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.
The Olson wartime example is a compelling demonstration of substitution possibilities under extreme pressure — and it's a useful corrective to the idea that supply chains are more brittle than they are. The rational self-interest and substitution pillars you describe hold up well at the level of individual transactions and production decisions. Where I'd add a question is at the level above that: even granting that price signals work and substitution is more flexible than critics assume, those mechanisms optimize local outcomes. They don't have a strong account of whether the cumulative result of decades of locally optimized decisions produces a system whose major components — wages, productivity, essential costs — stay aligned with each other over time. Wartime Britain adapted its production brilliantly. Whether the workers who made that adaptation possible shared proportionally in the postwar recovery is a different question, and one that the substitution framework wasn't designed to answer. Local optimization and system-level alignment are related but distinct problems. The first two pillars you describe handle the first well. The second may need a third
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?
The frustration here is legitimate but the diagnosis lands in a slightly different place than the tarot card analogy suggests. The reason economists reach opposite conclusions from the same tax cut data isn't primarily motivated reasoning — it's that macroeconomic interventions happen inside systems with dozens of interacting variables, no control group, and time horizons long enough that attribution becomes genuinely contested. The same data can support multiple causal stories without either side being dishonest. That's not a failure of economics as a method — it's a feature of studying complex adaptive systems where you can't run a controlled experiment. The harder problem is that this genuine ambiguity gets exploited by people who do have motivated conclusions, which makes it look like the whole enterprise is tarot cards when some of it actually isn't. The fix probably isn't demanding yes/no answers from a discipline that studies systems too complex to produce them cleanly. It's building better instruments for measuring what the system is actually doing — not just whether a given intervention helped or hurt, but whether the components that determine ordinary people's outcomes are moving together or apart.
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.
The tariff and egg examples hold up — basic supply and demand has real predictive power at the transaction level, and that's worth defending. The critique that economics has failed isn't most persuasive when aimed at price mechanics. It's most persuasive when aimed at the system level. Supply and demand explains what happens to the price of eggs when supply collapses. It doesn't have a strong account of what happens when wages, productivity, housing costs, and healthcare costs all respond correctly to their own local price signals for forty years and the cumulative result is a system whose components have drifted apart in ways that no individual market was designed to correct. Local optimization and system-level alignment are different problems. Basic economics is good at the first. It doesn't have great instruments for the second. That gap isn't an argument for abandoning economics — it's an argument for extending it.
You're right to say that using simple law of supply and demand would shed light on what is going on. But it a far simpler of an explanation that the reason for increse in price of eggs is increase in supply of money, rather than any issues with the supply of eggs. If supply chain was to blame for it, we should indeed expect inrease in price of eggs but a reduction in price of other commodities (assuming constant stable supply of money) - instead prices are over the roof across the board.
There is no substitute for a brilliant economist. The good ones see the broad, changing picture and assess what new variables must be added or subtracted. Frustrated mathematicians do not see models, do not properly assess inputs; they crank out charts and call it science. KISS principle work everytime.
“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!
The Olson wartime example is a compelling demonstration of substitution possibilities under extreme pressure — and it's a useful corrective to the idea that supply chains are more brittle than they are. The rational self-interest and substitution pillars you describe hold up well at the level of individual transactions and production decisions. Where I'd add a question is at the level above that: even granting that price signals work and substitution is more flexible than critics assume, those mechanisms optimize local outcomes. They don't have a strong account of whether the cumulative result of decades of locally optimized decisions produces a system whose major components — wages, productivity, essential costs — stay aligned with each other over time. Wartime Britain adapted its production brilliantly. Whether the workers who made that adaptation possible shared proportionally in the postwar recovery is a different question, and one that the substitution framework wasn't designed to answer. Local optimization and system-level alignment are related but distinct problems. The first two pillars you describe handle the first well. The second may need a third
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?
The frustration here is legitimate but the diagnosis lands in a slightly different place than the tarot card analogy suggests. The reason economists reach opposite conclusions from the same tax cut data isn't primarily motivated reasoning — it's that macroeconomic interventions happen inside systems with dozens of interacting variables, no control group, and time horizons long enough that attribution becomes genuinely contested. The same data can support multiple causal stories without either side being dishonest. That's not a failure of economics as a method — it's a feature of studying complex adaptive systems where you can't run a controlled experiment. The harder problem is that this genuine ambiguity gets exploited by people who do have motivated conclusions, which makes it look like the whole enterprise is tarot cards when some of it actually isn't. The fix probably isn't demanding yes/no answers from a discipline that studies systems too complex to produce them cleanly. It's building better instruments for measuring what the system is actually doing — not just whether a given intervention helped or hurt, but whether the components that determine ordinary people's outcomes are moving together or apart.
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.
The tariff and egg examples hold up — basic supply and demand has real predictive power at the transaction level, and that's worth defending. The critique that economics has failed isn't most persuasive when aimed at price mechanics. It's most persuasive when aimed at the system level. Supply and demand explains what happens to the price of eggs when supply collapses. It doesn't have a strong account of what happens when wages, productivity, housing costs, and healthcare costs all respond correctly to their own local price signals for forty years and the cumulative result is a system whose components have drifted apart in ways that no individual market was designed to correct. Local optimization and system-level alignment are different problems. Basic economics is good at the first. It doesn't have great instruments for the second. That gap isn't an argument for abandoning economics — it's an argument for extending it.
You're right to say that using simple law of supply and demand would shed light on what is going on. But it a far simpler of an explanation that the reason for increse in price of eggs is increase in supply of money, rather than any issues with the supply of eggs. If supply chain was to blame for it, we should indeed expect inrease in price of eggs but a reduction in price of other commodities (assuming constant stable supply of money) - instead prices are over the roof across the board.
Nice piece on the value of simple economic principles! ECO 101 may be the single best class any college student can take.
There is no substitute for a brilliant economist. The good ones see the broad, changing picture and assess what new variables must be added or subtracted. Frustrated mathematicians do not see models, do not properly assess inputs; they crank out charts and call it science. KISS principle work everytime.
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.