Thinking

Scott Sumner:

It seems to me that in economics (and to a lesser extent in fields like criminology) there is a distinction between what might be called a “common sense worldview” and an “economistic worldview.” Consider the following common sense worldviews:

1. People don’t respond very strongly to economic incentives. (I.e., higher prices don’t discourage consumption by very much, and higher taxes don’t reduce peoples’ work effort very much.)

2. Imported goods, immigrant labor, and automation all tend to increase the unemployment rate.

3. Most companies have a lot of control over prices. (I.e. oil companies set prices, not “the market”.)

4. Policy disputes over taxes and regulations are best thought of in terms of who gains and who loses.

5. Experts are smarter than the crowd.

6. Speculators make market prices more unstable.

7. Price gouging hurts consumers.

I define the economistic worldview as essentially the mirror image of the preceding seven assertions: incentives matter much more than one would expect; imports, immigrants, and automation do not raise the unemployment rate, prices are primarily determined by market forces, tax and regulatory policies often have little overall effect on income distribution, and a big effect on efficiency, the crowd (or market) is smarter than the expert, speculators tend to stabilize prices, and price gouging is socially beneficial. As you can no doubt tell, I use the term “common sense” in a derogatory way, much as a snobbish 19th century lady might have used the term “common.”

The Myth of the Rational Voter gets into this too. The thing is, most of what Sumner says here is pretty uncontroversial in economic circles and pretty out of the mainstream in political ones. The disconnect between rational worldviews of economics is one of the big drivers of economic turmoil.

Update: It just occurred to me that a perfect illustration of point #1 came from our President last night when he laughably asserted that reducing the deductibility of charitable contributions would not hurt charities at all. It was an unusually dumb thing for him to say.

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