The Role of Economists

by Russ Roberts on September 27, 2006

in Environment

Here are some very nice insights from a column by John Baden on what economists contribute to society. John was attending a conference on global warming:

Economists are to “progressives” as bankers are to cowboys; both serve
as reality checks on unconstrained visions. Join me as I develop this
idea.

Bankers, and to a far lesser degree economists, contribute to society.
Bankers provide funds to develop businesses, buy houses, and finance
education. (Most also make loans for expressive activities — RVs,
pleasure boats, and trips to Vegas for example — but this category
isn’t important here.) In addition to facilitating the building of
capital, bankers serve the critically important social function of
thwarting silly ideas, i.e., activities unlikely to earn a return
sufficient to repay the loan. In evaluating business propositions,
bankers are motivated by their responsibility to stockholders.

Economists evaluate the costs and benefits of public policies that
allocate funds to competing purposes. They are trained to measure the
efficiency of alternative choices. This task is far more squishy and
contentious than evaluating a loan for a specific project. Economists
are rarely popular spokespersons, especially among politicians and
their clientele.

While both are often resented, there is, however, an important
difference. Bankers can veto imprudent plans while economists can only
hector and admonish those who promote unrealistic policies. This was
compellingly obvious at the conference.

I’ve talked to a lot of entrepreneurs when I used to teach entrepreneurship in a business school. They all hate bankers. They see them as irrational misers. They have money, why won’t they share it?

The entrepreneurs also resented the inherent (and usually wise)
sekpticism of bankers. And finally, the entrepreneurs misunderstood the
role of bankers. They saw them as ATM machines when in fact they are
very risk averse about lending money. They rarely find it prudent to
lend to a start-up. But this drove the entrepreneurs crazy. They’ve got
the money! It’s obscene that they won’t invest it in my sure thing! For entrepreneurs, the reality of the bankers constraints and incentives was irrationally frustrating.

Here’s Baden’s summary of one economist’s (Vince Smith) presentation at the conference and the reaction that ensued:

Vince noted general scientific agreement that global warming is
occurring, in part due to human causes, and that there are
uncertainties about the speed and degree of change. He explained that
warmer and wetter has different implications for crops and forests than
would warmer and dryer — and climate models differ as to which is more
likely. He then explained that humans adjust much easier to slow than
to rapid change.

Most climate models look out 100 years, but consider the USA in 1906:
average income a mere $4000 in today’s dollars, no paved roads, few
cars, no modern medicine, short lives. We can’t predict life two or
three generations hence. After listing the risks that may accompany
global warming he gave this guidance: “There is considerable evidence
that a mixture of policy innovations…and markets can address all of
these challenges at a relatively low cost compared to the costs of
mitigating greenhouse gas emissions.”

Did this make folks happy? No, for this was largely a tribal gathering
where most folks already knew the right answers and these weren’t among
them. Here are a few of the responses I heard. “He shouldn’t be on the
program.” “I’d like to hit him.” (That from a sponsor.) “What do
economists know about climate?”

Ah, the search for truth.

Baden’s reference to unconstrained visions is a reference to this book by Thomas Sowell. Great book.

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