Much Good Economics Is Little More Than Debunking Man-In-the-Street Fallacies

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In my most-recent column for AIER, I distinguish one kind of economists from a second kind. The first, as did Adam Smith, spend much of their time debunking fallacies embraced by the man-in-the-street; the second specialize in spinning intricate theoretical justifications to support man-in-the-street superstitions. A slice:

The result is a division within the economics profession. In the case of trade policy, most economists continue to endorse free trade. But no small number of economists make names for themselves by spinning theoretical justifications for protectionism. This latter group of economists – let’s call them “anti-Smithians” – essentially attempt to explain why the man-in-the-street (and the minister-in-the-royal-court) were correct all along. While the man-in-the-street might not understand why his intuitive hostility to free trade is correct, anti-Smithian economists are there to help him with catalogues of clever theoretical justifications.

Economic reality being complicated, it’s nearly always true that a set of conditions can be imagined under which outcomes that are highly improbable in reality can be shown to be possible. Conditions can be described under which, in reality, it’s possible for protective tariffs or export subsidies to result in greater prosperity in the home country. Yet such conditions are wholly implausible.

Possibility, be aware, is a very weak standard. Almost every outcome that is possible – such as you surviving a fall off of a skyscraper because you luckily land in a huge drift of freshly fallen snow – will never occur. And so just because some outcome is possible doesn’t mean that it’s plausible. Furthermore, just because some outcome is plausible doesn’t mean that it’s probable.

One skill possessed and exercised by competent economists is the ability to distinguish the plausible from the possible, and the probable from the plausible. These economists understand that the best public policy is that which is guided by what is probable. They also understand the danger of any policy imposed in the hope of some improbable possibility coming to pass.

Anti-Smithian economists – those who specialize in finding reasons to assure the man-in-the-street that his untutored economic instincts are correct after all – are at work in areas other than trade policy. Any economic superstition that is popular with the untutored man-in-the-street is sure to have at least a handful of professional economists hard at work explaining why good economists such as Milton Friedman are mistaken to reject this superstition, and why he, the untutored man-in-the-street, is spot-on correct to embrace it.

History’s most famous economist to make his mark by rejecting sound economics and conjuring rococo theoretical justifications for man-in-the-street superstitions is John Maynard Keynes. The man-in-the-street understands that he’ll be rendered unemployed if consumer demand for his employer’s output falls sufficiently. The man-in-the-street then leaps from this correct understanding to the incorrect conclusion that the root cause of economy-wide unemployment is inadequate consumer demand. Based on this faulty understanding, the man-in-the-street further concludes that an easy cure for economy-wide unemployment is more spending by government. Seems simple.

Economists since Adam Smith worked hard to debunk this false belief. But in the midst of the Great Depression, along came Keynes. Keynes did indeed have genius, but in my opinion it wasn’t as an economist. Keynes’s genius was in spinning highly implausible, but impressive-enough appearing, theoretical justifications for the man-in-the-street belief.

Anti-Smithian economists are also hard at work to reassure the man-in-the-street that he is correct to believe, contrary to the teaching of most economists, that minimum wages benefit all low-wage workers. The man-in-the-street supports minimum-wage legislation because he supposes that the coerced higher wages are simply paid out of excess profits reaped by exploitative employers, or that employers pay these higher wages simply by raising the prices at which they sell their outputs, with no further consequences.

Basic economics is clear that government-imposed minimum wages, by artificially increasing the cost to employers of low-skilled workers, causes some jobs for these workers to be eliminated, and causes other jobs for these workers to become more onerous. In short, minimum wages harm many of the very workers who are meant to be helped.

But minimum wages are popular with the untutored man-in-the-street, as well as with the typical pundit-in-the-opinion-pages. And because markets pluckily supply all demands, the demand for theoretical excuses to support minimum wages is met by a supply of such excuses from anti-Smithian economists.

Every undergraduate econ major learns by her junior year how to draw a graph depicting a minimum wage having only positive, and no negative, effects on low-skilled workers. And if well-taught, this econ major also learns that the conditions under which such a graph describes reality are highly implausible. But no matter. Because the public’s desire to believe in the goodness of minimum wages is so intense, the supply is ample of anti-Smithian economists willing to satisfy this desire – willing to assure the man-in-the-street that his utter ignorance of economics is, in fact, economic brilliance.

Note that I don’t here accuse anti-Smithian economists of being insincere or, worse, mercenary. I don’t think that they are. My accusation instead is that as economists they are sincerely unwise.