Unlearning Economics

The Dangers of Thinking Like an Economist


Thinking like an economist” is one of those things you’ll see on the pages of every book released during the initial attack wave of pop economics books starting around 2006. In fact, the authors of such books set out with the explicit aim to educate the average person about the basics of economics: demand and supply, comparative advantage, opportunity cost, cost-benefit analysis, externalities, and of course the most beloved mantras: ‘people respond to incentives‘ and ‘there’s no such thing as a free lunch‘.

The typical economist’s mindset is a logical, dispassionate (though not necessarily uncaring) analyst who weighs up situations and policies using basic principles, bearing in mind there are always trade offs and no perfect solutions. Economists usually weigh things up with efficiency in mind, thinking of equitability as an important but often opposed goal to efficiency, and one that should probably be considered separately (this stems from Kaldor-Hicks efficiency, which suggests that pareto optimal policies can be combined with redistribution policies to produce the best possible outcome in terms of both efficiency and equity. Sadly, in practice this means economists sometimes just advocate the former, with the proviso that the latter could happen, but don’t worry as much as they should about whether the redistribution actually does happen).

There are obviously areas where economist’s toolkit applies. Cost-benefit analyses are appropriate for business plans and plans in other organisations. Opportunity cost is relevant when keeping the weekly shop within a budget: if we buy the biscuits, we won’t have enough for the cereal bars, etc. The economic way of thinking also has unexpected applications: for example, economists have done commendable work in the field of organ donation.

However, problems with the ‘economic way of thinking’ arise under certain circumstances. This is commonly when actions have outcomes that are fundamentally unknown, or are incommensurable. What is the opportunity cost of me writing this blog post? Well, I could be writing a different blog post, but I have no idea which one my readers would prefer. That’s assuming I evaluate blogging solely in terms of one metric, like page views, which obviously isn’t true. Alternatively, I could be reading a book; perhaps I’d get an idea for a better post for that, so over the long term reading would be more fruitful. I could also be sleeping, cooking, at the pub, or any number of things, but weighing up the various trade offs and benefits of these actions ‘like an economist’ is simply not possible.

I believe there are ample examples of economists extending their economist’s toolkit beyond where it is appropriate. I will note that good economists realise the limits of their approach, and would probably not endorse the (sometimes absurd) instances of ‘economic imperialism’ I am about to present:

Politicial science. Economists extended their toolkit to political science with public choice theory, which supposes that politicians and voters are rational self-maximisers who act to further their own interests, be they power, prestige, financial gain or what have you. This found its reductio in Bryan Caplan, who suggested that voters are rationally ignorant of politics because the costs outweigh the benefits, and so economists (who are obviously right about everything) should dictate public policy. You know, like in Chile.

Fortunately, this theory is wrong. Research, the best coming from Leif Lewin, has found that politicians and voters act in what they perceive to be the general interest, not narrow self interest. People vote and act out of a sense of obligation and citizenship, not because of any cost benefit analysis they partake in. Public servants are generally public spirited and less motivated by money than those in the private sector. While special interest groups are a problem, economists are better off turning to political scientists if they want to analyse this further, who have known what I outlined above for a long time.

The environment. Some of economist’s basic tools are easily shown to be absurd when applied to environmental analysis. It is not possible to place a monetary value – economist’s go to unit – on most environment variables. How do we compare the ‘value’ of a lake with the economic costs of a carbon tax? Is there some level of carbon tax at which we would forego every lake on earth rather than apply it? How do we compare, say, the depletion of coal with a rise in the sea level? These things have many different metrics by which they can be judged. The financial metrics used by economists are surely among them, but they are only a small part of the picture.

Another problem arises when looking at possible future environmental outcomes, as probabilities are fundamentally unknowable. Some try to approach the issue of global warming and environmental catastrophe by weighing up probabilities and doing cost-benefit analyses. But how do we propose to calculate the probability of environmental disaster? We don’t have a set of earths we can ‘run’ to evaluate how often catastrophe occurs; climate models display chaotic behaviour that is highly dependent on the accuracy of initial conditions. The fact is that we simply don’t know how likely disaster is, what its impacts will be, and framing it in such a way is deeply misleading. Furthermore, even if the probabilities were known, what matters is not just the weighted relative costs and benefits, but the potential for absolute disaster. If there is a 1% chance the world will end unless we do x, we shouldn’t do a cost-benefit analysis. Instead, assuming x is feasible, we should simply do it.

The law. As Yves Smith details in ECONNED (pp. 124-126), Chicago School economists managed to persuade first legal theorists, and then those involved in the legal system itself, of the efficacy of their way of thinking, eventually forming the ‘law and economics’ school. Since this was Chicago, it will not surprise you to learn that this approach largely consisted of a focus on efficiency over, say, due process, promoted deregulation, and rejected notions of corporate social responsibility. Nor should it surprise you that the movement had a large degree of – ahem – ‘support’ from various moneyed interests.

Theoretically, I find the corporate social responsibility position to be incoherent. Empirically, it’s obvious that the framework economists had a substantial part in setting up has failed. Fraud has risen; the changes in anti-trust have not had the benefits that economists predicted; we had a financial crisis in 2008 as a result of the regulatory framework put in place. Note that this isn’t an ideological point: you can think that the regulation was too loose, too tight, or simply wrongly formulated. But in general, defending the exact thinking and framework that led to the crisis is absurd.

Economists take pride in the seeming versatility and simplicity of their framework, and they are eager to apply it to other social sciences. That economists conclusions are, to quote Keynes, “austere and often unpalatable, len[d them] virtue”, especially when contrasted with less mathematically certain social sciences, such as sociology. But oftentimes economists act to displace existing theories without really considering the existing viewpoint. And oftentimes that existing viewpoint has more to it than economists, trained as they are to see things a certain way, might perceive. Hence, economists should always careful when venturing onto new intellectual turf, as otherwise they risk missing vital insights long known to others, insights to which their framework blinds them.