Dumbocracy in America

Wednesday, June 20th, 2007

In Dumbocracy in America, Nick Schulz interviews Bryan Caplan on his recent book, The Myth of the Rational Voter:

If people were merely ignorant about economics, I wouldn’t be worried. After all, if you never studied a subject, we’d expect you just to be agnostic about it. The real problem is that people have strong opinions about economics even though they’ve never studied it — and their strong opinions tend to be the opposite of what you’d learn in an economics class.

As you indicate, I identify four main ways that people’s beliefs about economics tend to go wrong. I call them anti-market bias, anti-foreign bias, make-work bias, and pessimistic bias. But you want “striking concrete examples,” not exposition, so here goes:

Example of anti-market bias: The way people react to higher gas prices in the face of natural disasters. When supply goes down in a competitive market, you should expect the price to go up. It’s hardly a sign of “conspiracy” or “gouging,” contrary to much of the public. More importantly, this price rise has large socially beneficial effects: In the short run, it encourages people to cut back on low-value uses of fuel; in the slightly longer-run, it encourages sellers to direct their inventories to the hardest-hit areas; and given a little more time, the price rise encourages additional production until the crisis abates.

Example of anti-foreign bias: These days, the best example has to be hysteria about immigration. In essence, trading labor is like trading anything — it’s mutually beneficial for buyer and seller. But public opinion has made immigrants a scapegoat for a long — and often contradictory — list of social ills. We hear simultaneous complaints that immigrants are “taking all our jobs” and “all going on welfare” — well, which is it? Their underlying theory is that economic interaction with foreigners has to have bad consequences, so people eagerly blame foreigners for anything that comes to mind.

Furthermore, even if you take some of the complaints about immigration seriously, the subjective reaction is out of proportion to the objective magnitude. George Borjas, an economist famous for emphasizing the costs of immigration, estimates that immigrants have reduced low-skilled Americans’ wages by only 8%. And if that were one’s real complaint, why would you want to deport millions of immigrants, instead of e.g. proposing extra taxes on immigrants to compensate low-skilled Americans?

Example of make-work bias: Make-work bias is probably one of the main rationales behind European labor market regulation. Among other things, you have a lot of laws that make it difficult to fire workers, seemingly forgetting that the key to social prosperity is not employment, but production. These laws backfire in other ways – making it hard for employers to fire workers also makes employers reluctant to hire in the first place. But the key point is that labor is a valuable resource — and passing laws that require employers to waste valuable resources makes little sense.

Example of pessimistic bias: The example that strikes me more and more as I grow older is the refusal to recognize how much life has improved over the past twenty years. I remember life in the ’80′s — the Internet alone has raised my standard of living in ways I could barely have imagined. But many remain convinced that life is getting worse — and want to “do something” about it.

Schulz asks Caplan about economists underestimating the value of markets:

Actually, I say that economists underestimate the virtues of markets relative to the democratic alternative. Rational voter models have made economists too optimistic about democracy. If you think that democracy works well, then every market failure you find makes you say “Let’s turn to the democratic process to fix it.” If and when economists give up on rational voter models, they will be a lot more likely to say “The market’s not perfect, but I’m worried that the democratic process will just make the problem worse.”

Definitely read the whole thing.

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