Economics is really hard – Econlib

Science writers like to suggest that anyone can understand the intuition behind theories such as special relativity and quantum mechanics, if only they will read this book, or that essay. Don’t believe them—I’ve tried. At best I get a bit of the intuition behind relativity, and none at all behind QM. Yes, I hear the words, but I don’t understand enough of the underlying physics and mathematics for the words to form a coherent picture in my mind.  I’m too dumb.

Some economists believe that the public can understand why protectionism is bad, or why price controls hurt consumers, if only the ideas are explained to them in clear language.  I doubt it.

Tyler Cowen recently linked to an interesting paper that addresses this issue.  Here’s the abstract:

During disasters, citizens call for “anti-price gouging” policies. However, majorities of economists oppose such policies. For democracy to function, citizens should be responsive to policy-relevant information—especially from experts. What impact does exposure to the potential negative externalities have on public support for anti-price gouging policies? We hypothesize that if the public were exposed to such information, they would be less supportive of anti-gouging policies. We employ two survey experiments: one administered in Florida (n = 2085), a state prone to hurricane activity, and the second in the United States (n = 2023) at the onset of the COVID-19 pandemic. Both show that the public overwhelmingly supports anti-price gouging policies, regardless of exposure to information about negative externalities, even when it comes from experts.

Having taught economics for 35 years, this is no surprise to me.

You might object that surely economics is not as hard as modern physics.  Yes, that’s true in one sense—you do not need an extremely high IQ to understand economics.  On the other hand, the quantity of information required to understand economics is vastly larger than the quantity of information needed to understand modern physics.  It’s a far more complex field, despite being much “easier”.

For this reason, economists will often take shortcuts when trying to persuade the public on a policy issue.  They might argue that a ban on banks charging a fee for ATM use would hurt consumers because this would reduce the availability of ATMs.  Or they might argue that tariffs would hurt the economy by raising the prices that consumers must pay. 

It’s true that an ATM fee ban would hurt bank customers and it’s true that tariffs hurt the economy.  But not for the reasons that are usually given.  After all, it might be the case that the saving in not paying ATM fees is worth more to consumers than the negative of fewer machines being available.  And it might be the case that the benefit tariffs provide to our producers exceeds the extra costs incurred by consumers.  Neither of those arguments (for price controls and tariffs) is actually true, but they might be true.  In order to show they are not true, you must first learn a whole lot of economics. 

In theory, students majoring in economics are able to understand these ideas.  As a practical matter, most students don’t actually understand these concepts until they get to graduate school.

A science writer can tell me that quantum mechanics is true because of blah, blah, blah, but it won’t sink in.  I can explain to the man on the street why price gouging is actually a good thing, but my explanation won’t sink in.  It requires too much background information.  Here’s just a portion of what you need to know—and I mean really know in your bones:

1. Supply and demand elasticities are far greater than common sense suggests.

2. Public policy is a repeat game—policies need to be evaluated as a long run regime, not as an ad hoc decision.

3. Retailing is a highly competitive industry, with zero economic profits in the long run.

4. Willingness to pay is far less correlated with wealth than you might assume.

5. Price controls are not an effective way to redistribute income.

6. The economy is not a zero sum game.

All of these ideas (and many more) need to be understood before considering the question of price gouging.  And not just “understood” in the sense that someone tells you the words; you need to understand the ideas well enough so that you could persuasively explain the claims to your friends.

A while back, I recall some intellectuals claiming that two well-informed rational people should not disagree over a factual claim.  Once all the facts are laid out on the table, there is only one rational conclusion.  The problem here is that no one has a complete model in their mind, and when debating an issue I don’t have time to teach a 3-year course in Chicago graduate economics, or a 3-year course in MIT graduate economics (which would present a different set of models.)  Thus rational people will continue to have good faith disagreements.

Nonetheless, we should not give up just because the public can never reach the desired level of enlightenment.  Over the past 12 years, I’ve had numerous people tell me that my blog posts have helped them to better understand a specific economic issue.  So we should continue trying to nudge the public toward greater enlightenment, even as we understand that we’ll always be a bit disappointed with the results. 

PS.  Persuasion can take many forms.  Perhaps it would help to point out all of the price gouging that we already allow to occur:

1. We allow gas stations to sell gasoline at very inflated prices after a war breaks out in the Middle East.
2. We allow a grocery store to sell eggs at a very high price after a problem with bird flu.
3. We allow a homeowner in Palo Alto to sell their house for an obscene profit after zoning rules are tightened to reduce supply.

Those are all cases of price gouging.  Why don’t we have price controls in those cases?  Getting the public to think through each case might help to clarify their thought process.