Smithian and Anti-Smithian Economists


powered by Surfing Waves

Economics began with a brilliant debunking of fallacies embraced both by the man-in-the-street and by the minister-in-the-royal-court. Chief among these fallacies is the notion that the people of a country are enriched if their government compels them to export more to – and to import less from – foreigners. In An Inquiry Into the Nature and Causes of the Wealth of Nations, Adam Smith famously exposed the absurdity of this mercantilist delusion.

As Smith correctly observed, people are more prosperous the greater is their access to those goods and services that they, by their own individual spending choices, reveal to be ones that contribute best to their standard of living. The subsidization of exports is nothing but the home-country government forcing its own citizens to divert some of their spending into paying for part of what is consumed by foreigners. Therefore, export subsidies clearly make most people in the home country poorer.

Similarly, the imposition of protective tariffs is nothing but the home-country government coercively reducing its own citizens’ access to goods and services. The only plausible consequence of such tariffs is a decline in the prosperity of home-country citizens.

For nearly 250 years, most economists have repeatedly conveyed, in countless variations, this Smithian insight to the general public. And yet members of the general public continue to believe that they are enriched the harder their government forces them to work to supply foreigners with goods and services, and impoverished if they are offered by foreigners a greater abundance of goods and services.

One reason for the persistence of this strange belief is that most people simply don’t spend the ten or so minutes required to understand why it is mistaken. Another reason is that politically powerful producers have a material interest in perpetuating this false belief. But also at work is a third reason – namely, a handful of economists stand ready to distinguish themselves from most of their fellow economists by describing theoretically possible scenarios in which export subsidies and import tariffs can, if just the right circumstances prevail, yield positive results for the home country.

Home-country producers who stand to gain from subsidies and tariffs, of course, are thrilled to trumpet the work of such economists. Ditto both for politicians who enjoy power, and for ideologues eager to justify government intervention.

The result is a division within the economics profession. In the case of trade policy, most economists continue to endorse free trade. But no small number of economists make names for themselves by spinning theoretical justifications for protectionism. This latter group of economists – let’s call them “anti-Smithians” – essentially attempt to explain why the man-in-the-street (and the minister-in-the-royal-court) were correct all along. While the man-in-the-street might not understand why his intuitive hostility to free trade is correct, anti-Smithian economists are there to help him with catalogues of clever theoretical justifications.

Economic reality being complicated, it’s nearly always true that a set of conditions can be imagined under which outcomes that are highly improbable in reality can be shown to be possible. Conditions can be described under which, in reality, it’s possible for protective tariffs or export subsidies to result in greater prosperity in the home country. Yet such conditions are wholly implausible.

Possibility, be aware, is a very weak standard. Almost every outcome that is possible – such as you surviving a fall off of a skyscraper because you luckily land in a huge drift of freshly fallen snow – will never occur. And so just because some outcome is possible doesn’t mean that it’s plausible. Furthermore, just because some outcome is plausible doesn’t mean that it’s probable.

One skill possessed and exercised by competent economists is the ability to distinguish the plausible from the possible, and the probable from the plausible. These economists understand that the best public policy is that which is guided by what is probable. They also understand the danger of any policy imposed in the hope of some improbable possibility coming to pass.

Anti-Smithian economists – those who specialize in finding reasons to assure the man-in-the-street that his untutored economic instincts are correct after all – are at work in areas other than trade policy. Any economic superstition that is popular with the untutored man-in-the-street is sure to have at least a handful of professional economists hard at work explaining why good economists such as Milton Friedman are mistaken to reject this superstition, and why he, the untutored man-in-the-street, is spot-on correct to embrace it.

History’s most famous economist to make his mark by rejecting sound economics and conjuring rococo theoretical justifications for man-in-the-street superstitions is John Maynard Keynes. The man-in-the-street understands that he’ll be rendered unemployed if consumer demand for his employer’s output falls sufficiently. The man-in-the-street then leaps from this correct understanding to the incorrect conclusion that the root cause of economy-wide unemployment is inadequate consumer demand. Based on this faulty understanding, the man-in-the-street further concludes that an easy cure for economy-wide unemployment is more spending by government. Seems simple.

Economists since Adam Smith worked hard to debunk this false belief. But in the midst of the Great Depression, along came Keynes. Keynes did indeed have genius, but in my opinion it wasn’t as an economist. Keynes’s genius was in spinning highly implausible, but impressive-enough appearing, theoretical justifications for the man-in-the-street belief.

Anti-Smithian economists are also hard at work to reassure the man-in-the-street that he is correct to believe, contrary to the teaching of most economists, that minimum wages benefit all low-wage workers. The man-in-the-street supports minimum-wage legislation because he supposes that the coerced higher wages are simply paid out of excess profits reaped by exploitative employers, or that employers pay these higher wages simply by raising the prices at which they sell their outputs, with no further consequences.

Basic economics is clear that government-imposed minimum wages, by artificially increasing the cost to employers of low-skilled workers, causes some jobs for these workers to be eliminated, and causes other jobs for these workers to become more onerous. In short, minimum wages harm many of the very workers who are meant to be helped.

But minimum wages are popular with the untutored man-in-the-street, as well as with the typical pundit-in-the-opinion-pages. And because markets pluckily supply all demands, the demand for theoretical excuses to support minimum wages is met by a supply of such excuses from anti-Smithian economists.

Every undergraduate econ major learns by her junior year how to draw a graph depicting a minimum wage having only positive, and no negative, effects on low-skilled workers. And if well-taught, this econ major also learns that the conditions under which such a graph describes reality are highly implausible. But no matter. Because the public’s desire to believe in the goodness of minimum wages is so intense, the supply is ample of anti-Smithian economists willing to satisfy this desire – willing to assure the man-in-the-street that his utter ignorance of economics is, in fact, economic brilliance.

Note that I don’t here accuse anti-Smithian economists of being insincere or, worse, mercenary. I don’t think that they are. My accusation instead is that as economists they are sincerely unwise.

Smithian economists – those who research, write, and teach in the tradition begun by Adam Smith – make their livings by exposing the many economic fallacies embraced by the man-in-the-street and peddled by vote-hungry politicians and click-crazy pundits. These economists will never want for work. The reason is that they are opposed by anti-Smithian economists whose give to the man-in-the-street seemingly credible assurance that each and every one of his untutored instincts about the economy reflect his genius.

Being myself a Smithian economist, perhaps I should be grateful to my anti-Smithian colleagues for sustaining a high demand for my services. Perhaps. But I’d prefer that all economists worked, as did Adam Smith, to debunk man-in-the-street fallacies rather than to prop them up.



* This article was originally published here

powered by Surfing Waves

HELP STOP THE SPREAD OF FAKE NEWS!

SHARE our articles and like our Facebook page and follow us on Twitter!




Post a Comment

0 Comments