Indonesia | Economics

Saturday, November 04, 2006

Economic instincts and "do-it-yourself economics"

Can people derive economic principles from their everyday lives? Yes ― but many of them would be wrong. Nonetheless, many people, particularly politicians, untrained in economics very often feel qualified to make economic pronouncements. John Kay, in The Truth About Markets (in the States, it's called Culture and Prosperity) observes:
The theme of [David] Henderson's [1985 BBC Reith Lectures] ― born of frustration with economic pronouncements of politicians ― was what he called 'DIY economics': the false propositions which people who have not studied economics know instinctively are true... Anyone who claimed expertise in 'practical physics' derived from their experience of driving a car or boarding an aeroplane would immediately reveal themselves as a fool. It is a measure of the failure of the economists to persuade the public of the value of what they do that there are no such reactions to those who claim practical knowledge to economics. There is almost no DIY dentistry, little DIY history or law, rather more DIY medicine. There is much DIY economics.

An example of this do-it-yourself (DIY) economics is well-captured by Steven Landsburg in his excellent little book, Armchair Economist. Landsburg likes to clip New York Times's letters to the editor that betray economic sense. One such a letter was by one Ronald Breslow, a chemistry professor at Columbia University and winner of the National Medal of Science.... Breslow argues that the government can increase spending in one sector ― related to his work as a scientist ― with little effect to the overall economy.

Of course this is nonsense: Everyone who has taken an intro to economics course (and actually sit in it throughout) knows this. Government money spent supporting research cannot be spent elsewhere ― in a similar way that money spent to subsidize domestic fuels cannot be spent to build schools or public clinics. There is no such thing as a free lunch.

To make his point, Landsburg takes an analogy from physics: To say what Breslow said ― that free lunch is possible ― is tantamount to saying that, in defiance of the laws of physics, it is possible to create a perpetual motion machine ― a machine that can move without being supplied with energy. But here is the irony:
If I, as an economist, were to design a perpetual motion machine, the New York Times would probably consult an expert (such as Professor Breslow) before treating my proposal with respect. When Professor Breslow, as an eminent physical scientist, designs a free lunch, the Times takes it at face value. In other words, the Times recognizes that assertions about chemistry or physics should be disciplined by some fundamental understanding of the subject, but it fails to recognize that the same is true of economics. That failure is a symptom of a widespread economic illiteracy that makes me sad and angry.

Me too. What makes me angrier still is that, in Indonesia, not only non-economists employed this type of 'practical economics'. Some people with economics training ― Kwik Kian Gie being one famous example ― do so with ease. People like them seem to think that they can subvert basic economic principles.

They cannot. But still, thanks to the uncritical print media, people believe them. Why? Because, although DIY economics is wrong, it feels right. But why does it feel right? That's a topic for another day. But here's a hint: Even though an economy consists of individuals, an individual's experience is a poor proxy of the economy's.

2 Comments:

  • I agree with you, but I suppose my point was that for the "economics" situations that people deal with on a daily basis, people generally come up with common sense / intuitive solutions which agree with the theory (which if you think about it is a good thing for economists to keep in mind). In fact a researcher once told me that if you come across a theory that is /non-intuitive/ it is generally wrong, which I thought was v interesting.

    Of course economics in the media about complex non-everyday issues is a different kettle of fish, the media generally look to publish the most salacious opinions they can find - their motive is to sell newspapers afterall. Most commentators have ulterior motives.

    My favourite is business people complaining about the negative balance of trade or a costly Rupiah. Or western unions worrying about Indonesians working for $60 a month or whatever - tell that to the workers in Tangerang who lost their jobs recently...

    Perhaps it would be better if economists could declare unified opinions - but then some care about equality while others care about efficiency etc, while others are employed to represent certain interests (e.g. Mankiw when he worked for Bush).

    By Blogger johnorford, at 11/05/2006 10:38:00 am  

  • John,
    True -- it's the David Friedman quote at the end this blog, that most people tend to choose the right action to achieve their objectives.

    But, when they use this 'success' to approximate the right policy, that's where the problem starts. They tend to disregard the general equilibrium consideration. I'll probably write on this one of these days.

    By Blogger Arya, at 11/05/2006 04:39:00 pm  

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