The Economist’s View of the World
Steven E. Rhoads and I attempt to distill an entire semester’s worth of economic thinking into a full hour.
Joe Biden’s gaffes are usually unplanned slips of the tongue — not pre-meditated social media posts that presumably received approval from staffers prior to publication.
However, his recent Tweet demanding that gas stations lower their prices to alleviate the “pain at the pump” is far more embarrassing than his accidental public speaking fumbles.
Even Jeff Bezos had to correct the President for his ignorance of basic economics, which combined blatant scapegoating with a denial of the universal laws of supply and demand. However, in a nation where the vast majority of citizens have likely never taken an undergraduate economics course, can Biden be blamed for engaging in such classic political opportunism?
Perhaps we can channel former President Barack Obama in considering this a “teachable moment.” Or as Rahm Emmanuel once said, we should never let a good crisis go to waste.
I was delighted to welcome Professor Emeritus Steven E. Rhoads to the show to discuss the new and substantially revised 35th-anniversary edition of his best-selling book, The Economist’s View of the World: And the Quest for Well-Being.
Rhoads wrote the book as an assistant professor at the University of Virginia (home of the Public Choice economics), and was surprised when the original edition skyrocketed to the tops of best-seller lists and made economic principles accessible to millions who would have otherwise believed the fallacies embedded in Biden’s tweet.
David Henderson — editor of the Concise Encyclopedia of Economics — calls it “A Wide-Ranging Book for Non-Economists and Economists” alike, and the WSJ named it one of the best books of 2021. It’s worth reading in its entirety, but if you don’t have time, be sure to listen or read:
Transcript
On COVID
What does it mean to think like an economist?
During the pandemic, policymakers put great emphasis on the advice of public health experts, but little to none on the advice of economists.
What might have been done differently if economists had been asked their opinion?
STEVEN: Economist are not all for health or any one thing. You have to give something up when you go all in on health. [Lockdowns] were a disaster for our kids staying home, especially low income kids, who lost a year of education.
Economics is important because there is more than one thing we want. We want education. We want recreation.
This illustrates the principle of marginalism, which helps us decide how much of one thing we are willing to give up to gain in another area.
If we take people at their words only, they would say that safety is the most important thing. But if you tell them that means cancelling the Little League season, they will surely note that they also care about other things.
“Economists would say we have other goals besides health.”
Opportunity Cost
When it comes to our decisions at the grocery store, we naturally think like economists – considering the relative prices of goods like steak vs. hamburger to decide whether it’s worth the additional cost of the more expensive option.
But if you’re talking about public programs, you’re just one person out of hundreds of millions, so taxes don’t mean much to you.
Here we find another contradiction in what people say versus what they must actually believe, since people routinely vote to increase spending while also expressing disapproval about the deficit.
We could always spend more on, for example, road safety. But at what expense? Opportunity cost tells us that we must give up some other form of spending for each dollar that gets diverted to adding rumble strips to the side of the road. At some point, the law of diminishing returns dictates in favor of letting taxpayers keep the money.
“If we put them in every country road, it’ll cost an enormous amount of money, and they’re better ways to save lives. So we have to look at the margin, additional expenditures won’t get as much benefit, because we put it first hopefully, where the problems were the greatest.”
Therefore, everything comes at a cost. There is no free lunch.
The Economist is always the sourpuss. He’s saying, ‘Yeah, it’s good. But it’s not good.’
Incentives Matter
In the same vein, economists favor congestion pricing and any other incentives to get people to pay for some of the benefits that they are receiving from public services like roads or tennis courts.
The bauty of this approach is that you need not restrict liberty to improve outcomes.
You can drive whenever you want, but you have to pay for the luxury of getting there a little faster during rush hour.
Because of features like incentivizing efficient use of resources, Steven loves markets. He shares this love affair with most economists – even the liberal ones like Joseph Stiglitz and Paul Krugman, who writes about the marvels of how markets allocate resources in the New York Times.
“The reason economists love markets is because they know more about markets,” Steven says.
A 12-year-old might expect that top-down central planning would achieve better outcomes than the “anarchy” or unplanned order market, but only markets can account for dispersed information embedded in a million different prices to help people adjust their decisions based on relative scarcity of various goods and services.
Steven illustrates this with the seemingly mundane example of sawdust, which turns out to be a fascinating study upon closer inspection. A shortage of sawdust can be reflected in the price of milk, since milk farmers use the soft wood residue to bed their cows. It’s also used in mulch, particle board, and car dashboards. In response to the increase in these prices, consumers adjust their behavior and look for cheaper alternatives. Whoever is willing to pay the most can still get it, but others will find more cost-effective substitutes or cut down their use.
This principle can also be illustrated with the “diamond and water paradox.” Why are diamonds so much more expensive given that people can’t survive without water? Adam Smith first solved this puzzle with his discovery of marginal value. If you have a lot of water to begin with, you won’t pay much more for an additional unit. Thus, scarcity breeds higher prices. We need markets to tell us what is most scarce so that people don’t overconsume.
On Inequality
Left of center economists like Joseph Stiglitz, however, maintain that markets shouldn’t have the last word when it comes to the allocation of wealth. THey often scapegoat “the 1%.”
When Rhoads wrote the book 35 years ago, most economists agreed that “a rising tide lifts all boats.”
Today, growing concerns about the rising “wealth gap” have resulted in more calls to raise taxes on the super-rich. This neglects a simple fact:
Economic growth helps everybody. The statistics about the wealth gap neglect the fact that the 1% invest most of their money, and that leads to new inventions which save us money or give us new products. So it’s really not the case that the 1% get all of the benefits. 98% of the benefits go to the public.
Left of center economists seem to want to tax as much as possible before it starts to diminish revenues, ignoring the long-term effects on innovation and growth from redisbrutionist policies. This question ultimately boils down to whether you believe that the government or private individuals will make better decisions about how to spend money.
Competition Breeds Quality
People will frequently say that actors in markets don’t have perfect information. The seller knows about defects in his product that the buyer cannot know until after he’s paid for it. While that may be true, Rhoads notes that competition tends to eliminate the opportunity to “cheat,” since people will turn elsewhere if they discover that you are making fraudulent claims.
People’s trust in corporations like Amazon and google is actually at an all-time high, especially when compared to Congress, which ranked last in a recent poll of public opinion. Despite the frequent scapegoating of the rich, people said they would trust Jeff Bezos with their money far more than government.
We will see how Joe Biden’s recent attempt to blame gas stations for the inflation-driven rise in prices will pan out. People may not understand the nuances of the economic way of thinking, but most people know intuitively that Biden is barking up the wrong tree.
Sometimes the word “competition” is used as a pejorative, as in the case of “cutthroat competition” supposedly epitomized by Amazon. All this means, however, is that the company is ruthlessly fighting for the privilege to satisfy our needs. The marketplace selects for survivors who have learned to be really good at getting us what we want at the right price.
Anyone who has ever switched from patronizing one hairdresser to another, or fired a plumber for doing a bad job has participated in advancing the process of “cutthroat capitalism.” So don’t go blaming it all on greedy corporations.
If Biden had listened to another left-of-center economist, Larry Summers, we likely wouldn’t be in the economic mess we are in today with a “shortage” of gasoline reflected in exorbitant prices. The price increase is the market’s way of ensuring that we don’t have long lines at the gas station, or run out completely.
Competition for Jobs
Bill Gates, fearing a looming job loss, called for a tax on robots that replace workers. Larry Summers asked in response, “Why not tax anything that saves time, like dishwashers or laundry machines?”
Following Rhoads’ original injunction, we must think at the margin and consider both costs and benefits. Workers in countries like France enjoy more job security and employee benefits, but the average worker is much poorer because the country has slower growth and less innovation. Furthermore, policies like mandating extended paternity leave discourages hiring and can actually make it harder to get a job in the first place in France.
It drives Rhoads crazy when he hears young people identifying as socialists, for lack of an understanding of the beauty of markets and the prosperity they produce.
The Case of the House and Senate Cafeteria
To put a nice bow on the economics lesson courtesy of Professor Rhoads, here is a pop quiz. The Senate and House cafeteries were run very differently. The Senate was run by the government, with decisions made in a top-down fashion, while the House contracted their cafeteria services out to a private company.
Guess which one ended up with better food at a lower price?
Listen and find out if you answered correctly:
