Friday, July 19, 2013

Economics, inside and out

Noah Smith is a terrific economics blogger, and Thursday’s post, “How normal people see economics” is a fine example of his work. As the title implies, it’s about the contrast between how economists view their profession, versus how the rest of us view it. (Cue the appropriate meme.)

According to Smith, outsiders see economics, particularly macroeconomics, as “inherently political” and as “being mostly about redistribution.” Economists, on the other hand, are far more aware of the vast body of settled science in their field (or dogma, if you prefer), and see themselves as students, not of distributional fairness (whatever that is) but of efficiency.

I think Smith is right, and I hope most people will agree: It’s utterly unsurprising that economics is viewed this way. Noneconomists mostly encounter economics in policy debates – as the source of rationales for tax policies, fiscal stimulus, regulation schemes, and so on. And, as the past few years have shown, though economists may hold hands and sing "Kumbaya" around the normal science that constitutes the majority of their field, when it comes to policy they disagree as profoundly as the rest of us do. Tellingly, even highly respected names in the field seem to let their politics determine their economics rather than the other way around, even to the point of making what other economics consider to be intro-level mistakes. So there are good reasons for the perception that economics is a form of ideology, a field that attempts to make prejudices look objective by dressing them up with numbers and equations.

As for Smith’s second observation, it’s simply much easier for the average person to notice social fairness than social efficiency. For most of us, the modern world’s historically unprecedented prosperity is background noise. It takes an economist to marvel appropriately at the wonder that is a $1 bag of Lay’s potato chips at the mini-mart; the average person sees it and is bummed because he can’t afford the $3 gourmet chips with the artisanal sea salt.

One might expect Smith to close ranks with his fellow economists and chide us laymen for our naïveté about his profession. Instead, he suggests we have a point:

In a certain sense, the normal people's approach makes more sense than that of the economists. We are an incredibly rich economy - the world's richest large economy by far. This means there are relatively few efficiency gains to be had, but the impact of any redistribution of our titanic wealth will be enormous. Economists usually try to be impartial, shrugging and saying "Rent is rent!" when confronted with questions of distribution, or pooh-poohing welfare analysis as the province of philosophers and dorm-room discussions. They focus on efficiency because a Pareto improvement is something that everyone can get behind (in fact, that's how it's defined). In the process, they ignore the main issue that is usually on the mind of someone thinking about the economy: "What's in it for me?"

For the average American, that last question is of more than theoretical interest.

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