Economic Misconceptions

Economics Professor Bryan Caplan (of George Mason university) writes @ Reason magazine exploring the economic misconceptions of the common voter. (HT: RCP)

"the general public’s views on economics not only are different from those of professional economists but are less accurate, and in predictable ways. The public really does generally hold, for starters, that prices are not governed by supply and demand, that protectionism helps the economy, that saving labor is a bad idea, and that living standards are falling."

First, let's tackle supply and demand. Profits aren't a form of stealing from the poor to the rich, but rather a reward for providing a good or service that others are willing to pay for - they're an incentive to reduce operating costs, bring new goods to market, and propel resources into more valued market sectors. Similarly, interest is the reward to a lender for postponing his consumption so the borrower can consume today.

Prices are not set by the whim of some executive in a boardroom, nor are wages. Workers earning low wages are generally low skilled, less productive and have limited options for employment. Caplan also points out that many business strategies that would result in a quick profit are counter-productive - they wind up eliminating the business in the long run. No one will buy from a business that routinely sells shoddy products or cheats its customers.

Next, people question the benefits of trade, which on the balance appears nothing more than a bias against foreigners. Almost no one would rather spend months growing their own food than taking a few minutes to go down to the grocery store and buying their food. Specialization allows all of us to benefit - I can do what I'm good at and make money to buy stuff I can't make or don't have the time to invest to make. No one worries about a balance of trade between Omaha and Lincoln, or Nebraska and Iowa, but once you start buying stuff from foreign countries, look out!

Then there is the crazy idea that people have that making more with less effort is bad. The obvious worry is about lost jobs, but what most don't realize is that labor saving machinery frees up people to do other things. Caplan illustrates with a classic example of agriculture. In 1800, 95 out of 100 Americans worked in agriculture. In 1900, 40 out of 100 did, and today that number is 3 - and we are eating better than ever. Those 92 other people today are doing other (and much more productive and valuable) stuff - like computer programming or running an MRI machine. The same thing is just as true for the manufacturing sector today as it has proven to be for agriculture over the last two hundred years.

Finally, there is this odd perception that everything was better in Granpa's day - despite overwhelming evidence that it wasn't. Not only do we eat better, but our technology is radically improved, our water and air is cleaner, and people live far longer. In addition, the planet is not getting overcrowded and resources are actually much more readily available for most of humanity than at any time in human history. (There are places where living standards have declined - mostly places with a high degree of centralized economic planning, like Cuba, Venezuela, Zimbabwe, Iran and Burma). And this brings out his last point - these misconceptions color people's views of other aspects of their lives, such as their beliefs in the political system and government.

"This pessimistic bias is a general-interest prop to political demagoguery of all kinds. It creates a presumption that matters, left uncontrolled, are spiraling to destruction, and that something has to be done, no matter how costly or ultimately counterproductive to wealth or freedom. This mind-set plays a role in almost every modern political controversy, from downsizing to immigration to global warming....
Students of economics are not blank slates for their teachers to write on. They arrive with strong prejudices. They underestimate the benefits of markets. They underestimate the benefits of dealing with foreigners. They underestimate the benefits of conserving labor. They underestimate the performance of the economy. And in doing all that underestimating, they overestimate both the need for the government to solve these purported problems and the likely efficacy of its solutions."

Great analysis, and quite sobering when examined in this level of detail. Now we know where liberals come from.