'The Economist', of June 16, 2007, reviewed a book by one Bryan Caplan, who basically says that we voters should all stop complaining and ride along with the free-market express, because Adam Smith's "moving hand" will make everything all right for everyone.
...Bryan Caplan, an economics professor at George Mason University, makes the slightly politer claim that voters systematically favour irrational policies. In a democracy, rational politicians give them what they (irrationally) want. In "The Myth Of The Rational Voter", Mr Caplan explains why this happens, why it matters and what we can do about it.
Continues below the fold, with my comments ...
...Mr Caplan says that politics is different because ignorant voters do not vote randomly.
Instead, he identifies four biases that prompt voters systematically to demand policies that make them worse off. First, people do not understand how the pursuit of private profits often yields public benefits: they have an anti-market bias. Second, they underestimate the benefits of interactions with foreigners: they have an anti-foreign bias. Third, they equate prosperity with employment rather than production: Mr Caplan calls this the "make-work" bias. Finally, they tend to think economic conditions are worse than they are, a bias towards pessimism.
For example, asked why petrol prices have risen, the public mostly blames the greed of oil firms. Economists nearly all blame the law of supply and demand. Experts are sometimes wrong, notes Mr Caplan, but in this case the public's view makes no sense. If petrol prices rise because oil firms want higher profits, how come they sometimes fall? Surveys suggest that, the more educated you are, the more likely you are to share the economists' view on this and other economic issues...
If the oil companies kept their prices at a consistently high level, consumers would lose hope of them ever descending and making their gas-guzzler SUVs affordable again. Then the consumers would go out and buy Hondas and Priuses, thereby reducing the demand and thus the profits of the oil companies. So instead, the price of gas jumps around, and consumers are thereby given incentive to hope that "it will come down again soon".
Another factor is not "supply and demand", but rather the hummingbird-nervous oil traders' anticipation of supply and demand-- oil and gasoline prices paid by gas stations are based on futures, not actual oil bought and sold now. This is how oil prices can jump around several dollars a barrel in a day, despite the obvious fact that consumption/supplies do not move that quickly.
The public's anti-foreign bias is equally pronounced. Most Americans think the economy is seriously damaged by companies sending jobs overseas. Few economists do. People understand that the local hardware store will sell them a better, cheaper hammer than they can make for themselves. Yet they are squeamish about trade with foreigners, and even more so about foreigners who enter their country to do jobs they spurn...
The Americans who most believe that "the economy is seriously damaged by sending jobs overseas" come in several varieties, including: former manufacturing workers who lost their high-paying union jobs to overseas companies and are now working in lower-paying, non-union jobs; and Americans who studied computer science and programming on the promise of "the information economy," only to see programming jobs sent to India. The former category include huge swathes of automobile, steel, and textile workers. The textile workers have only to go to Wal-Mart to see where their jobs went-- pick up a shirt and read the label, "made in China".
News stories reported that illegal immigrants were hired in large numbers to do reconstruction work after Hurricane Katrina, in spite of numerous New Orleans natives who wanted to help rebuild but were turned away. In Michigan, landscaping work at apartment complexes is done by native-born American citizen workers who are presumably paid something above the minimum wage; while in Southern California such work is exclusively done by Hispanic-looking workers, some of whom may be native-born but some of whom have most certainly come across the border to work, with or without green card.
So the assertion that "immigrants do the work Americans spurn" is rapidly becoming untrue; immigrants, especially illegal ones who don't dare complain, are recruited to do work at much lower wages than Americans would, or could accept. After all, how many native-born American citizens do you know who would cram in 10 to an apartment or camp in a tent in a weedy canyon?
The make-work bias is best illustrated by a story, perhaps apocryphal, of an economist who visits China under Mao Zedong. He sees hundreds of workers building a dam with shovels. He asks, "Why don't they use a mechanical digger?" "That would put people out of work," replies the foreman. "Oh," says the economist, "I thought you were making a dam. If it's jobs you want, take away their shovels and give them spoons." For an individual, the make-work bias makes some sense. He prospers if he has a job, and may lose his health insurance if he is laid off.
For the nation as a whole, however, what matters is not whether people have jobs, but how they do them.
If you don't have a job from which to earn wages, you don't eat. This is the bald truth on the microeconomic level for the individual person. Until somebody figures out how to ensure that "the nation as a whole"'s prosperity is shared with all its people, "an overall good economy" is no benefit whatsoever to the out-of-a-job individual.
Oh, wait-- there is such a method... it's called "welfare" and roundly damned by these same economists.
The more people produce, the greater the general prosperity.
For whom?
It helps, therefore, if people shift from less productive occupations to more productive ones.
Again, helps whom? And who's going to provide the cross-training to enable people to make this shift?
Economists, recalling that before the industrial revolution 95% of Americans were farmers, worry far less about downsizing than ordinary people do...
And this farmer statistic is relevant to the argument exactly how...?
Finally, the public's pessimism is evident in the belief that most new jobs tend to be low-paying, that our children will be worse off than we are and that society is going to hell in a variety of ways...
Maybe because this is the personal experience of millions of actual individuals.
...To curb the majority's tendency to impose its economic ignorance on everyone else, he suggests we rely less on government and more on private choice. Industries do better when deregulated...
But workers do worse, as industries do their best to reduce what they pay them.
Religions thrive when disestablished...
True, but people don't depend on their religion in order to eat.
What we have here is a classic perceptual gap between macroeconomists, and the microeconomics of each voter's personal experience. The macroeconomists cheerily note that as jobs, money, and commerce move to and fro, the market indices and corporate profits rise and rise, and the macroeconomists ask, "why can't everyone see that the country is doing better?" Well, they miss some very important factors.
In the simple, idealized economics we learned in school, companies and workers move around in a single, homogeneous economy. Companies pay their workers as low as they can get away with, and if the workers don't like the wages they move to another company that needs them badly enough to pay higher. This was the ideal that existed in the insular American economy of the '50's and '60's, but it is no longer true today. This world economy is far from homogeneous, and the players have far from equal mobility in it.
For one, in today's globe-wide economy, corporations can quickly move their operations to wherever the pay is lowest, but workers cannot move as easily from one country to another in order to pursue (or retain) their jobs. When they try, as in Turkish immigrants to Europe or Latin American immigrants to the U.S.A., they must surmount huge hurdles of language, immigration laws/quotas, lack of demand for their work, geographic obstacles such as the Pacific Ocean, or insufficient funds to move. American workers in addition find themselves at the top of a large "gravitational wage slope"-- in few parts of the world could they earn as much as they could even at a Wal-Mart job in the U.S. Where they could, such as Canada or Europe, the well-paying jobs are already mostly soaked up by natives there.
So, the corporations can play the citizens of one country off against those of another for the lowest wages, and, pinned down in their individual nations, the people are not able to exert an equivalent economic counter-force.
Their only option, as Mr Caplan ruefully notes, is to vote for policies that benefit them directly, macroeconomic theory be damned.