay”.

No one is alleging that male and female warehouse workers were paid unequally or that male and female retail workers were paid unequally or that there was any direct or indirect discrimination. The only claim is that warehouse workers, who are less likely to be female than retail workers, earn more than retail workers. And since these jobs have been judged “equal,” the company has violated Equality Act 2010.

Who could have predicted that jobs as disparate as warehouse and retail jobs might one day be deemed “equal.” Yet because Next failed to foresee such lunacy they are now required to pay millions in back wages to their retail employees. Software engineers, particularly in AI, are currently in high demand. A British firm looking to hire them may hesitate to raise wages, fearing that a future ruling could classify software engineers as “equal” to a larger, lower-paid group like HR administrators. Such a decision could easily push the firm into bankruptcy.

The warehouse workers were almost 50% female (47.25%). So females were not barred from the higher paying jobs. The fact that 77.5% of the retail workers were female suggests that retail work has special appeal to females relative to males and thus that there are compensating differentials. Any of the three female plaintiffs could have taken jobs in the warehouse. If the jobs are equal and the warehouse jobs pay more this is, on the plaintiffs’ theory, “puzzling”. [Or, as Ayn Rand would say, blank out.]

In fact, the court case reveals that Next was struggling to fill the warehouse positions and offered any retail employee—including the plaintiffs—the opportunity to switch to warehouse work. On cross-examination, one of the plaintiffs admitted that, given the unpleasant conditions in the warehouse—described by the court as “the drone of machinery,…vibration, alarm sirens and the screeching of machinery, wheels and rollers, continuously present in all areas”—the warehouse job “did not seem particularly attractive” compared to the greater autonomy and more appealing environment of the retail job. The plaintiff added that she would only have considered the warehouse job if it paid “a lot more money.”

Thank goodness for the men and women who were willing to take such jobs for only a little more money! It should not shock that different people have different preferences over jobs, just as they have different preferences over ice cream. In particular, it will perhaps surprise only the judges to learn that men tend to be more wage-focused and “women are relatively more attracted to employers with low pay but high values of nonpay characteristics (NBER 32408).” The court, however, recoiled from this idea, noting that if they were to take demonstrated preferences seriously this would be tantamount to applying “an unfettered free market model of supply and demand.” The horror.

Now consider how the jobs were deemed “equal”. On the left is the job evaluation report for claimant Amanda Cox. The specific categories and numbers are not important; what is important is that the jobs are rated across 11 categories, and the point-scores are then added to get a total score at the bottom.

Amusingly, the evaluators emphasize that they use equal weighting across the categories. Of course, they did—because “equal” is synonymous with fair, right? An unequal weighting would surely be discriminatory!

I am not making this up:

Any scheme which has as its starting point – “This qualification is paramount” or that “This skill is vital” is nearly always going to be biased or at least open to charges of bias or discrimination.

Thus, if you think that a skill is vital for a job, that’s discrimination!

(Notice also that equal weighting is just another form of weighting. Given the subjective nature of both the categories and the points assigned, equal weighting holds no inherent superiority or objectivity.)

But no matter—we have yet to get to the best part. The evaluators selected three warehouse workers and assessed them using the same metric. For example, Amanda Cox was compared to warehouse worker Calvin Hazelhurst, resulting in the table on the right.

Can you spot something surprising in this table? I’ll give you a moment.

The obvious conclusion any reasonable person would draw from this table is that the jobs are clearly not equal. Amanda’s total score is 440, while Calvin’s is 340. 440 ≠ 340. Not even close! In nearly every category—except (no surprise!) physical demands and working conditions—the retail job requires more points, aka “skill and responsibility”.

At this point, most people would stop and ask some critical questions. If the jobs differ so much across multiple dimensions, isn’t it clear that they are not equal? And why do jobs that seemingly require less “skill” pay more? Could it be that our point-score rating system is oversimplified? Maybe the market is telling us something that this crude scoring system isn’t capturing? Is it time to check our premises?

But not the evaluators! Oh, no. The evaluators are thrilled–because the fact that the jobs are unequal proves that they are equal!

War is peace, freedom is slavery, ignorance is strength. UNEQUAL IS EQUAL.

Adam Smith had a much better understanding of wages in 1776 than UK judges have today.

Adam Smith had a much better understanding of wages in 1776 than UK judges have today.

The wages of labour vary with the ease or hardship, the cleanliness or dirtiness, the honourableness or dishonourableness, of the employment. Thus in most places, take the year round, a journeyman tailor earns less than a journeyman weaver. His work is much easier. A journeyman weaver earns less than a journeyman smith. His work is not always easier, but it is much cleanlier. A journeyman blacksmith, though an artificer, seldom earns so much in twelve hours, as a collier, who is only a labourer, does in eight. His work is not quite so dirty, is less dangerous, and is carried on in day-light, and above ground. Honour makes a great part of the reward of all honourable professions. In point of pecuniary gain, all things considered, they are generally under-recompensed, as I shall endeavour to shew by and by. Disgrace has the contrary effect. The trade of a butcher is a brutal and an odious business; but it is in most places more profitable than the greater part of common trades. The most detestable of all employments, that of public executioner, is, in proportion to the quantity of work done, better paid than any common trade whatever.

Today, the UK would convene a labor board to rule that the tailor and the weaver must be paid equally because they DO WORK OF EQUAL VALUE. Case closed.

Labor boards will inevitably lead to the misallocation of labor, diminishing both wealth and fairness. Severe misallocation may lead to further intervention, in the worst scenario, even to the allocation of labor by fiat. Politicization breeds division, rent-seeking, and a stagnant, unpleasant society.

More generally, it pains me that there is no recognition that the market is a discovery procedure, including the discovery of the value of different skills and people’s preferences over different jobs. No recognition that the market harnesses tacit knowledge and knowledge of particular circumstances of time and place–knowledge that is difficult to quantify, communicate, or communicate in a timely manner–and that “society’s economic problems are primarily related to adapting quickly to changes in these circumstances.” No recognition that a price is a signal wrapped up in an incentive.

I despair when I consider that these fundamental ideas are the foundation of our liberal, global, and prosperous civilization. On economics, as on free speech, the UK has entered the great forgetting.

Addendum: A special hat tip to Bruce Greig who brought this to my attention and had the receipts."