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Tuesday, Nov. 30 - 4pm to 8pm

Religion & Liberty: Volume 33, Number 3 & 4

Distinguishing Sound Economics from Ideology

It’s difficult to know who to trust these days. We are bombarded with competing claims, perspectives, and information, and at such a rapid pace, it almost induces vertigo. MIT professor Sinan Aral characterizes social media and its societal impact as The Hype Machine—the title of his 2020 book on the topic. Aral points out that “This Hype Machine connects us in a worldwide communication network, exchanging trillions of messages a day, guided by algorithms, designed to inform, persuade, entertain, and manipulate us.”1 How do we sift through what is true and what is simply ideological manipulation? Is it even possible to just “follow the science”?

First, it would be a mistake to dismiss expertise. Not long ago, Tom Nichols lamented the death of expertise, which he described as a “Google-fueled, Wikipedia-based, blog-sodden collapse of any division between professionals and laymen, students and teachers, knowers and wonderers—in other words, between those of any achievement in an area and those with none at all.”2 The world thrives on the division of labor and the division of knowledge. We all depend on experts to help us know what is true on certain matters. Nevertheless, there are rules of thumb to help laypeople discern bias behind claims or proposals made by experts. Let’s take a look specifically at a discipline prone to inaccurate predictions or controversial policy advice: economics.

 

Conceptual Tools

There are several conceptual tools nonexperts can use when assessing economic claims. To use these tools effectively, one must first understand the essence of economics. Economics is the study of human action under conditions of scarcity. This entails three important points.

First, economists are concerned with the observable choices that people make, not the psychological rationale underlying those choices. Second, economic expertise entails describing what is the case—not what ought to be. In short, economics is distinct from the fields of psychology and ethics. Third, economics concerns itself with scarcity. Scarcity exists when the demand for something exceeds supply when the price is zero. Economists study the different methods of rationing these scarce resources; the most common is the price system, such as how to ration Ferraris. There are also nonpricing mechanisms, such as how to ration limited admissions to Stanford (where they don’t sell to the highest bidder). With this basic background, let’s turn to some useful tools noneconomists can use to assess economic claims and policy recommendations. Such tools will help to distinguish sound economic ideas from those that are infused with bias or dominated by ideology.

The first tool is this: Does the economic claim or policy analysis acknowledge tradeoffs, and in particular, recognize that each choice entails foregone alternatives? Consider labor policy and the minimum wage as an example. Economists debate whether imposing a particular minimum wage reduces employment in a specific situation, but what is indisputable is that the employer must forgo spending these funds on alternative uses (e.g., hiring another worker or increasing the advertising budget to increase sales, etc.). There is always an opportunity cost involved—and any economist who suggests otherwise is not acknowledging reality. The same concept can be applied to industrial policy. A growing number of conservatives advocate propping up U.S. manufacturing through various subsidies or, like economist and former Trump appointee Peter Navarro, advocate various forms of protectionism. On the other side of the political spectrum, liberal economist Mariana Mazzucato advocates government-intensive “moonshot” economics to achieve various UN Sustainable Development Goals.3 While both sides make valid points about how to potentially improve current policy, they ultimately fail to adequately address the opportunity costs involved in their respective economic policy proposals.

A second tool pertains to externalities. An externality is a cost or benefit borne by individuals who are not participants in an exchange. An economic idea or policy proposal can be assessed for soundness by asking whether or not it recognizes the existence of relevant externalities. Pollution is an example of a negative externality; herd immunity from vaccination is an example of a positive one. Establishing clear property rights and enforcing the rule of law can often internalize these externalities. Nevertheless, externalities arise from numerous economic activities, and ignoring or dismissing them is a potential indicator that the economic claim or policy proposal is infused with bias.

Two more evaluative tools are particularly helpful when assessing economic claims or policy recommendations—and they are closely linked to one another. The first flows logically from economics as the study of human action under conditions of scarcity. Humans are distinct from the rest of the created order. Human beings are created in the image and likeness of God and are endowed with reason and free will. Because humanschoose and act, economic science cannot be conducted in the same fashion as the natural sciences. Consider this: Combine sodium with water and you will invariably get an explosive reaction; the atoms and molecules don’t choose how to react—they simply react in accordance with their nature. But unlike molecules, human beings do choose how to react—and because each person is unique, policy makers can’t necessarily predict how certain policies will alter people’s choices. While empirical analysis of economic matters can identify patterns and yield genuine insights, such empirical studies ultimately constitute a commentary on economic history but are of limited value as a predictive tool. Economic optimization and equilibration (the core of neoclassical economics) are contingent—that is, based on particular historical circumstances. In contrast, ballistics can use the laws of physics to hit a target under controlled conditions every time. Policymakers cannot do the same. Human beings aren’t static, nor do they respond like molecules in a controlled experiment. Thus, one should always assess economic ideas in light of the uniqueness of the human person—each of whom chooses uniquely.

A similar evaluative tool is what is called the “knowledge problem.” Nobel laureate Friedrich Hayek highlighted this problem in his seminal essay “The Use of Knowledge in Society.” Hayek states:

The peculiar character of the problem of a rational economic order is determined precisely by the fact that the knowledge of the circumstances of which we must make use never exists in concentrated or integrated form, but solely as the dispersed bits of incomplete and frequently contradictory knowledge which all the separate individuals possess. The economic problem of society is thus … a problem of how to secure the best use of resources known to any of the members of society, for ends whose relative importance only these individuals know. Or, to put it briefly, it is a problem of the utilization of knowledge not given to anyone in its totality.4

The implication of Hayek’s insight is straightforward: economic analysis, insofar as it is wedded to policy proposals, should be conducted with a certain kind of humility and reservation. Just as human nature precludes economists from engaging in policy the way a chemist engages in a science experiment, so too should the use of knowledge in the marketplace constrain economists from a kind of policymaking hubris. Economists and policymakers cannot possibly know—or even make use of—the kind of distributed knowledge that permeates the marketplace. Attempts to control economic production and economic outcomes from the commanding heights fare poorly, largely because of the knowledge problem.

While economists agree on most fundamental economic concepts and principles, they often come to different conclusions on the effects of various policies. It’s not easy to discern truth from propaganda or insights from ideology. Most economists seek to educate and explain, but they can also become partisan ideologues for specific policies that go beyond the purview of economics. Paul Krugman, who won the Nobel Prize in economics, is unquestionably a highly insightful economist. But unfortunately, as a New York Times opinion columnist, he often ventures into areas well beyond his expertise. Inasmuch as he pushes ideology over dispassionate economic analysis, he harms the credibility of his otherwise astute economic contributions. We can be tempted to write off economists, but rather than dismiss or devalue their particular expertise (when they are indeed operating within the realm of their expertise), the noneconomist would do well to assess economic ideas and policy proposals in light of tradeoffs (opportunity cost), externalities, the distinctiveness of human action, and the use of knowledge in society.

 

NOTES

1 Sinan Aral, The Hype Machine: How Social Media Disrupts Our Elections, Our Economy, and Our Health—and How We Must Adapt (New York: Harper Collins, 2020).

2 Tom Nichols, “The Death of Expertise,” https://thefederalist.com/2014/01/17/the-death-of-expertise/. Accessed September 1, 2021. 

3 See Mariana Mazzucato, Mission Economy: A Moonshot Guide to Changing Capitalism (New York: Harper Collins, 2021).

4 F.A. Hayek, “The Use of Knowledge in Society,” The American Economic Review 35, no. 4 (September 1945), https://www.jstor.org/stable/1809376.

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Stephen Barrows, PhD is the Managing Director of Programs at the Acton Institute.  In this capacity, he leads the Research, Program Outreach, Communications, Marketing and Conference & Events departments.  Prior to his role at the Acton Institute, Dr. Barrows served as the Executive Vice President, Provost and Dean of Faculty of Aquinas College (Grand Rapids, MI) where he was also a tenured associate professor of economics.  While at Aquinas, he taught undergraduate and graduate courses in economics, and led a team of more than 85 full-time faculty, 150 part-time faculty