When it comes to setting public policy, economics is one of the most important social sciences. It’s right up there with history. But like Rodney Dangerfield, it don’t get no respect.
"An Economist knows the cost of everything and the value of nothing."
"An Economist can predict anything except the future."
"An Economist falls in a hole and says, ‘I need a ladder. Therefore the market will provide one.’"
The phrase "The Dismal Science" was coined by historian Thomas Carlyle in his 1849 essay "Occasional Discourse on the Negro Question". Carlyle described the misery of former slaves in West India and, with deliberate irony, argued that slavery was more just than the "free labor" market that was now exploiting them. It stands with Swift’s "A Modest Proposal" as a classic work of social satire, but no one remembers that.
We just remember that one line:
"a dreary, desolate and, indeed, quite abject and distressing [science]; what we might call, by way of eminence, the dismal science."
A Reputation Deserved?
What has economics done to deserve this slight? In my first econ diary I drew a distinction between ideological and politically driven economic systems (Normative Economics) and basic economic tools, like supply and demand, incentives and comparative advantage (Positive Economics).
Economic ideologies certainly deserve their miserable reputation. Fascism created the horror of industrialized mass-murder and Communism perfected its practice. But even before them, Feudalism and later Mercantilism kept entire continents in crushing poverty for millennia. In our own time Corporatism (as distinct from Capitalism, I’ll talk about that later) has driven our economy to the brink.
Baloney Detector For Public Policy
While basic economics has not killed as many people as its ideological cousins, it earns its dismal reputation another way. It has the really annoying habit of showing why your best-intentioned plans to bring peace and plenty to the world probably won’t work.
In his last book, The Demon-Haunted World, Carl Sagan proposed the Baloney Detector; a set of mental habits and tricks which will help you avoid falling for bull shit. Whether it’s psychics, spoon-benders, ghost hunters or whatever, the simple methods of the Baloney Detector will separate the wheat from the chaff.
Basic economics serves the same function in public policy debates. Let’s see how it works.
Why Don’t We Just...
As oil prices have soared, there have been several "Why don't we just" diaries suggesting that the US simply refuse to pay more than approximately $70/barrel. The reasoning is that we are the largest consumer of oil in the world, so we should be able to exert some pressure on the price.
The law of Supply and Demand would seem to agree with this plan. We’ve reduced demand, so prices should fall. But the Competitive Market says there are still plenty of other buyers in the world.
So congratulations, folowing this plan we've just cut the price of oil in half in India. Because as soon as we declare a ceiling of $70/barrel, the Indians will call the Saudis and offer $71/barrel.
Of course, you can’t stop there. Because the Chinese will bid $72 and the Europeans will bid $73. Then India will bid $74 and on it goes. Almost immediately oil will be back to the roughly $140/barrel we are paying today, minus some small delta because of the reduced US demand.
And we won’t benefit at all from this reduction because we’ve sworn to not pay a dollar more than $70/barrel. Soon we’ll start cheating on our own reverse embargo and we’ll drive demand right back to where it is now.
So Econ Really Does Suck
Because, right out of the gate, it tells you one of two things. Mate it with an authoritarian political ideology, from the left or the right, and it will kill millions. Use it properly and it will show you that the world’s problems are a lot harder than you think. The most obvious solutions will, at best, accomplish nothing and, more likely, will make the problem worse.
But there must be something good here. Otherwise, there would be razor blade dispensers mounted on the walls of every Econ Department in the world.
That good is simply this. Even though it is a harsh discipline, basic economics can help you focus on the real, underlying problems, not the symptoms and keep you from wasting time and resources on "fixes" that won’t help at all.
And that can take you a long way.
[Updated to correct a couple formatting errors and typos I noticed after originally publishing it. Why is it so hard to proof-read your own work?]