Economic Biases

The Myth of the Rational Voter: Why Democracies Choose Bad Policies is not for everyone. Bryan Caplan’s book is much too technical for the average audience (which includes me). But Chapter 2 on “Systematically Biased About Economics” was worth the proverbial price of the book. In this chapter the George Mason professor highlights four common economic biases.

1. Antimarket Bias. This is “a tendency to underestimate the economic benefits of the market mechanism” (30). For example, most people find profits distasteful (other people’s profits!). But, as Caplan explains, profits are not a handout. “Profits give incentives to reduce production costs, move resources from less-valued to more-valued industries, and dream up new products” (32). In other words, profits provide invaluable signals about what is important to people and what is not.

Likewise, most people do not understand Adam Smith’s “invisible hand.” In a free market economy, when individuals pursue their self-interests (which is not the same as greed) they unintentionally promote the well-being of the whole society. If I want to make more money with my widgets I will be motivated to increase productivity, develop new technologies, and market a product the people actually want. My desire may be for money, but the net result is a growing economy.

In similar fashion, competition benefits the larger whole. CEOs who wake up and decide to gouge their customers, sell junk, and harass their customers will lose their business to the company that respects their customers, their desires, and their wallets. In a market economy people are still greedy, but “intelligent greed militates against ‘deceit, unfairness, dishonesty, and discourtesy’ because they damage the seller’s reputation” (35).

2. Antiforeign Bias. This is “a tendency to underestimate the benefits of interaction with foreigners.” Most Americans grow concerned over a negative trade imbalance. It seems logical at first: if we buy 1 trillion worth of stuff from Mexico and they buy 100 billion worth of stuff from us (made up numbers) Americans must be getting a raw deal. But we wouldn’t be buying all that stuff from Mexico (or wherever) if it wasn’t cheaper. Other countries can produce some goods more cheaply than we can (it’s called competitive advantage). So it would be foolish not to buy these goods from them.

The problem is foreign purchases feel like a cost, like money leaving our country to go somewhere else. But every purchase entails a cost. And yet, “No one loses sleep about the trade balance between California and Nevada, or me and Tower Records” (38). No doubt, if you buy Toyota instead Ford, Ford suffers. But if people can get better cars more cheaply from Japan (and I’m not saying they can), people buying those cars are better off. They have more of their money to spend elsewhere. In time, they will spend that money and new industries will pop up and existing industries will grow accordingly.

3. Make-Work Bias. This is “a tendency to underestimate the economic benefit of conserving labor” (40). Most people believe labor is better to use than conserve. Thus, when a nation is able to produce more goods with fewer man-hours, we consider it a danger, not progress. We tend to think the ultimate goal is to have everyone in the country working. And while a job is certainly good for the individual (assuming it pays something), the society as a whole does not prosper if someone has a job, only if he does a job (41). That is to say, we could employ more people if we had all of the nation’s clothes made by hand, but in today’s technological climate this would not be a job well hired.

This is the most persistent economic bias because it encourages us to put well-meaning compassionate instincts above careful reasoning. For example, it’s well known that there are far fewer farmers today than a hundred years ago. Technological advances have made it possible for fewer people to farm more land more productively. Labor has been conserved. No doubt, the country is far better off because of these advances. But during the economic “churn” that led to the relative disappearance of the small family farm, the farmers put out of work were certainly not helped. They suffered, and when people suffer we should want to help. But the best way to help is not to subsidize their industry or stop the turn over. For, “every time we figure out how to accomplish a goal using fewer workers, it enriches society, because labor is a valuable resource” (43).

Simply put, productivity is the name of the game. Wealth is created when people learn to produce more with less. When this happens some people will be temporarily out of work (and we ought to help them individually), but in the long run the market is directing them to use their skills and efforts in more profitable areas.

4. Pessimistic Bias. This is “a tendency to overestimate the severity of economic problems and underestimate the (recent) past, present, and future performance of the economy” (44). We usually see the past with rose-colored glasses, thinking that we are not living up to our forefathers, and forgetting all the problems they had which we no longer experience (e.g., polio, high infant mortality rates, unclean drinking water, etc.). As a result most people feel like things are usually getting worse.

Moreover, the public, often stoked by the media, tends to fears resource depletion and the subsequent sky-rocketing costs. But economists argue that natural resources almost always get cheaper. As demand increases there is incentive to find more supply. As supply increases, prices drop. And if supply truly runs low, the market directs investors and researchers to develop new technologies which now can profitable. Again, innovation is the engine that leads to growth, and innovation is spurred on by the signals that prices and wages offer in a market economy. This is no security against periodic slowdowns or contractions, let alone wars and natural disasters, but it should temper us against constant doom and gloom scenarios.

I’ve just scratched the surface with these big ideas, and I don’t claim every Christian needs to have the same economic approach. But I think there is a lot to learn by using a little less sentimental intuition and using a little more logic. Individuals in need should be treated with compassion. But compassion usually makes for bad economic policy and ends up hurting more people than it helps.