How Can Economists Help?

That’s not true; Russ has helped me a lot. I’ve been a regular listener of Econtalk for many years. I can’t tell you how many books I’ve read after listening to one of his author interviews, but it has to average at least two a year. I can tell you that Russ’s book How Adam Smith Can Change Your Life completely changed the way I think about Adam Smith and made a big difference in how I think about economics.

Maybe I find Russ especially helpful because he and I are in the same business. But there are many millions of downloads of his podcast every year. He must have helped all kinds of people.

The question of whether economists help people has been on my mind a lot lately. This is an extraordinary time. People need help and, as Russ likes to remind us, one of Adam Smith’s most important insights is that “man naturally desires not only to be loved but to be lovely.” Most of us genuinely want to help. But we don’t know how to hook up a ventilator, we don’t have the local knowledge necessary to deliver fresh milk to the store and most of us wouldn’t even be very good at stocking the cooler once the milk arrives. Do economists have anything to offer?

I think so. Here are my 9 suggestions.

Focus on teaching, not problem solving. Good economists spend most of their time either teaching or being taught. And I don’t just mean teaching in the classroom. A good teacher takes information from many different sources, finds what is relevant, figures out how the various bits of information are connected and then presents them that in a way others will understand. A good teacher helps others understand how economic data and the economic way of thinking can inform the problems the students need to solve.

In academics we pretend there’s a sharp line between teaching and research and we often attach higher status to research. But there’s not really much of a boundary. Think about some idea that had a big influence on you. Ronald Coase’s theory of the firm is my example. His seminal paper didn’t solve a problem or discover some new fact. Firms and transactions costs existed long before Coase. But Coase explained the link between the two in a way that satisfies our curious minds and, judging by the paper’s enduring success, in a way people must find useful. The Theory of the Firm is a lesson. It may answer a question but it does not solve a practical problem.

This is not to say that economists shouldn’t try to solve the problems created by this pandemic. Many of us are good at modeling and data analytics. More importantly, economics teaches us to understand tradeoffs and to look for unintended consequences. These are useful skills. Even if we can’t solve a problem, teaching people the lessons of economics will be very helpful.

Teach like an Austrian. I don’t mean teach the classic texts and thinkers that are labeled “Austrian economics,” that’s up to you. I mean honor Friedrich Hayek’s famous dictum: “The curious task of economics is to demonstrate to men how little they really know about what they imagine they can design.”

It doesn’t matter whether you’re a Marxist or an anarcho-libertarian, if you’re an economist you understand the overwhelming complexity of social organization. There are 7.8 billion people in the world. We each have an economic relationship with countless millions of those people.

Economists get teased for the simplistic ‘assume a can opener’ nature of our models. But what choice do we have? It’s not our fault that the average human has 85 billion neurons and absolutely no interest in behaving like an ant or a bee. Many of us could have become perfectly competent entomologists, studying orderly and predictable social insects. We thought economics would be more interesting than that. I still think so, but I understand that along with that interest comes a lot of frustration. There are many, many things I don’t understand. We need to remind policy makers that they don’t get it either.

But at the same time, don’t carry this Hayekian humility too far. His famous quote, after all, warns against overconfidence in imagining what we can design. That’s good to know, but at the end of the day, somebody has to design something. Economics can offer some good advice to the designers. Which leads me to my next few thoughts.

Teach people that they can’t avoid tradeoffs. As the COVID-19 crisis in New York City was growing, Governor Andrew Cuomo said “My mother is not expendable… We’re not going to accept a premise that human life is disposable. We’re not going to put a dollar figure on human life. We are going to fight every way we can to save every life that we can. Because that’s what I think it means to be an American.”1

As long as politicians think they’re obligated to say things like that, economists are obligated to tell them they’re wrong. Of course, it is immoral to fling virgins into volcanos. But appeasing the gods with human sacrifice isn’t at all similar to the real tradeoffs we have to make. The real tradeoffs require balancing various kinds of risk, including risks to life. Everybody crosses the street. Not everybody thinks about how the decision to cross involves a tradeoff with existential risk on one side of the scale. In ordinary times that’s fine. We will usually make sensible tradeoffs by relying on habits and the example of others. But in this extraordinary time, we need to think carefully about the costs and consequences of our decisions. That’s exactly the kind of thinking economists do every day.

Teach people that the tradeoffs never involve money. We can’t do economics without money. Without some unit of account it’s impossible to think about tradeoffs. But we need to explain that behind the veil of money are real people with real needs, hopes, and desires. Governor Cuomo said, “we’re not going to put a dollar figure on human life.” It’s easy to understand why a politician would say that. If it was really a tradeoff with suffering humans on one side of the scale and bales of cash on the other, all decent people would side with the humans. But that’s not the real trade off. What looks like dollars are really other humans. The way New York prioritized COVID-19 measures meant that kids couldn’t go to school and that women with suspicious mammograms couldn’t get biopsies. Those things may be worth giving up, but they are real and important things. They’re not dollar bills.

Teach people what markets can and can’t do. Economists think of markets as the greatest supercomputer ever invented. Markets collect information from every nook and cranny of the world and then summarize that information in a language everyone can understand. Higher market prices are a signal that somewhere in the world someone needs a little extra help. Lower market prices mean that somewhere in the world someone is wasting precious resources. And even better, prices nudge the most likely helpers in the right direction. Most economists think that’s awesome.

But most people only think about markets when the market tells them something they don’t want to hear. Every crisis brings with it massive shifts in demand and supply, followed by predictably dramatic changes in price. Some prices go up (N95 masks). Other prices plummet (crude oil). And just as certain, these price changes will be met with self-righteous demands for help. People have been decrying “price gouging” for weeks, and as I write this the Texas Railroad Commission is debating whether to order oil producers to restrict output in an attempt to boost prices. We need to teach people that interfering with the market disrupts the flow of critical market signals. Our job as economists is to tell people that while they may hate the message, they shouldn’t shoot the messenger.

This is not to say that economists should become simple-minded cheerleaders for free markets. We understand market failures caused by poorly defined property rights, transaction costs, asymmetric information, political interference and the rest. We should acknowledge those possibilities while at the same time explaining that sometimes even imperfect markets are better than the alternative. We should also acknowledge that considerations of human autonomy, human dignity, and other fundamental values may trump the market.

Teach people to trust their moral intuitions but not their economic intuitions. This is in some ways a variant of Hayek’s counsel of humility. But if we make a serious effort to teach this lesson, we might nudge public discourse in a helpful direction. Take, for example, the question about the value of a $15 minimum wage. You can certainly find good economists on either side of the debate. You can’t find good economists who start from the premise that they are morally superior to those who prefer a different policy. First of all, that’s probably not true. People are much more likely to share moral intuitions than to reach common conclusions about complex economic issues. Second, attacking someone’s moral foundations just isn’t a good way to get them to agree with you. Logic and evidence—the kinds of things good economists depend on as persuasion—are much more likely to resolve differences. Economists know this. We should demonstrate it when we teach.

Teach people to trust science but be skeptical of research. On April 11 a group of researchers, most from Stanford University, presented results from an “antibody seroprevalence” survey of a sample of people from Santa Clara County, California. They concluded that “the population prevalence of SARS-CoV-2 antibodies in Santa Clara County implies that the infection is much more widespread than indicated by the number of confirmed cases.” If true, that is very, very good news. It means that denominator in the distressingly high case fatality rate (CFR) for COVID-19 is much larger than previously believed and hence the CFR is much lower.

In a crisis people like good news. The Stanford study was the subject of much conversation in both social media and mainstream media. On April 17 the Wall Street Journal featured an op-ed with the headline “New Data Suggest the Coronavirus Isn’t as Deadly as We Thought: A study finds 50 to 85 times as many infections as known cases—meaning a far lower fatality rate.”2 The study had huge implications in the debate over whether extreme social distancing mandates should be relaxed.

Unfortunately, the study also had huge problems. About the same time the Wall Street Journal was publishing this good news editorial, others trained in science and statistics were discovering massive flaws in the Santa Clara study. No one has said that the reported numbers are just wrong. But questions about the reliability of the test for antibodies coupled with questions about bias in the sample indicate that the results can’t be trusted.

Despite the seductive appeal of “data driven science,” data seldom settles a question. Economic and medical data have something in common: they both measure a small set of characteristics of a complex system. Even if the measurement is accurate—and it never is—a handful of numbers can’t fully capture the complexity. That’s why much research is simply wrong, and all research is incomplete.

Teach people to (mostly) ignore point estimates. A point estimate is almost always a simple answer to a complicated question. If the question matters, that’s not good enough. Ideally, the answer to our question would involve probability distributions and confidence intervals. This is different, by the way, from reporting a series of point estimates. Again, it is impossible to generate credible point estimates without a credible understanding of the underlying distribution(s). Of course, we often don’t know much about the underlying distribution. That’s too bad, and all we can do is admit our ignorance. But we should fight like crazy to keep the point estimate from becoming the headline.

Teach yourself to become more than a scientist. Economists can safely ignore taunts about how we all suffer from “physics envy.” That tiresome cliché never had much substance. We need to worry about science envy. It’s true that much of what we do can quite properly be described as science. We formulate and then test hypotheses using the same rules of logic and standards of proof as most other sciences. That’s a good thing. We’re all struggling to understand reality, and the scientific method forces us to be honest with each other and more importantly, honest with ourselves.

But we’re not studying atoms or molecules or cells. We’re studying humans. That means we have to struggle with human nature. Now maybe you believe that human nature is just another kind of nature and that nature follows certain laws that only science can describe. Understand the laws of nature and you can understand human nature. Who knows, you might be right. Maybe someday scientists will have the final say about who we are.

But long before humans invented science, humans struggled to understand themselves. The legacy of that struggle is everywhere to be seen—in history, art, religion, and the gritty details of everyday life. If you ignore that legacy, you cut yourself off from an incredible source of insight and inspiration.

This is certainly the most remarkable crisis any of us have seen. All of us are confused but we’re reacting in different ways. Some are sheltering in the same intellectual places they’ve always lived. If they believe in the power of the government to moderate shocks, they want more government. If they believe in markets, freedom and individual autonomy, they want more of that. Others, though, are studying new things and thinking about the world in a different way. I’ve been impressed by how quickly some of the brightest minds in our discipline—people like Daron Acemoglu, Paul Romer, Glen Wyle, John Cochrane and their co-authors—have integrated the insights from epidemiology, virology, and other disciplines into their economic analysis.

But why stop there? Why not look outside of science for help in answering economic questions? Historians have been studying the Spanish flu for 100 years. How many of us have looked at any of this literature? If economists are to evaluate competing policies, we have to think about the value of human life and the duty we owe to others. Theologians have been thinking about those things for a very long time. But how many of us have read the great religious texts?

That’s my list. I think it’s good advice for me. We’ll see how well I can follow it. Let me know if it works for you.

Footnotes

[1] “‘Job one has to be save lives’: Cuomo implores Trump not to rush toward reopening the economy at the expense of human life,” by John Haltiwanger. Business Insider, March 24, 2020.

[2] “New Data Suggest the Coronavirus Isn’t as Deadly as We Thought: A study finds 50 to 85 times as many infections as known cases—meaning a far lower fatality rate,” by Andrew Bogan. Wall Street Journal, Apr. 17, 2020.