Another needed post! I'll note some older writings that make similar points--which emphasizes that economists need to again and again re-emphasize the usefulness of our approach. Michael Salemi wrote--in 1998!-- about how economists should and could do a better job of educating students ("How economists can improve economic education," The Region, Federal Reserve Bank of Minneapolis, vol. 12(Dec), pages 34-37). His opening paragraphs were about how a journalist wrote only about the unfairness of "price gouging" in the Triangle area of NC during a Special Olympics. The journalist wrote: "Don't bother telling me that raising prices is business as usual for the hotel trade. Of course it is, but that doesn't make it go down easier. It was that mind set—supply and demand—that jacked up the prices for everything from ice to chain saws to generators after Hurricane Fran came through. Remember how it felt to be gouged. .."
Salemi emphasized that those higher prices increased the supply of places for visitors to stay--home rentals, shuttle bus/hotel packages from farther away, etc. He concluded: " Economists, for the most part, believe that the price system allocates hotel rooms and other scarce resources far more efficiently and often more fairly than government bureaus or appeals to good citizenship. They place great stock in the fact that allocation by price leaves each individual free to "pay and stay" or "stay away." I would add: higher prices for chain saws and ice brought forth a veritable caravan of supplies from neighboring areas not hit by the alluded-to hurricane (such as from my home town of Lynchburg VA).
I would say that "basic economics" for our type of economy rests mostly on two pillars: An assumption that individuals rationally pursue their own self-interest, and an assumption that in pursuit of their self-interest, people will, in Adam Smith's words, "truck, barter and exchange one thing for another.."
The second assumption embodies an observation that people actually trade one thing for another. It must be, then, that people's desires can be satisfied with varying quantities of different goods, and that varying quantities of goods can be produced, i.e, that there exist substitution possibilities within the economy.
Related to your point about gas in Europe, a great book documenting substitution possibilities is: Olson, Mancur Jr. 1963, “The Economics of the Wartime Shortage,” Durham, NC: Duke University Press. Olson documents the ability in the World Wars, during which both Great Britain and Germany faced serious disruptions to normal supplies of good and services, of the economies of Great Britain and Germany to produce everything from oil to gun barrels without any
of once-thought "essential inputs."
Another great article is "Economists and Public Policy: (R Coase 1975, in Daniel B. Klein,
(ed.),What Do Economists Contribute?, London, UK: McMillan. ). Coase points out numerous examples of public policy consequences easily foreseen by economists, based only on their appreciation of self-interested behavior and substitution possibilities, but unforeseen by the policy makers themselves.
Is economics really a science, or is it no more scientific than tarot cards?
Let me take a nice, clean economic hypothesis I would like to test: do tax cuts for 'the rich' help or hurt the economy? Let's not test this hypothesis with a small sample set such as giving $1000 to a rich person in some tiny country and see if the economy improves. No, let's take the biggest and best documented economy in the history of mankind: the US economy. And let's not give a little tax break to a few rich people and see what happens, no, let's give tax cuts of over a trillion dollars - a fair sized fraction of the entire revenue of the largest economy on earth, and let's do it for a sustained period of ten years. In fact, let's do this test over and over, under different administrations (Reagan, Bush Jr., Trump), and then analyze the data.
Apparently the result of something as huge as multi-year, very expensive tax cuts for the rich is still subject to your political persuasion. I'm not even asking for a quantifiable number such as 'what percentage improvement in the GDP of the US resulted from the tax cuts?' I simply want a very basic yes/no answer: did it help, or did it hurt the economy? If I work for the Weekly Standard, or AEI, or the Wall Street Journal, I can find teams of economists who will tell me that tax cuts for the rich are the single greatest way to improve the economy. But if I'm Paul Krugman, or I work for the Progressive Caucus I can find teams of economists who will tell me the exact opposite.
That is not a science. That is no more scientific than tarot cards, where I can call in one 'psychic' who will tell me that a given layout of cards say my life is going to be great; while another 'psychic' will look at the very same cards and tell me I'm doomed.
The usual economists' statement that 'we don't have enough data to determine a definitive result' just doesn't wash in this case. If you take a multi-trillion dollar economy and give it a stimulus of trillion dollar tax cuts for ten years you'd better have enough data to definitively say, at the least, whether it helped or hurt the economy. If you can't answer that, then economics is NOT a science.
So what's the story? Is economics a science, or not? If it is, then why are the results of a test so dependent on the political philosophy of the person analyzing the data?
Yes! Economics really does explain the world. Part of the problem with people undervaluing economics is complaining that economists are not able to predict things precisely. But this is not physics! Part of the economic explanation of the social world is that it’s complex and multiple things happen at once, so to hope for exact numerical predictions is a misunderstanding. But, at the same time, we can still predict a lot with basic economics. It’s one of the greatest teachers.
“Economics is powerful because it gives you a framework for thinking clearly about scarcity, trade-offs, and incentives; it allows you to analyze human behavior rigorously and predict outcomes in ways that other social sciences often can’t.”
I admit I find arguments about whether economics is a science or not a bit of a distraction. The term encompasses so much that examples can be cherry picked to suit one's preferred position. However, as you illustrate, economics provides useful tools to understand, describe and predict how people tend to behave when interacting in markets (of many forms). As a non-economist, I find it bewildering trying to recognise where a professed expert is:
1. out of step with widely accepted economic theory (cf climate change deniers).
2. misrepresenting opinion (wishful thinking) as robust analysis.
3. arguing for a course of action from the ideological position that unfettered markets provide the best outcome. (I.e. discounting the potential for market failure and the necessity at times to adjust market parameters, e.g. to prevent social and environmental harm.)
Regarding the last, I think the language of economics often supports this bias. Terms such as welfare, efficiency, and productivity are applied narrowly to the operation of a market with the unspoken assumption that maximising these is inherently good. Meanwhile, many of the important effects of that market are ignored or dismissed as externalities (e.g. climate change).
Your econ 101 posts are valuable as they help us with a few critical questions like, does x policy affect supply or demand and how? What are the opportunity costs? What are the externalities and who will be paying for them?
Thanks, please keep them coming and I'll try to keep up.
Models always work... the problem is that it's nearly impossible in a short timeframe to create enough models to account for all possible factors influencing the supply and demand for a specific product. However, some things have been explained long ago, and so we know that tariffs will cause harm... especially broad-based ones, or those that affect a product crucial to many other products (like steel, iron, copper, oil...).
Excellent post. In "Simple economics is surprisingly good at making real-world predictions.", I would underscore "simple". The power of economics lies in the simple logic of supply and demand, and its focus on incentives.
I would disagree, however, on the suggestion that Nobel Prize economists can't be political hacks. Sometimes they are, and part of the reason for the harsh criticism leveled against economics is that some of us economists do in fact surrender our professional honesty to political agendas or the all-too-human thirst for clicks.
Bu thanks for an excellent post reminding everyone that basic, common-sense economics remains the best guide for important policy decisions.
Another needed post! I'll note some older writings that make similar points--which emphasizes that economists need to again and again re-emphasize the usefulness of our approach. Michael Salemi wrote--in 1998!-- about how economists should and could do a better job of educating students ("How economists can improve economic education," The Region, Federal Reserve Bank of Minneapolis, vol. 12(Dec), pages 34-37). His opening paragraphs were about how a journalist wrote only about the unfairness of "price gouging" in the Triangle area of NC during a Special Olympics. The journalist wrote: "Don't bother telling me that raising prices is business as usual for the hotel trade. Of course it is, but that doesn't make it go down easier. It was that mind set—supply and demand—that jacked up the prices for everything from ice to chain saws to generators after Hurricane Fran came through. Remember how it felt to be gouged. .."
Salemi emphasized that those higher prices increased the supply of places for visitors to stay--home rentals, shuttle bus/hotel packages from farther away, etc. He concluded: " Economists, for the most part, believe that the price system allocates hotel rooms and other scarce resources far more efficiently and often more fairly than government bureaus or appeals to good citizenship. They place great stock in the fact that allocation by price leaves each individual free to "pay and stay" or "stay away." I would add: higher prices for chain saws and ice brought forth a veritable caravan of supplies from neighboring areas not hit by the alluded-to hurricane (such as from my home town of Lynchburg VA).
I would say that "basic economics" for our type of economy rests mostly on two pillars: An assumption that individuals rationally pursue their own self-interest, and an assumption that in pursuit of their self-interest, people will, in Adam Smith's words, "truck, barter and exchange one thing for another.."
The second assumption embodies an observation that people actually trade one thing for another. It must be, then, that people's desires can be satisfied with varying quantities of different goods, and that varying quantities of goods can be produced, i.e, that there exist substitution possibilities within the economy.
Related to your point about gas in Europe, a great book documenting substitution possibilities is: Olson, Mancur Jr. 1963, “The Economics of the Wartime Shortage,” Durham, NC: Duke University Press. Olson documents the ability in the World Wars, during which both Great Britain and Germany faced serious disruptions to normal supplies of good and services, of the economies of Great Britain and Germany to produce everything from oil to gun barrels without any
of once-thought "essential inputs."
Another great article is "Economists and Public Policy: (R Coase 1975, in Daniel B. Klein,
(ed.),What Do Economists Contribute?, London, UK: McMillan. ). Coase points out numerous examples of public policy consequences easily foreseen by economists, based only on their appreciation of self-interested behavior and substitution possibilities, but unforeseen by the policy makers themselves.
I wrote about this at greater length (20 years ago! never published) in what I called "The Economist's Perspective," https://my.vanderbilt.edu/robertdriskill/international-economics-various-and-sundry-entrees/. Lots more examples.
Keep up the good work!
Is economics really a science, or is it no more scientific than tarot cards?
Let me take a nice, clean economic hypothesis I would like to test: do tax cuts for 'the rich' help or hurt the economy? Let's not test this hypothesis with a small sample set such as giving $1000 to a rich person in some tiny country and see if the economy improves. No, let's take the biggest and best documented economy in the history of mankind: the US economy. And let's not give a little tax break to a few rich people and see what happens, no, let's give tax cuts of over a trillion dollars - a fair sized fraction of the entire revenue of the largest economy on earth, and let's do it for a sustained period of ten years. In fact, let's do this test over and over, under different administrations (Reagan, Bush Jr., Trump), and then analyze the data.
Apparently the result of something as huge as multi-year, very expensive tax cuts for the rich is still subject to your political persuasion. I'm not even asking for a quantifiable number such as 'what percentage improvement in the GDP of the US resulted from the tax cuts?' I simply want a very basic yes/no answer: did it help, or did it hurt the economy? If I work for the Weekly Standard, or AEI, or the Wall Street Journal, I can find teams of economists who will tell me that tax cuts for the rich are the single greatest way to improve the economy. But if I'm Paul Krugman, or I work for the Progressive Caucus I can find teams of economists who will tell me the exact opposite.
That is not a science. That is no more scientific than tarot cards, where I can call in one 'psychic' who will tell me that a given layout of cards say my life is going to be great; while another 'psychic' will look at the very same cards and tell me I'm doomed.
The usual economists' statement that 'we don't have enough data to determine a definitive result' just doesn't wash in this case. If you take a multi-trillion dollar economy and give it a stimulus of trillion dollar tax cuts for ten years you'd better have enough data to definitively say, at the least, whether it helped or hurt the economy. If you can't answer that, then economics is NOT a science.
So what's the story? Is economics a science, or not? If it is, then why are the results of a test so dependent on the political philosophy of the person analyzing the data?
You can find economists besides Arthur Laffer (pun intended) that believe this? The MPC of the rich is quite low I would presume
Yes! Economics really does explain the world. Part of the problem with people undervaluing economics is complaining that economists are not able to predict things precisely. But this is not physics! Part of the economic explanation of the social world is that it’s complex and multiple things happen at once, so to hope for exact numerical predictions is a misunderstanding. But, at the same time, we can still predict a lot with basic economics. It’s one of the greatest teachers.
https://open.substack.com/pub/tomwatkins12/p/pragmatic-abundance?r=1lq8gw&utm_medium=ios
“Economics is powerful because it gives you a framework for thinking clearly about scarcity, trade-offs, and incentives; it allows you to analyze human behavior rigorously and predict outcomes in ways that other social sciences often can’t.”
I admit I find arguments about whether economics is a science or not a bit of a distraction. The term encompasses so much that examples can be cherry picked to suit one's preferred position. However, as you illustrate, economics provides useful tools to understand, describe and predict how people tend to behave when interacting in markets (of many forms). As a non-economist, I find it bewildering trying to recognise where a professed expert is:
1. out of step with widely accepted economic theory (cf climate change deniers).
2. misrepresenting opinion (wishful thinking) as robust analysis.
3. arguing for a course of action from the ideological position that unfettered markets provide the best outcome. (I.e. discounting the potential for market failure and the necessity at times to adjust market parameters, e.g. to prevent social and environmental harm.)
Regarding the last, I think the language of economics often supports this bias. Terms such as welfare, efficiency, and productivity are applied narrowly to the operation of a market with the unspoken assumption that maximising these is inherently good. Meanwhile, many of the important effects of that market are ignored or dismissed as externalities (e.g. climate change).
Your econ 101 posts are valuable as they help us with a few critical questions like, does x policy affect supply or demand and how? What are the opportunity costs? What are the externalities and who will be paying for them?
Thanks, please keep them coming and I'll try to keep up.
Yes. Well done.
Models always work... the problem is that it's nearly impossible in a short timeframe to create enough models to account for all possible factors influencing the supply and demand for a specific product. However, some things have been explained long ago, and so we know that tariffs will cause harm... especially broad-based ones, or those that affect a product crucial to many other products (like steel, iron, copper, oil...).
It’s economics, stupid!
Excellent post. In "Simple economics is surprisingly good at making real-world predictions.", I would underscore "simple". The power of economics lies in the simple logic of supply and demand, and its focus on incentives.
I would disagree, however, on the suggestion that Nobel Prize economists can't be political hacks. Sometimes they are, and part of the reason for the harsh criticism leveled against economics is that some of us economists do in fact surrender our professional honesty to political agendas or the all-too-human thirst for clicks.
Bu thanks for an excellent post reminding everyone that basic, common-sense economics remains the best guide for important policy decisions.