Arnold Kling  

Economic Illiteracy

PRINT
Social Security and Real Produ... Economics of Health Insurance...

Bryan Caplan summarizes some evidence.


One of the first things that stands out is anti-foreign bias. When they contemplate economic interaction with foreigners, the general public gets unreasonably negative...

A second major pattern in the public's economic illiteracy is make-work bias...In the long-run, blaming technology for unemployment is just silly. As the mechanization of agriculture beautifully illustrates, when machines replace people in one line of work, they switch to another...

a blanket anti-market bias...In the minds of public, prices apparently go up when businesses suddenly start to feel greedier. Economists, in contrast, expect businesses to be greedy year-in, year-out; but depending on market conditions, greed may call for prices to go up, go down, or stay the same...

A final catch-all category of economic illiteracy may be called pessimistic bias. Conventional wisdom has it that conditions are going from bad to worse. Most Americans think that real income has been falling for decades, most new jobs are low-paying, and doubt whether the next generation will have a higher standard of living. Economists think that this conventional wisdom is dead wrong.


Meanwhile, James E. Zull says that errors are an opportunity for learning.

learning produces physical change in the brain...

When we practice something, the neurons that control and drive that action fire repeatedly. If a neuron fires frequently, iit grows and extends itself out toward other neurons...Particularly in the cortex, neurons that fire more frequently will also reach out more frequently...

we need more than just activity--we need emotion...when we solve a problem, we have feelings of pleasure and satisfaction. Or when we cannot understand a calculus or biochemistry text, we have feelings of frustration and despair...

rather than treating student errors as obstacles to learning, I began to welcome them...

I saw student errors as clues for teaching. Errors identify gaps in student [neural] networks and provide ideas for how to build those networks.

For Discussion. What errors that non-economists make are not explained by Caplan's list of biases?


Comments and Sharing


CATEGORIES: Economic Education



TRACKBACKS (9 to date)
TrackBack URL: http://econlog.econlib.org/mt/mt-tb.cgi/128
The author at No Illusions in a related article titled Economic Illiteracy: It's widespread. It's costly. writes:
    BackgroundMany, possibly most, Americans are illiterate when it comes to understanding how the economy works, or knowing in the most general terms how the government spends their money. This applies to high-income professionals as well as to people... [Tracked on October 3, 2004 6:46 AM]
The author at Mahalanobis in a related article titled The Dismal Science Ain't So Bad writes:
    Aside from helping you to avoid these glaring economic mistakes, studying Economics will also help you make a lot of money. [Tracked on October 4, 2004 8:07 PM]
The author at The Raw Prawn in a related article titled The Dismal Science Ain't So Bad writes:
    Aside from helping you to avoid these glaring economic mistakes, studying Economics will also help you make a lot of money. [Tracked on October 9, 2004 2:10 AM]
COMMENTS (12 to date)

A final catch-all category of economic illiteracy may be called pessimistic bias. Conventional wisdom has it that conditions are going from bad to worse. Most Americans think that real income has been falling for decades, most new jobs are low-paying, and doubt whether the next generation will have a higher standard of living.

Sounds like the Kerry-Edwards platform.

Mark Horn writes:

I don't know what error non-economists make. I still consider myself a non-economist, but in training. I hope someday to graduate up to a basic level of literacy that I have not yet achieved. But I know that I'm not there so I'm open to instruction.

But with my status as it is, I can't imagine giving this document to someone totally illiterate and having them become enlightened enough to pursue further study. The very fact of my handing this document to them would be an insult - I'd be saying that they were illiterate - and they'd dismiss it in defense of their pride.

I can think of no effective way to convince someone who isn't already aware of their complete illiteracy to study something that assumes their illiteracy.

(Sorry if this is off topic)

Brad Hutchings writes:

Zull definitely has a sales bias :-). The most important lesson I can think of from sales is that any feedback is an opportunity to state your case, win a convert, fix a problem, and make money. I think it works more through psychology than brain chemistry -- when you show empathy for someone, you get some credibility that might help you change their mind or see something different (or buy your product).

There's also an anti-freedom bias or a "one really smart guy could fix this" bias that Caplan needs in his list. I hear a lot of anti-SUV snarking among my liberal friends. Parking your Ford Festiva between a Tahoe and an Escalade makes great schtick, but it's really gotten to the point of hatred and resentment. I have one friend who is seriously suggesting that the rise in crude prices needs to met by reimposition of the 55 mph national speed limit. You know, the family of 5 in the Escalade is getting better people-miles/gallon than the lone driver in the Festiva. But it would require junior high school math to grasp that, so I find myself with a pessimistic bias on whether the snarkers could ever grasp that.

Bruce Cleaver writes:

There is also confirmation bias - but *everybody* (economists included) makes that one. It could be that there are facts out there that decisively refute (or at least extensively modify) one or more of the central tenets of economics, if only we could see it.

mathijs bouman writes:

higher fixed production costs translate into higher prices. (e.g. the sometimes surreal policy debate just after the European autioning of UMTS-licences)

Mattew

Bob writes:

I don't know if this is a "bias" but the biggest shortfall I observe is the tendency to ignore the law of unintended consequences. To build on Brad's point, if you outlaw SUVs, you can end up with two cars on the road, each carrying three people, rather than a single vehicle carrying six. Far more gas used, if that's the relevent metric, particularly when you account for the additional traffic.

Jason Ligon writes:

A complete disregard for opportunity costs is the most common problem I see. Broken windows everywhere.

Lawrance George Lux writes:
What errors that non-economists make are not explained by Caplan's list of biases?

The worst bias, even shared by Economists, is the belief that Government spending is good for the Economy. Such spending is far more profligate than Private Sector spending, and with less than a quarter of the economic benefit.

Caplan, like many academians, likes to deride the common sense of working people. The anti-foreign bias is created by People using up their lifesavings during times of unemployment, and accumulating debt to buy the cheaper Products. His make-work bias needs some work as well, forced to return to an example occuring prior to WWII simply to prove his point. The truth lies in the fact Corporations are using technology to cut more expensive labor from the equation, and no one is providing replacement employment of equivalent payscale. The pessimistic bias probably needs the most work of all: Peoples' social and economic position is based upon the economic structure of old, which Economists are so busy trying to change. Does it seem like I condemn Caplan's article? I only condemn his attitude which believes People are dumber than they are. lgl

Rex writes:

What about the market-is-always-right bias? Many people assume that market outcomes are always just or fair. That's true only in the textbooks.

Rob Sperry writes:

"rather than treating student errors as obstacles to learning, I began to welcome them...I saw student errors as clues for teaching. Errors identify gaps in student [neural] networks and provide ideas for how to build those networks."

Roger Shank calls this expectation failure, he has a decent book that is an expantion on the implications of the idea.

http://www.bookfinder.us/review6/0060192992.html

Frank DeWith writes:

What errors that non-economists make are not explained by Caplan's list of biases?

- Underestimating the time value of money.

- Many anti-corporate, anti-big-business biases. For example, believing that no one gets hurt when they exaggerate a claim against a "faceless" insurance company.

- Equating being able to afford the monthly payment with being able to afford the purchase.

- For many, not being able to grasp the concept that "a penny saved is a penny earned" (actually better, since it's not taxed), for example, buying govt bonds instead of paying down high-cost debt.

Frank

Bernard Yomtov writes:

I would add the sunk cost fallacy to the many good suggestions listed by others.

It is amazing how hard it is to get this across.

"We have to go ahead with the project, or we'll lose the $X we've already spent." Grrrr.

Comments for this entry have been closed
Return to top