Coercive Regulation and the Balance of Freedom

Daniel Klein has written an elegant essay arguing that minimum wage laws are coercive. He is obviously right. These laws threaten employers with state-sponsored violence if they have a contractual relationship with wages that are too low. To me, the most striking fact in the essay was that more than fifty percent of a survey of economists said that these laws are not coercive in any significant sense. That’s just silly.

Minimum wage laws, like most restraints on trade and like tax laws, are enforced with the power of the state. Coercion lies at the core of almost all government policies. Rarely is voluntary participation a reliable tool for enforcing rules. If we could count on voluntary participation, we probably wouldn’t need the government involved in the first place.

But, as Klein notes, just because something is coercive, doesn’t mean that it is wrong. The coercive power of the state is useful when it protects our lives and property from outside harm. If we think that state-sponsored redistribution is desirable, then we are willing to accept more coercion to help the less fortunate. We also rely on state-sponsored coercion regularly when writing private contracts. The ability of creditors to collect depends on the power of the state to coerce borrowers.

The great difficulty is that coercion is both necessary and terrifying. For millenia, governments have abused their control over the tools of violence. The historical track record insists that we treat any governmental intervention warily. What principles help us decide on the appropriate limits to government-sponsored coercion? Are minimum wage laws acceptable coercion or do they fall outside of the pale?

I start with the view that individual freedom is the ultimate goal for any government. The ultimate job of the state is to increase the range of options available to its citizens. To me, this is not a maxim, but an axiom that is justified by both philosophy and history. On a basic level, I believe that human beings are the best judges of what is best for themselves. I also believe that the right to make our own decisions is an intrinsically good thing. I also believe that people become better decision-makers through the course of regularly making their own decisions. Moreover, the historical track record looks a lot better for governments that put freedom first. The liberal democracies, defined by their affection for liberty, have been far better for their citizens, than alternatives, whether Communist or Fascist, that enforced state-sponsored visions of how people should live their lives.

A belief in the value of liberty flows strongly through mainstream neoclassical economics. Economists frequently speak about an aim of maximizing utility levels, and this is often mistranslated as maximizing happiness. Maximizing freedom would be a better translation. The only way that economists know that utility has increased is if a person has more options to choose from, and that sounds like freedom to me. It is this attachment to liberty that makes neoclassical economists fond of political liberty and making people richer, because more wealth means more choices.

There is a recent wave of scholarship suggesting that the government can help individuals be happy by reducing their choices. While happiness may be a very nice thing, it is neither the obvious central desiderata for private or public decision-making. On a private level, I make decisions all that time that I expect to lower my level of happiness, because I have other objectives. On a public level, I can’t imagine why we would want to privilege this emotion over all other goals. A much better objective for the state is to aim at giving people the biggest range of choices possible, and then let people decide what is best for them.

But putting freedom first doesn’t mean abandoning the state. At the very least, we rely on the government to protect our private property against incursions by others. Even most libertarians think that it is reasonable for the state to enforce contracts. This enforcement increases the range of contractual options and this is, in a way, expands liberty.

While these forms of state action are readily defensible, many of the thorniest questions involve tradeoffs between the liberty of one person and the liberty of another. Taking wealth from Peter and giving it to Paul increases the choices available to Peter and decreases the choices available to Paul. Governmental coercion to redistribute income cannot be opposed purely on the grounds that it restricts liberty. Certainly, redistribution reduces the freedom of the taxpayer but it increases the options of the recipient of governmental largesse.

With this lengthy preamble, let me switch to the minimum wage and related restrictions on the ability to contract. The minimum wage reduces the options available to the employer, who must pay his workers more. It also reduces the freedom of both employer and employee, both of whom lose the ability to contract at a lower wage. Opposing this loss of freedom is an increase in the options available to workers who remain employed and now earn a higher wage. While I am no fan of higher minimum wages, I can imagine settings in which the increase in the freedom of the still-employed workers could be more important than the offsetting losses to individual liberty. We cannot get to a clear answer on the minimum wage on the basis of an axiomatic desire to increase the range of choices available to individuals, because we are trading one person’s choices against the choices of another.

Perhaps one might come to a clear view on the minimum wage by hewing to an uncompromising belief in freedom to contract. While I certainly have sympathies for that belief, there are cases where freedom to contract is and should be imperfect. For example, many contracts rely on expensive government enforcement, and it is reasonable to set limits on the scope of government action in this, as in every, setting. An employment contract with a lifetime non-compete clause, for example, relies on governmental agents enforcing a prohibition against a worker for decades. I’m okay with the idea that the government doesn’t need to spend its resources, which are, after all, our resources, enforcing every extreme contract. I am also in favor of limits on contracts that encourage highly anti-social activities, like murder. Support for the freedom to contract is a good maxim, but it cannot be an axiom.

The case against the minimum wage or other related restrictions on contracting does not, in my view, come from clear anti-coercion axioms or even maxims, but from other more technical reasons that have been emphasized for decades. If we want the state to redistribute income, we have sensible means for doing that like Friedman’s negative income tax or the Earned Income Tax Credit. These tax-based approaches are also coercive, but they can increase the choice set of the poor with less of a reduction in the freedom of others. Obviously, these tax-based solutions don’t restrict the set of available contracts and that is a great plus. The fact that American minimum wages are too low to create large-scale unemployment shouldn’t blind us to the fact that, across the Atlantic, far more aggressive minimum wages are accompanied by vast numbers of unemployed youths. The minimum wage is also bad redistribution policy because it imposes the costs of redistribution on the employers of the poor, and on their customers who will have to pay higher prices to make up for higher wages. If we want to redistribute income to the poor, then it is appropriate that everyone with resources pay, not just employers in sectors that employ the less fortunate.

A final reason to reject further increases in the minimum wage is that it gets the government into the business of setting prices, and this requires competence that seems far beyond the limits to government. The case for laissez-faire comes ultimately not from unbounded faith in the power of the market, but rather in a realistic appraisal of the limitations of government. Price-setting is a difficult task that is prone to enormous abuse. The historical track record of price and rent controls is pretty terrible. It seems like this track record should make us further recoil from further governmental incursions into setting prices.

By reminding us about the coercive nature of the minimum wage and other similar regulations, Daniel Klein also reminds us that the centuries of sagacious concerns about the abuse of government power also apply in this case. Perhaps we should use redistributive taxes that reduce the freedom of the wealthy to increase the freedom of the poor, but it is hard to think that the minimum wage is a good tool for redistribution.

Edward Glaeser is the Fred and Eleanor Glimp Professor of Economics at Harvard University

Also from this issue

Lead Essay

  • George Mason University’s Daniel Klein begins this month’s lead essay by presenting evidence from a poll of economists showing that more than half of those who are in favor of a minimum wage generally don’t think it is coercive, suggesting that judgments about what is coercive or voluntary underpin professional opinion about economic policy. If so, Klein asks, shouldn’t economists address the question of coercion more directly? Klein argues that we should treat non-coercion as a maxim to be followed “ninety-something percent of the time,” which allows for the legitimacy of coercion under certain conditions. Economists may then ask: “When should we endorse the liberty maxim and when not?” in a principled way. Klein draws on ideas from F.A. Hayek and Adam Smith to argue for the centrality of the distinction between voluntary and coercive action in the ordinary practice of economic inquiry, and to urge a renewed emphasis on the role of liberty in economic theory.

Response Essays

  • NYU philosopher and legal theorist Liam Murphy responds to Daniel Klein’s lead essay by questioning the relevance of the general concept of coercion to the defense of market institutions and disputing Klein’s particular characterization of coercion. Murphy observes that arguments in defense of markets generally appeal to pre-institutional rights or a conception of good consequences. In neither case does the idea of coercion play a key role. Further, Murphy suggests that Klein’s particular account of coercion is loaded with contestable moral baggage. But, Murphy writes, “The concept of coercion … is deeply indeterminate, with disagreement about correct usage tracking exactly the fault lines that have political significance; so there is simply no right answer to such questions as whether a labor contract for below a minimum wage, or its prohibition, is coercive.”

  • Harvard economist Edward Glaeser agrees with Dan Klein that economic regulations, such as minimum wage laws, are coercive, and that this ought to give us pause. “For millenia, governments have abused their control over the tools of violence,” Glaeser writes. “The historical track record insists that we treat any governmental intervention warily.” However, that does not rule out coercion. “The ultimate job of the state is to increase the range of options available to its citizens,” Glaeser maintains, and well-targeted coercion can increase total freedom in this sense. “Certainly, redistribution reduces the freedom of the taxpayer but it increases the options of the recipient of governmental largesse,” Glaeser says. He goes on to argue that laws that restrict the liberty to contract, such as the minimum wage, generally are not freedom-enhancing overall and tempt government abuse.

  • In his reply, University of Chicago law and economics guru Richard A. Epstein attempts to lay out an account of “justified coercion.” Taking the minimum wage as an example, Epstein sets forth and then rejects several grounds on which the minimum wage may be seen as non-coercive. He then sets forth and rejects several arguments that might justify the coercion in economic regulations such as the minimum wage. According to Espstein, state coercion in support of market institutions “is justified because it expands the envelope for gains from trade through voluntary exchange.” In general, coercion may be justified when “it is to the long-term advantage of all,” but detailed and systematic analysis of particular institutions — such as the one Epstein provides for the minimum wage — is required to establish when this is, and is not, the case.