How wrong may we be?

By Nicholas Shackel

Consider these propositions:

  1. Mandatory licensing of professional services increases the prices of those services.
  2. Overall, the standard of living is higher today than it was 30 years ago
  3. Rent control leads to housing shortages.
  4. Third World workers working for American companies overseas are not exploited.
  5. Free trade does not lead to unemployment
  6.  Minimum wage laws raise unemployment

Do you think they are true or false?

There is a strong and wide consensus among economists that these propositions are all true. Yet according to a recent research[1] non-economists tend to get these, and a further 15 economic propositions, wrong. Moreover, there is a significant difference in what proportion of people get them wrong on the left and the right. Roughly 60% get them wrong on the left whereas roughly 20% get them wrong on the right. Nor is this a matter of economists ideological bias, since the average economist is slightly on the left, and in any case, the propositions chosen are ones for which the consensus spans from left wing to right wing economists.

Clearly economic facts are important for political decision making and false beliefs about those facts are likely to result in bad policies. Given that in a democracy the rule of the political class is somewhat tuned to our approval, if we have false economic beliefs we are likely to approve of policies which we would not approve of give true economic beliefs. Furthermore, because policy and law are imposed on us all by coercion, our misplaced approval and disapproval has (indirectly) bad effects on others.

So an important question arises of how wrong, that is to say, how much in error, is it permissible for our economic beliefs to be and how wrong is it to be in error. Given our general ignorance of economics, I suspect that most of us are massively overconfident in our economic beliefs and the our overconfidence is a significant wrong because of the harm it contributes to.

Take only the minimum wage law: we tend to think this is good because we think of the people whose wages are increased. Politicians bluster about a living wage leads us to ignore the jobs that are lost and that are never created because they are not productive enough to be paid the minimum wage. These are jobs that the least skilful and the poorest among us would have were it not for the minimum wage law. We also know that for such individuals who are young and perhaps have done poorly at school, a low paying job may be an important first stepping stone into the employment market, giving them job specific training that can increase their productivity and thereby lead them to better paid work. A minimum wage law removes that stepping stone. The numbers of people harmed here may not be a large proportion of the working population. Nevertheless, the minimum wage law benefits a similar proportion who are just slightly more able at their expense. So the law is capriciously harmful and discriminatory. It harms the most economically vulnerable in the population.

The politicians who advance minimum wage laws bear the largest part of the blame for this harm, since  they know that the laws are harmful but advance them anyway in pursuit of their interest in remaining in power. Nevertheless, I doubt very much that we would have such a law were it not that very many people have overconfident false beliefs about minimum wage laws. Were they not overconfident the politicians promoting such laws would not easily survive the exposure of the truth about them and hence we would not have the laws. So our overconfidence is harmful and thereby wrong.

[1] http://econjwatch.org/file_download/432/ButurovicKleinMay2010.pdf based on the Zogby International large scale survey of American adults. Summarised here: http://online.wsj.com/article/SB10001424052748703561604575282190930932412.html

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5 Responses to How wrong may we be?

  • Bootlegger says:

    “There is a strong and wide consensus among economists that these propositions are all true.”

    False, no such consensus exists.

    Next.

  • Dominic Wilkinson says:

    One question that has been raised about the Wall Street Journal article that you discuss, and the questions listed above, is whether they are ambiguous and loaded – in favour of libertarian economics. see http://cruelmistress.wordpress.com/2010/06/09/gmu-econ-professor-flunks-both-philosophy-and-statistics/

    While minimum wage laws may harm some, as you note they also benefit others. Whether or not they cause more harm than good is going to depend on 1. how many job losses are caused, 2. on the level of unemployment support (relative to the minimum wage), 3. on how much lower wages tend to be in the absence of a minimum wage, and 4. on how much worse it is to be out of work independent of the financial disadvantage. I am not an economist and I don’t have answers to all of those. But it seems to me that that equation is far more complicated than you suggest.

  • Tom Douglas says:

    “Nor is this a matter of economists ideological bias, since the average economist is slightly on the left, and in any case, the propositions chosen are ones for which the consensus spans from left wing to right wing economists.”

    This assumes that all ideological bias must be measurable on the left-right spectrum. Why think that? There are all sorts of other biases that could explain, for example, the economist’s answer to question 4.

  • Bootlegger: Thanks for volunteering such a clear example of the epistemic over-confidence that is my target.

    Dominic: I’m not especially concerned to defend the report. What was of interest to me is the divergence between expert and lay opinion, and the bad effects that over-confidence in lay opinion can have. I try not to be confident in economic opinion and in the blog I am retailing what I believe to be consensus economic opinion, but of course, I might be in error in some of that.

    That caveat in place, I looked at the blog you cited. The writer simply ignores the central point, which is that these claims are not controversial among economists: for example, see Paul Krugman’s article http://www.nytimes.com/2000/06/07/opinion/reckonings-a-rent-affair.html on rent control.
    It also exhibits epistemic over-confidence: “It should be patently obvious that all restrictions on housing development do not make housing less affordable.” (In charity, I assume he meant that not all restrictions… make housing less affordable, since it really is patently obvious that ‘all restrictions…do not make housing less affordable’ is false). It is the appearance to the ignorant of the patent obviousness of many economic falsehoods that is the problem. Even if it were true, it certainly wouldn’t be patently obvious.

    One of his main arguments is based on a claimed counterexample: ‘if you restrict making housing less affordable, then it cannot be the case that this particular housing restriction makes housing less affordable’. This claim would seem to be directly refuted by the empirical facts. Rent control is a law that restricts making housing less affordable. The effect of rent control is to drive up the cost of housing. This has been empirically demonstrated time and again by numerous studies in a wide variety of different circumstances in which rent control has been tried. So we have a claim which is claimed to prove another to be patently obvious and which yet is well known to be false by economists. A perfect example of what I am on about, I would say.

    Furthermore, his criticism exhibits a variety of magical thinking to which we are all inclined: that a law is like a magic spell, so you pass a law forbidding making housing less affordable and abracadabra, housing does not become less affordable. We can’t avoid paying what things cost. What can happen in such a case is that the way the costs are paid for changes. For example, the nominal price of housing might not go up, but all sorts of other ‘fees’ would appear, like buying the sofa for £10,000. If you want to call that sofa unaffordability then you have a fine career in politics ahead of you.

    I’m not sure what you mean by saying that the equation is far more complicated than I suggest. In the political arena those defending minimum wage laws claim that they do only good to people who have or want jobs, they do the most good to the most economically vulnerable, and the cost is borne by the employer. As I understand it, standard economic analysis shows that all of that to be false. The costs are not borne by employers, they are borne by the most economically vulnerable. You are introducing an entirely separate question of whether the harm is outweighed by the benefits. I think most economists doubt that it is, but I agree balancing costs and benefits is a complex matter. Nevertheless, even if the benefits outweigh the costs, I doubt very much that it is generally right to interfere in the job market to benefit the slightly less vulnerable at the expense of the most vulnerable. However, the point of this example is to flesh out why we are inclined, in our economic ignorance, to think it is patently obvious that minimum wage laws do not harm the people they are claimed to help.

    Tom: Agreed. The point was simply that you can’t explain the left being more wrong about this than the right on the basis that the economists are on the right.

  • Mark J. Lovas says:

    “We also know that for such individuals who are young and perhaps have done poorly at school, a low paying job may be an important first stepping stone into the employment market, giving them job specific training that can increase their productivity and thereby lead them to better paid work.”

    It c a n work that way, but does it often or usually? In which countries?

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