The Economic Fallacies of Ordinary People

I’m traveling to a wedding in England this weekend, so there will be light blogging until next Monday.

I just got Bryan Caplan’s new book The Myth of the Rational Voter in the mail. I ordered it mainly for a research project, but the reviews make it seem like a pretty good read in general. Here, Louis Menand sums up some of the book’s main points, which would seem to be of universal application:

Caplan suspects that voters cherish irrational views on many issues, but he discusses only views relevant to economic policy. The average person, he says, has four biases about economics—four main areas in which he or she differs from the economic expert. The typical noneconomist does not understand or appreciate the way markets work (and thus favors regulation and is suspicious of the profit motive), dislikes foreigners (and thus tends to be protectionist), equates prosperity with employment rather than with production (and thus overvalues the preservation of existing jobs), and usually thinks that economic conditions are getting worse (and thus favors government intervention in the economy). Economists know that these positions are irrational, because the average person actually benefits from market competition, which provides the best product at the lowest price; from free trade with other countries, which (for American consumers) usually lowers the cost of labor and thus the price of goods; and from technological change, which redistributes labor from less productive to more productive enterprises.

The economic biases of the non-economist form a secular world view that people cling to dogmatically, the way they once clung to their religious faith, Caplan thinks. People do not, he proposes, vote their self-interest: they are much more altruistic than the standard model, in which voters behave like shoppers, predicts. (This explains the phenomenon, puzzling to many social critics, of the auto worker who supports the elimination of the inheritance tax and the Hollywood producer who favors its retention.) “Precisely because people put personal interests aside when they enter the political arena,” Caplan says, “intellectual errors readily blossom into foolish policies.” People really believe that the country would be better off if profits were regulated, if foreign goods were taxed, and if companies were prevented from downsizing. Politicians who pander to these beliefs are more likely to be elected, and the special interests that lobby for protectionism and anticompetitive legislation are the beneficiaries—not the public. The result, over time, is a decline in the standard of living.

6 thoughts on “The Economic Fallacies of Ordinary People

  1. Teehee, ‘economists’ are coming up with models for the behavior of people, find that (at least some) people don’t behave according to that model and brush those samples (i.e. individuals) away with accusations of ‘irrationality’. Back when I was in school, we learned that if the model doesn’t fit the data, your model is wrong. No selecting or changing of the data to fit your model, ever, period. Go back to the drawing table and come up with a better model. Not surprising that we read such stuff on someone’s blog who, with a government job, has been shielded from any economic concerns for a lifetime.

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  2. To my observation, the average economic expert has about “four biases about economics — four main areas in which he or she differs from the (other) economic expert(s)”, too. Especially when compared to econimic experts who are paid by somebody else.

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  3. I read the book, and will try to post a short review sometime soon. Now to the comments.

    1. Martin gets the book completely wrong. In fact, the book is an attack on the classical economic model of rationality. What Caplan trying to do is undermine the model of homo economicus by showing the influence of irrational, emotion-driven thinking on decision-making. That is, Caplan is doing exactly what Martin proposes — attacking a model that doesn’t adequately explain real-world behavior, and proposing a new one that does. Oh, and by the way, I don’t have a permanent government job, I have worked in the past for many years in the private non-profit sector (where, believe be, everyone has very serious ‘economic concerns’), I continue to work part-time in the private sector, and, like all other humans, still have ‘economic concerns.’ Nevertheless, like most of those who teach law, I have voluntarily traded the chance at a lucrative, full-time job to increase the time I can spend on intellectual pursuits. If that makes you envious — and it obviously does — all I can say is “if you can’t beat ’em, join ’em!”

    2. Caplan clearly distinguishes between the many areas in which economists disagree and those in which they are virtually unanimous. These areas do exist, and Caplan shows where they exist using empirical evidence.

    3. The book isn’t too stupid for words, and clearly Menand didn’t think it was. I didn’t agree with all of it, but it’s thought-provoking. Caplan does have libertarian leanings, but you don’t have to agree with them to find some of his points convincing. This is mainly because the data on voter ignorance are so stunning. Once you force yourself to accept how ignorant most adults are of even the most basic facts of political life, you have to begin readjusting your paradigms.

    In our ordinary lives, we generally expect that people who are ignorant will behave irrationally — why wouldn’t we expect voters to do the same? Take a subject such as free trade, for instance. All economists agree that, in general, free trade, on balance, is a win-win, expand-the-pie proposition on all sides (with some minor, transitory exceptions). This is not controversial, even among left-liberal economists. Even Engels warned against protectionism, for heaven’s sake.

    However, plenty of ordinary voters disagree, and support simple-minded, across-the-board protectionism. Perhaps they saw a short television segment on displaced textile or automotive workers. Perhaps they distrust foreigners (Americans, like all other populations, tend to be xenophobic, and will judge the same activity as drastically more threatening when you tell them foreigners did it). Their opposition to free trade, therefore, is not based on an informed balancing of its costs and disadvantages. It couldn’t be, because only a tiny fraction of voters has any idea what the actual costs and disadvantages of free trade are. Once again, let me repeat the mantra: ordinary voters have much less political knowledge than blog readers, or like the people blog readers meet every day. 75% of them have never attended college, and they spend about four hours a day watching TV.

    Their opposition to free trade is based on an unthinking, emotional reaction, as shown by study after study. Most ordinary people choose their political opinions because those opinions make them feel good, not because they have gathered objective information and carefully studied the pros and cons. This assertion may sound elitist, but it is not controversial; it’s been proven so many times that it’s now a staple of political-science wisdom.

    Some of ordinary voters’ views may be reasonably rational, but their blanket hostility to free trade isn’t. How do we know this? Simple — because those voters’ houses — like all Americans’ houses — are filled with cheap foreign goods. When it comes to abstract political opinions, voters will choose views that make them feel good and help them fit in their social environment. When it comes to their pocketbooks, though, voters will suddenly snap into tightly rational focus, and they will always buy the Chinese baby stroller which is $10 cheaper and just as good as the American one. “Buy American” campaigns come and go without ever making the slightest dent in Americans’ long-term behavior. Even people who have enough money to spare to buy only American goods never do so. Why is this? Because, Caplan argues, having irrational views on politics costs voters nothing, while having an irrational view of the price and quality differential between foreign and domestic goods costs the consumer thousands of dollars a year.

    As I said, I’ll write a review sometime soon. In the meantime, it’s foolish to write this book off before you’ve read it. Especially since Caplan’s arguments, as he recognizes, can just as easily be used to advance political views opposed to his own (hint hint).

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  4. > the book is an attack on the classical economic model of rationalityI don’t know about your English but in my English ‘rational’ means ‘acting according to a model’ so ‘action according to an irrational model’, which is what the book is ostensibly trying to suggest, is an Orwellian wordplay trying to fry the mind of the reader caught off-guard. But that’s not even important here anymore.Now that you’ve responded to my comment, I had to actually go and read the linked article, and had to witness Caplan suggesting, entirely while keeping a straight face:> require voters to pass a test for economic competence and other shenanigans, such as giving more votes to X, Y and Z.In other words, only those that vote according to the opinions of a self-proclaimed elite should be allowed to vote. Your link to the article without any objections to these suggestions implies at least some consent, which not surprising in the light of the continuing fascist untertones of this blog, advertising depriving people of having a say in essential features of their society such as what they read (http://andrewhammel.typepad.com/german_joys/2007/05/habermas_on_the.html) and their criminal policy, and instead just asking them to follow the dictum of said self-proclaimed (and self-serving) elite. From the article again: “Democracy fails because it does what voters want.”War is Peace anyone?

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  5. So, Martin. In the early 20th century, Congress passed a bill which took monetary policy (an area of public policy that directly affects every citizen who spends money) out of the hands of democratic representatives and gave complete control over it to a board (or cabal, if you like) of unelected self-appointed economic “experts.”

    http://en.wikipedia.org/wiki/Federal_Reserve_System

    According to your paradigm, then, the U.S. has been ‘fascist’ for nearly 100 years! Whodathunkit?

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  6. @Mr FedYes, the monetary policy of the U.S. of A. is more fascist than that of, say, the Euro zone. Criticism of the ‘privatization’ move can be found by the zillions on the internet, there are whole blogs devoted to this subject, including theories that the current situation of 1% of the US population owning 90% of the US wealth or such are the result of that, which can’t be discarded off-hand. The Fed’s decision to cease publishing M3 circulation figures last spring has also given some rise to speculation about a possible collapse of the dollar inflation due to Eurodollars, which in spite of their name can mostly be found in China and Japan.But that’s again besides the point, since by now you should know my standard response to all sorts of ‘comparative excuses’, those that involve some country X and trying to find something that is worse over there: Just take a look at North Korea, things are even worse in North Korea! With North Korea I’ve got the ultimate trump card that will win every round of the my-X-is-worse-than-your-Y game that people like to play around here. Might as well not bother next time.So can we get back to your pet projects of deciding who gets to read what in the newspaper and who is allowed to vote in the next election.

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