Bryan Caplan  

Econ as Incredulity

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What is economic theory?  Is it a body of proven truths?  Or a set of hypotheses whose only merit is that they've so far been successfully tested against the facts? 

Most economists openly embrace the latter position, but secretly believe the former.  The smoking gun: The typical economist has well-defined views on a wide range of issues, even though he is only familiar with a handful of empirical literatures.  If economists really believed their official methodological position, they'd be agnostic on the vast majority of topics.  They aren't.

How can economists resolve this tension?  Hard-line Austrian economists want the profession to renounce empiricism and admit that economic knowledge is a priori.  The main problem with this position is that even claims as elementary as "supply slopes up" and "demand slopes down" are not a priori true.  Hard-line empiricists want the profession to remain utterly open-minded on every economic issue until they've reviewed the empirical evidence.  The main problem with this position is that almost everyone who absorbs the "economic way of thinking" finds it to be incredibly clarifying and insightful.  A good economist really can talk more intelligently about many topics he's never specifically studied than most non-economists who work on those topics full-time.

But if the "economic way of thinking" isn't a body of truths, how can it provide such large epistemic benefits?  My answer: Economics provides clarity and insight by instilling selective incredulity.  A trained economist knows when to say, "What?!," "Really?!?!," and "How can that be?!"

A few examples:

1. Living standards during the Industrial Revolution.  Pure economic theory can't prove that a massive increase in production will make most people richer.  But when someone claims that the Industrial Revolution made most people worse off, the economic way of thinking teaches us to be incredulous.  "Mass production failed to increase mass consumption?  How is that possible?!"

2 Working conditions during the Industrial Revolution.  Pure economic theory can't prove that the rise of the factory made workers better off.  But when someone paints the Industrial Revolution as a disaster for workers, economics trains us to ask questions like, "People moved to cities to get worse jobs than they had in agriculture?!," "Immigrants wrongly believed they were likely to find a better life in the New World?," and "Employers got rich paying workers far less than they were worth - and failed to provoke new entry?!"

3. The minimum wage.  Pure economic theory can't prove that the minimum wage causes unemployment.  But when someone denies this effect, a well-trained economist asks "The price of labor goes up by 20% and employers buy just as much?  Come on."  Or, "Gee, why stop at $12 per hour?  Why not $1000 per hour?"

4. Public goods.  Pure economic theory can't prove that public goods are under-supplied.  But when someone claims that we can solve massive social ills by asking for donations, the economic way of thinking kicks in.  "People enjoy the same benefit whether or not they contribute, but they still contribute on a massive scale?"

Economists' incredulity should be surmountable.  Faced with our incredulous questions, economists should be ready to hear those we challenge say, "Yes, really!  I understand your skepticism, but a very careful study of the evidence yields a surprising answer."  The point of the economic way of thinking is simply to set the terms of the debate - to separate "Ordinary claims requiring ordinary evidence," from "Extraordinary claims requiring extraordinary evidence." 

Critics may call this dogmatic.  But it's no more dogmatic than scoffing at Bigfoot sightings.  The reasonable reaction to Bigfoot really is to ask, "A whole species of larger-than-man North American primates exists, but none of these animals has ever been captured, dead or alive?!"  And the reasonable reaction to protectionism really is to ask, "So we'll be richer if we prevent foreigners from selling us cheap stuff?"

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COMMENTS (29 to date)
Julien Couvreur writes:

You are only begging the question with your notion of incredulity.

As Bayes formalized, beliefs (and their probability) evolve with new information. Incredulity simply means that you have strong prior knowledge (high probability belief), which will be hard to change unless you have high confidence evidence or a stronger argument.

So, what justifies the strong prior knowledge that economists hold?
If the answer is logic and the simple understanding of human action (ends and means), then this prior knowledge rests on a priori grounds.

Allan Nadel writes:

5. Aggregate demand. Pure economic theory can't prove that the concept of aggregate demand is a load of bollocks. But when someone says that it was World War II that finally got us out of the Great Depression, the economic way of thinking kicks in. "The destruction of millions of human lives--not to mention the diversion of an immense amount of resources which were then used to destroy entire cities--was economically beneficial? How is that possible? Isn't that just like a billion broken windows?"

mike shupp writes:
"And the reasonable reaction to protectionism really is to ask, "So we'll be richer if we prevent foreigners from selling us cheap stuff?"

From which it follows that the sensible thing is always to rush to Walmart? You might have had problems selling this advice to Alexander Hamilton back in the 1790's.

Yes, it benefits me as an individual to buy say children's toys cheaply from foreign merchants. It benefits my neighbor to do the same, and so on. And all the kids, of course. But does this work on a national level? If all American parents buy their children toys from China, who do American manufacturers sell their wares to? Germany? If the US Army consistently buys tanks and howitzers from Germany, what do the would-be American manufacturers of tanks and howitzers do? Something other than build weaponry, of course, which is probably good for the economy in many ways -- but what happens to the US Army if the USA gets into a shooting war with the Germans? Does the Chairman of the JCS visit the White House and explain to the President that we have to put the fighting off for six months till the Germans fill our latest orders?

Economics is a valuable tool for analyzing the world and formulating policy. But is isn't the sum total of all the wisdom necessary for running human societies, and thus it fails to qualify as "the proven truth." Not that this must be an embarrassment; even Newtonian mechanics fails to describe phenomena on some scales.

Maniel writes:

Professor Caplan,
I’m not an economist, but economics has been helpful to me to understand and influence my own behavior and, to a limited extent, the behavior of others with respect to financial well-being. In this regard, it parallels the understanding of health. For example, knowing what I know now about exercise, nutrition, sleep, hydration, toxins, sanitation, etc., I am better equipped to construct a healthy lifestyle, to understand why I feel the way I feel, and to infer a thing or two about the health of others.
Applied to a topic such as the minimum wage, economic axioms, such as the notion that price is the mechanism which brings supply and demand into balance, are helpful to see more than one side of the discussion. To wit, it is unlikely that I will be hired by someone else at the minimum wage if that wage is more than I am worth. Understanding that the price mechanism has been disabled at above my value gives me the intellectual satisfaction of knowing why I am unemployed.
But, the discussion need not end there. Let us stipulate that (however unlikely) my congressman and senator also studied economics and are therefore well aware of my plight. Their knowledge of economics has also helped them to understand that they benefit from their current jobs and that it is to their advantage to be re-elected. Further, they believe (and I will hazard that “studies” would confirm) that poor and unemployed as I am, it is quite likely that, not only have I not studied economics but that even if I had and even if I understood how the minimum wage is excluding me from the “legitimate” workforce, in the unlikely event that I do vote in the next election, I may not even vote against them.
With this knowledge at the ready, my representatives have no hesitation in voting to support a minimum wage increase for the sake of “working families” (they don’t actually know what it means, but they know that, if they say that, unions will turn workers’ union dues into campaign donations). Moreover, these reps understand that constituents who might temporarily benefit from this dubious government intervention into private businesses will more than compensate them for any problems small business owners or losers like me might cause them.
Similarly, economics has helped me to understand why, as a nation, we take from the young to invest in the old. Is that intellectually satisfying or what?

Bedarz Iliaci writes:

Maniel gets to the crux. A society only exists when some people, at least some of the time, consider and seek the good of the society at large.

The idea that a society can be build to last by individuals pursuing their self-interest alone is an unproven idea. Dostoevsky called it the dream of building a Crystal Palace (in Dreams from the Underground).

Olivier Massin writes:

"all a priori" vs "all a posteri" sounds like a false dilemma. And that some alleged a priori economic truths turn out to be false empirically, does not show that all are (e.g. "free exchange is mutually beneficial ex ante", "money is a means of exchange" might still be a priori truths).
Why not grant that there might be some a priori economic truths (maybe less numerous that the Austrians thought) and still maintain your incredulity approach for a posteriori economical claims ?

Kenneth A. Regas writes:

" A good economist really can talk more intelligently about many topics he's never specifically studied than most non-economists who work on those topics full-time."

Perhaps Dr. Caplan could name one or two domains the scholars of which he dismisses wholesale this way.

Also I would reframe the protectionism question to something like this: "So the least prosperous among us will become less prosperous, while the more prosperous will become even more so if we allow impoverished foreigners to compete with the former?"

Ken

Enial Cattesi writes:

@mike shup:

But does this work on a national level? If all American parents buy their children toys from China, who do American manufacturers sell their wares to?

Why nations? Why not only your town? As a matter of fact, a town is pretty big, why not only your neighborhood? But still, why buy from those unbearable neighbors and not make everything in house?
If the US Army consistently buys tanks and howitzers from Germany, what do the would-be American manufacturers of tanks and howitzers do?

Make a better offer than the Germans.
Something other than build weaponry, of course, which is probably good for the economy in many ways -- but what happens to the US Army if the USA gets into a shooting war with the Germans?

That "of course" is not necessary. Why wont the Chinese buy? And what if I get into a fight with that neighbor which sell me food? My God, I'll starve to death!!

@Maniel:

Their knowledge of economics has also helped them to understand that they benefit from their current jobs and that it is to their advantage to be re-elected.

It is rather doubtful that the politician needed economics to behave like a rascal. There are two ways the acquire wealth: economic and political. The economical way means tread, which is peaceful. The political way is war and aggression. So the politician is, by virtue of his job, an aggressor. If he knows economics or not, it is irrelevant.

Enial Cattesi writes:

I meant "The economical way means trade, which is peaceful"

Glen writes:

I always felt that what distinguished economists was that they attributed too much to their theories, and then were trapped by the bad results produced by them.

" In the 1890s, according to Joseph A. Schumpeter there emerged 'A large expanse of common ground and ... a feeling of repose, both of which created, in the superficial observer, an impression of finality – the finality of a Greek temple that spreads its perfect lines against a cloudless sky.'" Wikipedia. Sounds like Dostoevsky's Crystal Palace just mentioned.

Maybe this explains
"[W]hat justifies the strong prior knowledge that economists hold?"

Jon Murphy writes:

Great post! Thank you

Brad writes:
Also I would reframe the protectionism question to something like this: "So the least prosperous among us will become less prosperous, while the more prosperous will become even more so if we allow impoverished foreigners to compete with the former?"

Only if you merely frame "Us" in a purely nationalistic sense. If you frame "Us" in a human way to include those impoverished foreigners, then the least of "Us" are raised out of starvation.

Remember 500 million people have been raised out of dire poverty in China in the last 30 years, less than $2 a day poverty.

Also, I am not sure the data supports the idea that our native poor have become less prosperous, more to the truth their position has been stagnate while others have grown.

Kenneth A. Regas writes:

@Brad
Professor Caplan identified who the "we" are when he referred to foreigners:

"So we'll be richer if we prevent foreigners from selling us cheap stuff?"

I simply pointed our that within the "we" group he chose, protectionism produces winners and losers, and that it usually has the effect, intended and actual, to privilege the relatively less prosperous of "us."

Of course, Dr. Caplan doesn't believe in privileging countrymen over foreigners, but in the quotation I reframed he put that objection aside to argue the economics. Protectionism can be legitimate only if it is moral to privilege countrymen over foreigners, and even some countrymen over others. This is not an economic question, but rather one for moral philosophy.

In short, I attempted to refine Dr. Caplan's economic argument to useful effect, and made no effort to address the moral argument.

Ken

LD Bottorff writes:

Economic thinking should also encourage us to think in terms of trade-offs. Do I want teenagers to be smoking pot? No. Am I willing to spend billions of dollars and thousands of Mexican lives to keep a few teenagers from smoking pot?

Do I want the polar ice caps to melt? No. Am I willing to trade all the benefits of our carbon-based economy to avoid a 3 degree warm-up?

Javier Gonzalez writes:

I completely agree with the historical portrayal of the Industrial Revolution. Most historians, having a liberal persuasion, paint the Industrial Revolution as a cataclysm for workers. But lets not forget the conditions in rural areas which some people paint as idyllic, but really are even worse. After all, there is a reason why workers migrated (and continue to do so) to the cities in search of better opportunities.

John Rogers writes:

"A good economist really can talk more intelligently about many topics he's never specifically studied than most non-economists who work on those topics full-time."

Why is this?

Arthur Breitman writes:

The problem is that few people have the correct epistemology. Popper is very popular even though popperism doesn't allow one to make any prediction.

When a plane accelerates on a runway most people expect it to take off even though that particular plane has never taken off before in the exact same conditions.

Science requires generalization. The position that "we have no idea what the minim wage does it's a purely empirical question" is empiricism taken to its logical and absurd conclusion, lacking any generalization.

On the other hand of the spectrum, we have the crazy Austrian praxeology and its claim to be logically irrefutable.

The truth of course is that the behavior of humans can be observed empirically and that predictions can be made by generalizing from this evidence.

This is what is done in practice all the time. An engineer building a bridge and calculating its load will use auriculares physical laws which have been derived em mutually in different contexts. Economic predictions will be by nature less accurate, but this does not invalidate the method per set.

A rigorous formalization of epistemology actually exists in the form of Solomonoff induction. And yet, popperism still is in vogue. It's like the Mendeleev table has been discovered and flogiston is still the dominant theory.

Brian writes:

"Perhaps Dr. Caplan could name one or two domains the scholars of which he dismisses wholesale this way."


Kenneth,

Historians? Philosophers?

I'm hard-pressed to think of any I've personally met who understand much about economics. That's bound to happen when Marx is your go-to source.

Maniel writes:

@Enial Cattesi: "It is rather doubtful that the politician needed economics to behave like a rascal."

I did not intend to imply that politicians behave like rascals, rather that they act in their own best interests. This is clearly a hazard of representative government of course, because their best interests, as measured by election returns, do not necessarily correspond to "the good of the society at large" [Bedarz Iliaci].

As for the "ways they acquire wealth," I don't really need to know - since the fact is that they do - but I could hazard a guess that influence plays a role.

But the larger point here is that "sensible" economic arguments for efficient public policy rarely stand against "enlightened" political calculation (largely driven by money if not necessarily economics).

Kevin Driscoll writes:

@Bedarz So, your claim is that millions or possibly billions of people, at least every now and then, engage in completely altruistic acts? Personally, I think this claim would need some serious evidence. I think its more likely that people act on 'the good of society at-large' because they feel it will benefit them emotionally, economically, and/or spiritually.

@Ken I don't think Brian is talking about economists besting academic scholars here. I think he's more likely referring to working professionals (managers, bankers, construction foremen, politicians, etc.) who must make economic decisions regularly and have non-economic justifications for them, that don't stand up to economic scrutiny.

Kenneth A. Regas writes:

@Kevin
I take your point about who it was that Dr. Caplan meant to casually give the back of his hand. But I don't think it saves him from the scorn implicit in my suggestion that he name them. The people you list (excluding politicians) have to defend a bottom line every day of their working lives while standing in the cold wind of competition. If asked to say who most often gets the pertinent economic issues right - the economist or the construction foreman - I'd pick the guy with mud on his boots every time. Wouldn't you?

Ken

p.s. As for politicians, I'll concede that economists could generally teach them a thing or two - if the incentives that politicians live under would allow. Too bad they so often don't.

Ennio E. Piano writes:

I know you're not big fan of Hayek's. But this post reminds me of his "The Trand of Economic Thinking"

it is probably no exaggeration to say that economics developed mainly as the outcome of the investigation and refutation of successive Utopian proposals"

Bedarz Iliaci writes:

@Driscoll,
Are you defining "altruistic acts" as those that are not primarily intended to benefit oneself?
Is so, I would say Yes.
Now, it may well be, that the act benefits the actor as well. The question is of the primary intention of the actor.

Suppose, someone asks you directions on a street. I suppose you tell him the direction. Here, your primary intention was to help the person that asked you. That your act benefited you emotionally or spiritually does not vitiate the other-directed-ness of the act.

My claim is that the other-directed acts are prerequisite to form any society whatsoever. There is hardly any need to show evidence since they are ubiquitous. Indeed, their ubiquity itself makes them invisible to the mind.

Bedarz Iliaci writes:

However, my point was about not inter-personal altruistic acts but about acts that sought the good for the whole community.

My evidence is the existence of this and similar blogs itself. To post and comment on this blog, where the intention, actual or presumed, is to know the truth about the good for the community, and not any personal benefit.

terrymac writes:

I find most "public goods" claims to be incredibly over-hyped. Consider government education, which allegedly solves a "public goods" problem - the hypothetical under-provision of education. When the rubber hits the road, however, such schools produce huge dropout rates - a signal that many students aren't getting anything which they consider to be useful, even when it is provided "free of cost." Literacy rates have fallen since the institution of this "solution." The data suggest that something has gone badly wrong.

Meanwhile, in the developing world, parent-funded free-market schools are springing up, so numerous that they provide education for 50-80% of students in some markets, and James Tooley and Pauline Dixon have discovered that these students are learning significantly more, at lower cost, than those attending competing government schools.

Considering that most of the students whom you must laboriously instruct in economic ways of thinking are graduates of government schools, it might be better to think of such institutions as Public Bads, suffering as they do from a severe conflict of interest.

Nathan Smith writes:

One way to explain the value of "the economic way of thinking" is that it is a style of formalism that protects logical reasoning from certain vagaries and biases of natural language and the human mind. You can explain in words why price equilibrates demand and supply, but a demand-and-supply CHART (a formal argument in graphical form) is ten times as likely to pass from mind to mind without getting garbled.

Sometimes economics runs into a "garbage-in-garbage-out" (GIGO) problem: unrealistic assumptions lead logically to unrealistic conclusions. After all, people aren't really rational, self-interested agents, and that often matters. Because people don't act like rational, self-interested agents at home (way too much love is at work for that), the "economics of the family" tends to be more strange than insightful, but on balance it's probably useful, simply because since the vast majority of us have personal experience of how households work, that we can filter out the silly errors from the surprising insights.

People don't act like rational, self-interested agents in politics either, or at any rate, there's a lot more going on. Bryan was picking low-hanging fruit when he exposed "the myth of the rational voter"; I expect books titled "The Myth of the Rational Bureaucrat" or "The Myth of the Rational Ruler" would be even easier to write, and just as valid. The public choice school, though, by importing not only the "rational, self-interested agent" assumption, but also METHODOLOGICAL INDIVIDUALISM, has avoided disastrous fallacies and made a net positive contribution, though it has often barked up the wrong trees, too. The real disasters occur when political economists like Karl Marx or Daron Acemoglu cross-apply the selfishness assumption to politics, without the rigor of methodological individualism, so that history becomes a battleground of self-interested GROUPS. That particular distortion of the economic way of thinking is worse than worthless.

Economics really shines in the analysis of markets, i.e., complex systems of consensual transactions among strangers or near-strangers, within a framework of rights. In this case, it is quite licit for people to act self-interestedly, since they have scant moral obligations to each other except to respect each other's rights, so the "rational, self-interested agent" simplifying assumption is innocuous; and taking it as a point of departure permits far subtler and more complex analyses than mere verbal rhetoric would be likely to attain. Here "the economic way of thinking" often makes trained economists' casual reasonings wiser, not only than the crude intuitions of the man on the street, but even than the informed opinions of expert insiders.

Unlearningecon writes:

Existing mainstream economic theory (not 'economics') is just that: a set of theories which make debatable and (in principle) falsifiable propositions about the world. It doesn't place economists above historians, sociologists or anyone else. All this post consists of is Bryan stating his priors with (deliberate) incredulity. But this is no more authoritative than if anyone else did it.

You can call what you're doing 'economics', and think that using such a definition gives your priors some authority - it doesn't. In the end, claims like the ones Bryan makes have to be discussed and debated with heavy use of evidence. I'd sooner turn to a non-economists for answers to these questions than to an economist like Bryan. Thankfully, I don't believe many economists think this way, just the pseudo-economists libertarian ideology that plagues the web.

Ghost of Christmas Past writes:

(X) Low-skilled immigration.  Pure economic theory can't prove that massive immigration causes falling wages.  But when someone denies this effect, a well-trained economist asks "The supply of stoop labor goes up by 20% and employers pay each desperate worker just as much?  Come on."

Richard Davis writes:

At the end of Disney's new movie Frozen the good queen punishes the bad duke by cutting off all trade. Otherwise a quality movie.

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