Why Do Economists Disagree?

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The influence of economics suffers from the idea that economists disagree to the point of uselessness. George Bernard Shaw supposedly complained that “if all the economists were laid end to end, they'd never reach a conclusion.” A similar old adage says that if you ask the advice of five economists, you will get five different answers, or, if Keynes is one of the five, six answers.

Such talk may be fun, but it is unfair. "The first lesson of economics,” said Thomas Sowell, “is scarcity: there is never enough of anything to fully satisfy all those who want it. The first lesson of politics is to disregard the first lesson of economics." Why? With characteristic exaggeration, H.L. Mencken observed that “no educated man, stating plainly the elementary notions that every educated man holds about the matters that principally concern government, could be elected to office in a democratic state, save perhaps by a miracle . . . by a combination of miracles that must tax the resourcefulness even of God” (Notes on Democracy, 1926, pp. 103, 106). A politician who understands economics and tries to apply it loses votes. One who understands it but conceals that fact is dishonest. Honest ignorance is an electoral advantage.

Externalities, monopoly, inflation, recessions, mistakes, inadequate foresight — all do occur. Economists are tempted to damn reality for being real.

Economists agree on the basics of their subject; disagreement on policy has other sources. The following list merely names the main points of agreement. Explaining them would go beyond this note, although, toward the end, it does expand on the most fundamental of them.

  1. Scarcity and the need for choice; opportunity cost.
  2. The division of labor, gains from trade, and comparative advantage.
  3. Marginalism and diminishing marginal returns.
  4. The role of the price system in exploiting the fragmented knowledge and coordinating the productive efforts of millions and billions of people in the nationwide and worldwide economy. The task includes allocating resources between the present and the future. The midget economy of the Swiss Family Robinson on its desert island contrasts instructively with the vast capitalist world of diverse resources, abilities, and preferences.
  5. “Economic calculation,” which is more than the mere dovetailing of such activities as automobile production and tire production, suitably proportioned. It refers, further, to producing the chosen amount of each good and service at minimum sacrifice of other desired things. Efforts at such calculation without genuine markets and prices, whether in theory or in the real world, have failed.
  6. Money as an institution that vastly promotes specialization and gains from multilateral trade. Money prices express opportunity costs, convey information and incentives, and ration scarce resources and goods.
  7. Private property, innovation, and entrepreneurship as essential to a thriving economy.
  8. Refutation of fallacies that have contaminated policy for centuries, especially ones relating to international trade and to a supposed self-regulation of money — the “real-bills doctrine” that the money supply will be correct if based on short-term bank loans to finance the production or marketing of real goods.

Shared understanding does not end there. Economists agree that reality has “imperfections” in comparison with an imaginary perfectly working price system. Externalities, monopoly, inflation, recessions, mistakes, inadequate foresight — all do occur. Economists are tempted to damn reality for being real, and they agree on many such matters. Price inflation traces above all to creating too much money.

Recessions are episodes of snowballing impediments to transactions, and economists explain them in various ways. In no field do professionals totally agree. An example in macroeconomics is the opinion of central bankers worldwide, shared by many but not all economists, that 2% inflation — a halving of money’s purchasing power every 36 years — is a proper objective of policy and that lower inflation is a cause for concern. Some technically valid arguments do exist for chronic mild inflation, but they are not decisive. Economists disagree on the weights to be accorded to agreed considerations.

Disagreement on policy traces overwhelmingly to matters other than economics.

But disagreement makes news while agreement does not. Lack of total agreement parallels what also occurs in the natural sciences: total understanding and consensus never are reached; room always remains for further research. As in other disciplines, economists disagree, when they do, on details and at the “frontiers” of research but not on the basics.

Disagreement on policy traces overwhelmingly to matters other than economics. Economists are not equally bold in predicting the future. They (as well as political scientists) hold differing opinions about how well government and politics function. Scientific issues join in policy disagreement, as about how serious a problem global warming is.

Economists are not equally knowledgeable about history, as about periods of advance and stagnation, crises, recessions, and monetary systems. Historical knowledge is valuable for making judgments about prospective population growth and technical and other innovation, but agreement cannot be expected to the extent that it can be expected on the basics of economics.

Psychology is sometimes at issue. Not all economists have the same understanding of people’s psychological quirks and of whether policy “nudges” might improve their decisionmaking.

Economists sometimes yield to wishful thinking. An example is the belief that proposed tax-rate cuts will so stimulate economic activity as to increase, not reduce, tax revenues.

Sociological questions arise, such as whether and to what extent welfare programs foster a culture of dependency and undermine the traditional family. So do issues of ethics and social philosophy, as about inequality of wealth and income, concern for future generations, how progressive the tax structure should be, whether the estate tax is fair, and what claims poor people at home and abroad are entitled to make on the more fortunate. “Bleeding-heart libertarians” do exist and have a web site of that name.

Like other people, economists sometimes yield to wishful thinking. An example is the belief that proposed tax-rate cuts will so stimulate economic activity as to increase, not reduce, tax revenues. Such a belief does not mean rejection of economic principles; in rare circumstances, that happy result could occur.

Career advancement can be a factor. Some economists seek distinction in cleverly working on the “frontiers” of research, in deploying impressive mathematics, or in finding exceptions to generally agreed applications of basic principles. Alternatively, some may be paid for rationalizations about policy that selectively emphasize some valid principles while disregarding (though not denying) others.

Some economists, perhaps seeking influence and fame, make compromises by taking account of political feasibility (i.e., votes), endorsing policies other than those they truly consider best. Full honesty would require openly acknowledging what they are doing (see Clarence Philbrook’s eloquent article in the American Economic Review, December 1953).

If enough demand exists, wouldn’t private enterprise satisfy it, and in a less costly and otherwise more suitable part of town?

Not all so-called economists are real ones who have completed graduate studies in the field and try to keep up with and occasionally contribute to the professional literature. It is not enough to hold an economics-related government position or to be prominent on TV. Disagreement among such people shouldn’t be allowed to disparage the professionals.

The most basic economic principles concern scarcity and opportunity cost. The city council of Auburn, Alabama, has voted to build an outdoor ice-skating rink downtown, where it will gobble up scarce parking space, worsen traffic problems, and otherwise inconvenience nonskaters. Evidently the council has not made a full cost-benefit analysis. Might not the money be better spent for other city purposes or left to taxpayers for their own purposes? How intense, anyway, is the demand for ice-skating here in the Deep South, where, by the way, the ice would have to be artificial? If enough demand exists, wouldn’t private enterprise satisfy it, and in a less costly and otherwise more suitable part of town?

I conjecture that the city council simply agreed with someone’s idea that a rink would be a good thing. So why not build it? It is easy to forget asking how desirable it would be and how great the opportunity cost in sacrifice of other public or private use of resources.

Disregard of opportunity cost is disregard for a principle accepted by all economists.

Such blitheness about opportunity cost shows up on the big-city and national levels. If a proposed museum would be nice or another overseas military base would seem to be a wise precaution, why not vote for it? A new sports stadium might please the fans, and consultants will conceive of side benefits for nearby restaurants, so why not support it with city money? An individual legislator pays practically nothing himself and might gain some votes.

James L. Payne shows how disregard of opportunity cost supports thinking that government money is somehow “free” (The Culture of Spending, 1991). Lobbyists not only for governors and mayors but also for industries swarm Washington seeking local projects and grants of money. Understandably, witnesses calling for such favors in congressional hearings far outnumber those who dissent. A similar explanation applies to firms and industries seeking protection from competition. But disregard of opportunity cost is disregard for a principle accepted by all economists.

Nothing said here denies that economists have expertise in contributing to policy judgments and that they — and quasi-economists — often disagree. Such disagreement rarely hinges on core principles and does not excuse disregarding them. Specialists cannot and should not have the decisive vote on policy, but that judgment does not excuse neglecting the basic principles that concern everybody and on which economists emphatically do agree.




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Non-Starters

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President Obama recently made a whirlwind tour of colleges and issued a series of proposals for making college more affordable. On the good side, his speeches spurred public discussion about the problems of higher education, especially its costs. On the bad side, they deflected attention from the causes of the problems.

U.S. higher education has been providing questionable products at high costs for years. Under the Bush administration, Secretary of Education Margaret Spellings tried to address the weaknesses with a special commission on higher education. Among other things, the commission proposed requiring schools to report their students’ learning outcomes. (That is, did they learn anything?) This caused something of a stir among universities, which scurried to create a voluntary program of “accountability” — briefly. The urgency faded away, especially when university lobbyists got Congress to forbid the Department of Education from making too many demands.

It was only with the 2008 crash and recession that the public took notice of higher education again. The economic downturn revealed that many college graduates, some with mindnumbing debt loads, were not able to get jobs. That public notice meant that President Obama would not be far behind.

Unfortunately, Obama’s recommendations are superficial. The centerpiece is the idea of rating colleges on affordability, graduation rates, and access to low-income students. That’s not very much different from the College Scorecard that the Department of Education issues now. The department even has a “hall of shame” — an annual listing of colleges that have too-high tuition or that raised their tuition too much. These efforts don’t seem to have had much of an impact, although more information is generally a good thing.

Obama wants to use the rating system to reward the schools that score well. He would provide higher Pell grants to students at schools that have both high graduation rates and high percentages of low-income students. But it is simply a fact that high percentages of Pell grantees are correlated with lower graduation rates. To have both a high percentage of Pell grantees and high graduation rates would probably require gaming through grade inflation (and grade inflation is already a problem).

Fundamentally, President Obama is trying to “fix” college problems through regulation and legislation, without changing the underlying incentives that push costs up at most schools. It does not take rocket science to diagnose what is wrong with higher education.

Essentially, too many students are going to school who don’t want to, who don’t benefit, and who don’t learn enough to justify high wages. The national mantra that “everybody ought to go to college” is reinforced by federal grants and loans (and, until recently, federal guarantees of private loans).

This artificial demand, a lot like the artificial demand for housing in the mid-2000s, enables colleges to keep pushing up their tuitions. They do this shamelessly because they are spending for education, which is “priceless.” Furthermore, most colleges are either government-owned or nonprofit, and thus there is no pressure to make, or even identify, a profit. The result is that all revenues are spent, and the hard task of controlling costs is ignored (again, education is “priceless”). Since there is no market for control (economists’ words for potential buyers scrutinizing a company to decide whether they can run it more efficiently and thus profitably), there is no pressure to keep prices down . . . as long, of course, as there is this continual demand.

With these university characteristics firmly in place, the president’s proposals are window-dressing. And it’s unlikely that Congress will pass any of them.

In closing, I should say that one of Obama’s suggestions is a good one: He thinks that students should not be able to get additional Pell grants if they have not completed a specific number of courses within a certain period of time. That would be a start in reforming the $30-billion-a-year Pell grant program — but only a start. Much more needs to be done.




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