June 4, 2007
Economics Department
Why People Don't Believe Economics
Kip has a few thoughts about why so many people don't know basic economics:
The problem of economic illiteracy — which at this point is indeed a dangerous, sometimes lethal, epidemic in America — derives not from failed economics instruction, but from failed philosophy instruction.
For example, we can (and do) show essentially every college freshman — even most high school students probably — just why the minimum wage is counterproductive. The students nod in agreement, answer correctly on final exams, graduate — and promptly demand increases in the minimum wage. Because, economics be damned, it gives them warm fuzzy feelings to do so.
The problem is not that students, or politicians or people generally, "don't get" economics. The problem is that they "don't get" the nature of the universe and of human existence.
I think Kip's description of the problem is about right. What people don't get about "the nature of the universe and of human existence" is that the laws of economics matter. They matter because economics is a science.
Granted, economics falls far short of the dazzling precision of a really hard science. Physicists have launched investigations into 5-year space flights that take a minute longer than expected. If space flight was run by economists, they'd be happy just to have the spacecraft move in the general direction of its destination.
Nevertheless, just because economics is not an exact science doesn't mean it's not a good science. Proposed economic laws lead to mathematically rigorous predictions which can be tested against the real world. The currently accepted laws of economics may not make exact predictions, but the predictions they make are better than any known alternative. Within the limits of human knowledge, the laws of economics are the laws of the world.
Yet as Kip points out, not everyone believes that, which is why they say things like "A wholesale sellout to the law of supply and demand is not the answer" as an argument against paying organ donors. Somehow they don't realize that the laws of supply and demand are very general rules that apply to everything in the world, and not even a massive shortage of organs will change their minds.
The question then becomes, why don't people realize this?
I think part of the answer is that people tend to encounter the ideas of economics at a time in their lives when free-market economics isn't directly important. "From each according to his ability, to each according to his needs" may be Marxism, but it's also a good approximation of how families manage their internal economics. Children receive food, clothing, housing, and medical care because they need it, not because they've earned it.
When these children go to college, they probably get support from their families, and the government is a source of need-based financial aid rather than a tax drain on their income. Even if they have jobs, they probably don't do a lot of the sort of business decision making that requires economic thinking. So if these people take an economics class, it doesn't seem applicable to their lives, and they never really learn to use the ideas of economics as problem-solving tools.
Later, when discussing issues of public policy, they may encounter arguments based on economic reasoning, but that's all economics is to them, an argument, and they hear lots of arguments. Some people say that increasing the minimum wage helps poor people, others say it doesn't. They don't see the economic argument as decisive.
(To be fair, I think Kip could have chosen a better example. Although classic price theory predicts that increasing the minimum wage leads to increased unemployment, the effect has been difficult to detect in the real world. I doubt that many who support a minimum wage do so because they are aware of the controversy in economics, but a clearer example of people ignoring the laws of economics might be found in controversies over price controls or free trade.)
2 Comments
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I chose the minimum wage for no other reason than because it was timely, with the increase having just been passed by Congress and now off to the president for his signature.
Cheers. =)
I agree that you have to start by teaching them something of "the nature of the universe." Can they learn that in college? Or for most people is it better to spend some time supporting yourself before trying to understand either philosophy or economics? Otoh, it seems that a lot of folks soon become too "mature" to learn anything fundamentally new.