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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