Bryan Caplan  

The Danger of Economics

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Timeless insight from Don Boudreaux:
This thought is frequently thrown at me and other advocates of laissez-faire, such as when protectionists allege that our endorsement of unilateral free trade ignores "market imperfections" and other "complexities" that aren't discussed in econ-principles courses.  Ditto for our opposition to minimum-wage legislation.  ("Don't you know that real-world markets aren't as perfect as they are in ECON 101 textbooks?!")  Ditto, indeed, for almost every endorsement issued by an economist for laissez-faire policies.

It's this thought that I wish here to discuss.

This thought - that serious discussions of real-world policies often require more than knowledge of a freshman-level economics course - can be interpreted to be trivially true...

But it does not follow - from the above rather trite, if true, concession - that a knowledge of only principles of economics is "dangerous."  My strong sense, from having carefully observed public-policy making and public-policy discussion for nearly 40 years now, is that what is dangerous is a lack of knowledge of principles of economics.  The problem is not that most politicians and pundits take economic principles too literally; the problem is that most politicians and pundits are utterly ignorant even of these principles.

The typical politician does not oppose free trade because he took an advanced econ course and learned there that, under just the right combination of real-world circumstances, an optimally imposed tariff can be justified on economic grounds.  No.  The typical politician opposes free trade because he doesn't understand the first thing about economics.  He doesn't understand that the purpose of trade - any trade - is to enrich people as consumers and not to enrich people as producers.  He doesn't understand that exports are a cost and that imports are a benefit; he thinks that it's the other way 'round.  He doesn't understand that the specific jobs lost to imports are not the only employment consequences of trade; he doesn't understand that trade also 'creates' jobs in the domestic economy.  He doesn't understand that domestic producers protected by government from competition have diminished, rather than intensified, incentives to improve efficiencies of their operations.  He, in short, doesn't understand the first damn thing about the economics of trade.  And nor do most of his constituents.  If these constituents understood basic economics and basic economics only, they would better understand that this politician's policies are economically harmful and that his policy statements are malarky.

The typical politician doesn't support minimum-wage legislation because she has concluded, after careful study, that employers of low-skilled workers have sufficient amounts of monopsony power in the labor market (as well as monopoly power in their output markets) to nullify the prediction of basic supply-and-demand analysis and, instead, to create real-world conditions that enable a scientifically set minimum wage actually to improve the welfare of most low-skilled workers without reducing the employment prospects of any of them.  No.  She supports minimum-wage legislation because she believes that raising the minimum wage will result simply in all low-skilled workers getting the stipulated pay raise without any negative consequences befalling these workers.  And most of her constituents - even those low-skilled workers whose jobs are put at risk by the minimum wage - share her economically uninformed belief.

And:
The claim that I see many people (mostly on the political left) making is something like the following: "Oh, principles of economics is too simplistic.  Reality is so complex that, when one learns advanced economics, the policy prescriptions that a student takes from his or her principles course are typically shown to be faulty.  Here are some examples.  The Minimum wage: Econ principles show that it destroys jobs for low-skilled workers, but advanced economics shows that it can be good for those workers.  FDA regulation: Econ principles show that it prevents consumers from gaining access to pharmaceuticals that can benefit consumers, but advanced economics shows that such regulation can be good for consumers.  Workplace-safety regulation: Econ principles show that competition for workers obliges firms to supply optimal levels of safety, but advanced economics shows why this conclusion is mistaken."

If claims such as these are generally true, then what is being taught as economic principles would be anti-principles.  If claims such as these are generally true, then what is being taught as economic principles would be, at best, simplifications of reality so extreme that they misinform students rather than inform them.  If claims such as these are generally true, then the typical econ-principles student should demand a refund of his or her tuition and compensation for being defrauded by his or her college.

But, instead, if what is taught in (good) principles of economics classes (such as I am sure are featured at George Mason University) is in fact solid principles of economics, then principles-of-economics students are better informed about reality at the end of the semester than they were at the semester's start.  Such students can use these principles as a generally reliable, if not infallible, guide to understand reality and to predict the general consequences of typical government interventions such as price controls and trade restrictions.

Put differently, suppose that the knowledge conveyed to students of, say, good introductory physics courses were analogous to the knowledge of what people who disparage principles of economics believe is conveyed to students of introductory economics course.  In that case, then the likes of Newton's Laws of Motion and Boyle's Law would be downright misleading when used to understand most instances of observed reality.  Of course, in reality these basic laws of physics are not misleading, although they also are understood not to reveal all relevant details of the reality that they are used to describe.  

Related: Me on "Who Loves Bastiat and Who Lives Him Not."




COMMENTS (12 to date)

Einstein disproved Newton's Law of Gravity. Therefore things fall up.

David R. Henderson writes:

@Bryan Caplan,
I agree with you that this is a good post by Don. I still disagree though that the producers’ goal in trade is not to gain as producers. Sure, they want to gain in order to consume, but so what? They gain as producers. See my earlier post.

KLO writes:

This is wrong both in tone (if only politicians weren't such idiots they would agree with me on free trade) and content (the reason politicians are against free trade is because they don't understand economics). It seems highly implausible to me that politicians that oppose free trade do so out of a lack of understanding for its benefits. They may of course not understand free trade, but that is hardly the reason why they would oppose it. The more plausible explanation is that opposition to free trade generates votes for politicians whose primary goal is to gain power. In turn, voters may oppose free trade, because they think they will be among the losers or are risk averse and think that a small chance that they will be among the losers is not worth the possibility of that trade will personally benefit them.

Don Boudreaux writes:

David,

I don't disagree that producers' surplus is real and that it matters. My only point is that the typical advocate of protectionism writes and speaks as if increased production and sales are ends in themselves. That advocate misses the fact that the end goal of economic activity is always and only consumption; production is the means while consumption is the end. This truth is too rarely recognized in public-policy discussions (especially those conducted by politicians) on trade.

My point in that part of the post is nothing more (or less) than the point that Adam Smith made about consumption being the ultimate goal of economic activity.

Don Boudreaux writes:

KLO:

Fair point about politicians. Perhaps they do understand the economics of trade but publicly speak and vote only as if they don't understand it. Either way, my larger point is not to comment on the knowledge of politicians; it is, instead, to point out that far too much public policy is driven by - or enabled by - an ignorance of basic economics. Whether politicians really are as ignorant of economics as they typically sound, or whether they only feign such ignorance in order to appeal to an economically untutored electorate, doesn't matter to my larger point.

More generally, while I'm the last person to reject public-choice explanations for the likes of tariffs and minimum-wage legislation, the evidence is overwhelming that large swathes of the general public are truly ignorant of the most basic principles of economics. Bryan Caplan's 2007 book, The Myth of the Rational Voter, presents much of that evidence. The public's economic ignorance combines with interest-group forces to foist on that unsuspecting public economic policies that harm most members of the public.

Don Boudreaux writes:

Let me add one more thought to my response to David's point:

When I wrote the passage to which David objects, what I had in mind by "purpose of trade - any trade" was to indicate that the purpose of international trade no less than that of local or intranational trade is ultimately to improve people's abilities to consume.

I suspect that David reads that passage as indicating that only the gains of the buyers in any particular exchange are relevant while the gains reaped by sellers from that same exchange are irrelevant. I can see that that's an understandable reading of that passage, but it's not what I meant. I meant, even if I didn't express my meaning with sufficient clarity, that trade in general - the institution of trade, and (hence) of a policy of free trade - is to be judged ultimately only by how well it enables us to better consume and not by how much it enables us to produce and sell.

Jose Romeu Robazzi writes:

I would take this statement:
"Don't you know that real-world markets aren't as perfect as they are in ECON 101 textbooks?!"

and counter with:

Don't you know that markets don't have to be "perfect" (in the academic sense) in order to achieve its beneficial effects? Don't you know that even if markets are "imperfect", economists still haven't come up with a better alternative ?

Floccina writes:

Someone has to have told Bernie Sanders that spending more Government money on post secondary education is not an efficient way to reduce inequality or to subsidize the poor and middle-class.
Someone has to have told Bernie Sanders that spending more Government money on post secondary education is a very good way to get young people on board with his election campaign.
A guy like Bernie Sander who has held political office for a long time is very good at attracting support.

_NL writes:

I often see the parallel argument regarding ethics. When some basic ethical principles have a result someone finds confounding or extreme (personal freedom means open borders, or economic freedom means no taxes), they tend to argue the very idea of ethics. The argument fits some version of "we have to be realistic" or "you can't ignore reality."

The argument that good ethics can be suspended when they result in an unpopular conclusion is similar to the argument that good economic principles are suspended if they would imply an unpopular policy. While the typical libertarian is driven by a need to be consistent, most people are anchored to the mainstream Overton Window and what the average person in this view would consider acceptable.

Rather than finding a new ethical principle or a new economic principle and then applying it consistently, the argument tries to muddle the issue. Then, once everything is murky, you can simply assert your argument.

I do not apply these comments to academic economists, who are operating at a level I don't feel comfortable commenting on. But for an internet debater of reasonable intelligence, it's easier to muddy the waters (of ethics or economics) rather than thoroughly applying new principles.

Anonymous writes:

@Don Boudreaux:

More generally, while I'm the last person to reject public-choice explanations for the likes of tariffs and minimum-wage legislation, the evidence is overwhelming that large swathes of the general public are truly ignorant of the most basic principles of economics.

This seems to parse as "I don't normally reject public choice explanations, but this time I think it's actually the public choice explanation that's the correct one".

My understanding was that one important insight of public choice is voters have no incentive to become well informed on the effects of the policies they can choose to support, because no matter where their vote goes, the chance that it will affect the outcome is virtually zero. Is that wrong?

perfectlyGoodInk writes:

I actually don't see the primary purpose of economics principles as creating a good foundation for higher level classes. To me, it seems that the goals of principles are 1) convince students that they should go into economics by providing the misleading impression that its models are more elegant and have far more predictive capability than they really do and 2) give students who never take another economics class enough talking points to win political debates against those who have never taken an economics class.

This is clear in that the little math that is used at the principles level tends to be only algebra. Furthermore, the main model taught in principles macro (AD/AS) is not used at all in intermediate or graduate levels. And of course when students get to intermediate macro, they typically learn IS/LM (or some other model of similar difficulty involving a handful of equations) that they will once again completely abandon once they get to graduate macro.

More significantly, it's not that the principles models are too simplistic and the advanced ones are better, because the DSGE models that graduate macro students learn actually have a terrible track record of forecasting (which is probably why economists don't supply 90% or 99% confidence intervals when providing forecasts). It's that the whole profession is so focused on influencing politicians and/or attacking the other side of the aisle that the field hasn't really cared about better explaining the real world.

If there's one thing economics has right, it's that incentives matter, and the incentives upon economists are clearly terrible. The ones that act like radio talk show hosts are likely to enjoy more career success than the ones that act like scientific researchers.

hanmeng writes:

I agree that leftists believe that reality is more complex than what economics teaches.

But then they go on to credit central planners with the ability to understand and manipulate this complexity.

Of course, I'm smarter than those guys because I know things are more complex than they think.

"There are more things in heaven and earth, Horatio, Than are dreamt of in your philosophy"

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