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Pittsburgh Tribune-Review: “Not so simple”

In my column for the July 27th, 2011, edition of the Pittsburgh Tribune-Review, I argued that “[t]he more complex the economy … the more we must rely upon localized individual decision-makers and less on centralized, collective plans to keep it going and growing.” You can read the full column beneath the fold.

Not so simple

Harry Truman famously longed for a one-armed economist. Our 33rd president was tired of his economic advisers qualifying their counsel by saying “but on the other hand.”

Reality is like that. It’s complex. The economy is especially so.

In the U.S. alone, hundreds of millions of consumers daily make choices, often different from the choices made yesterday. Millions of entrepreneurs daily anticipate what consumers want — and try to outguess each other in the competition to anticipate correctly. Countless investors, business executives, labor-union officials — just like consumers and entrepreneurs — attempt to promote their self-interest in a world of innovation, change and, hence, uncertainty.

Mixed in with all these private-sector activities are the actions and reactions of politicians, government administrators, judges and jurors, each of whom — sometimes individually, more commonly in groups — can alter the rules that govern private-sector economic activities.

Over the past two-plus centuries, economists have made real progress in the quest to explain economic activity in ways that meet scientific standards and to enhance our understanding of the economy. But this real progress does not mean that economists can make predictions as precise as those made by, say, astronomers.

The zillions of decisions made daily by the billions of people in today’s global economy simply cannot be predicted — and the detailed consequences of these decisions cannot be predicted — with the kind of precision that we take for granted in many of the natural sciences. So any economist worth his or her salary will qualify any prediction of the future — and qualify any explanation of the past — with the recognition that other predictions and explanations also have potential merit.

Economists cannot avoid the large amounts of uncertainty and imprecision that make economics unsatisfying to people, such as Truman, who demand simple and unambiguous answers.

But because there’s a large demand — especially among politicians — for simple and unambiguous answers, there’s no shortage of people willing to supply such answers.

Consider the history of tariffs in America. Protectionists today are fond of pointing out that U.S. tariffs in the 19th century were high by modern standards, and that economic growth during that century was also impressively robust. From these two facts, protectionists dive confidently into the conclusion that America’s 19th-century economic growth was promoted by tariffs. These protectionists then assert that if we would raise tariffs to heights not seen in generations, today’s economic troubles would be diminished.

Reality, though, allows no such simplistic conclusions.

Nineteenth-century America was full of policies nonexistent — or much modified — in 20th- and 21st-century America. For example, women weren’t allowed to vote in national elections in the 19th century. Should we therefore conclude that the prohibition on women voting during America’s first full century caused the impressive amount of economic growth during that century? Should we disenfranchise women today as a means of reinvigorating the economy?

Although anyone with a decent amount of creativity could concoct a logically coherent “theory” to explain just how the prohibition on women voting led to economic growth, almost everyone would reject that “theory.” And rightly so.

The implausibility of economic growth being fueled by keeping women from casting ballots is so great, especially in light of many other things that we know about the 19th-century American economy, that we sensibly reject that “theory” out of hand.

What are some of the other things that we know about the 19th-century U.S. economy? For starters, it was a giant free-trade zone. From Miami to Seattle, from San Diego to Caribou, Maine, men and women traded freely with each other. States — tempted as governments always are to shield producers within their jurisdictions from competition — were stopped from engaging in such protectionism by strict application of the Constitution’s Commerce Clause.

If free trade discourages economic development, it’s difficult to explain the economic growth that took place in the 19th century among the tariffless U.S. states spanning a huge continent. Does anyone believe that Californians and Pennsylvanians would be even richer today had states been allowed to impose tariffs on each other’s products?

We know also that, apart from imposing tariffs and handing out some subsidies, Uncle Sam in the 19th century followed a comparatively laissez-faire policy. Now there’s a plausible source of economic growth, one that is consistent with the facts — including the fact that the economy is astonishingly complex.

The more complex the economy, after all, the more we must rely upon localized individual decision-makers and less on centralized, collective plans to keep it going and growing. Such plans, relative to the economy, are always simplistic — and, hence, dangerously alluring to minds that seek simple answers.