Klein on the invisible hand

by Russ Roberts on December 21, 2011

in Complexity & Emergence, Podcast

This week’s EconTalk is Dan Klein talking about the use of allegory in economics and in particular, his own way of looking at the invisible hand more deeply and how that provides a way to assess public policy. It’s all interesting but I found his discussion of evaluating public policy particularly interesting. Dan argues that we should evaluate public policy the way we evaluate art or movies. Hang on, I know this sounds ridiculous, but what he means is that we don’t use a formula or equation to evaluate art or to assess the best movie to watch tonight or our favorite novel. We don’t pretend that those kinds of aesthetic evaluations are remotely scientific or amenable to an equation or statistical estimation. So why should we evaluate the minimum wage or trade policy that way?Instead of trying to put a dollar value on the gains and losses and adding them up for some net measure of efficiency, it’s more honest to say here are the winners, here are the losers, here is what happens to them and here are the larger effects on liberty or security or innovation or other things we might also value. Whether the overall economic pie gets larger or smaller isn’t irrelevant. But why would you pretend you can measure that precisely and that that effect is the only relevant one?At least that’s how I take Dan’s point–I’ll let you know if he agrees.

When I was younger, I taught my students about efficiency and dead-weight loss. That approach is too utilitarian for me. I stopped teaching dead-weight loss a few years back. It’s great for exam questions. Not sure it’s good for thinking about public policy other than as one factor that is interesting but never decisive. I think Dan’s approach is a better way to teach and maybe a better way to think about it.

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AC December 21, 2011 at 4:45 pm

When are you going to write an econ textbook, or at least a non-fiction book? Video lectures?

Chucklehead December 21, 2011 at 4:55 pm

But who are the winner and losers in art? Minimum wage and trade policy effects feeding you children. Bad art or film does not.

SmoledMan December 21, 2011 at 7:27 pm

What about starving artists?

Greg Webb December 21, 2011 at 8:01 pm

We are all losers with modern art.

Charlie December 21, 2011 at 5:43 pm

“I taught my students about efficiency and dead-weight loss…I stopped teaching dead-weight loss a few years back…Not sure it’s good for thinking about public policy other than as one factor that is interesting but never decisive.”

Seems like you should have always been teaching it that way. That’s how the concepts have always been taught in my classes.

I think it’s great to teach how simplified economic models can give great insights, but it’s always important to step back at the end and put it in a greater context at the end. What does the model abstract away from? What’s a good or bad question to ask of this model? What can we learn about policy? Who might be for or against such and such policy?

Dead weight loss is just the idea that sometimes output is lost that no one gets. It doesn’t transfer from one person to another; it just never gets created. The converse of that is that output can be gained that doesn’t take from anyone. Everyone has more. Surely you teach that concept now in some way, right?

Invisible Backhand December 21, 2011 at 7:03 pm

What’s the deal with comments? Are they back by accident?

Greg Webb December 21, 2011 at 8:05 pm

Probably. Merry Christmas, IB!

khodge December 21, 2011 at 7:07 pm

Elections are essentially evaluating economics as art. In movies, the best actors or directors are the most professional and use the best techniques, thereby rendering the best performance. The untutored viewer does not see or know the techniques and judges the end products. In politics, the politician should have at his disposal economists who are properly trained and attuned to the best economics thought. Sure, there is a crap shoot in both professions but the professionals need to treat their professions professionally.

SmoledMan December 21, 2011 at 7:28 pm

Economists like Paul Krugman and Joseph Stiglitz.

khodge December 21, 2011 at 7:40 pm

I think Paul Krugman (or Christina Romer) is an excellent example. They offer legitimate justification for stimulus. It is up to the next set of politicians to paint a prettier picture of the economy than the one offered by the politician whom Romer backs.

Brad Hutchings December 21, 2011 at 7:12 pm

At a superficial level, people really do grab onto allegory when evaluating economic policy. But like numbers, their interest isn’t very deep. A couple examples:

“People who work hard and play by the rules…”
“The 99%”

A study of chain letters that liberals and conservatives send around might yield a treasure trove of allegory. I saw one today decrying stimulus checks, but at the same time sprinkling in a good share of anti-immigrant and anti-trade sentiment (“you’ll just spend it on TVs made in China”).

As an aside, I recently saw a Twitter post by Adam Penenberg calling Klein to task over the bias paper correction, and in doing so, totally missing the plot. It’s interesting to see Klein arrive to this allegory discussion. He’s been doing this kind of thing — putting story to economics — since his early faculty days at UC Irvine. He has a true gift for sparking conversations.

Russ Roberts December 21, 2011 at 8:10 pm

Oops. Forgot to close comments. Will close them now. They should be returning soon. Stay tuned.

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