Obviously economics is about more than public policy. But to me it seems to be mostly about public policy, and I’d be interested in your thoughts about whether I am right. Let’s approach this in a roundabout fashion. I just finished Tyler Cowen’s new book (which is excellent–highly recommended) and noticed this claim (p. 222):
We [economists] still haven’t dispensed with models, because there are a few models we believe in pretty strongly, such as that when price goes up, people usually buy less of that good or service . . .
I don’t think that’s true. Never reason from a price change. Perhaps Tyler saw me looking over his shoulder, and hence the complete sentence is:
We [economists] still haven’t dispensed with models, because there are a few models we believe in pretty strongly, such as that when price goes up, people usually buy less of that good or service, all other things being held equal.
OK, am I happy now? No, I still think it’s wrong. Recall that every transaction is two-sided. When someone buys something, someone else sells something. So when you describe the quantity of something purchased changing, you are also describing the quantity of something sold changing. Let’s re-word Tyler’s claim into something exactly equivalent:
We [economists] still haven’t dispensed with models, because there are a few models we believe in pretty strongly, such as that when price goes up, people usually sell less of that good or service, all other things being held equal.
If Tyler had said this, I believe some eyebrows would have been raised. But Tyler did say this! It’s not easy to avoid reasoning from a price change. So how should he explain this concept to the public? How about this:
We [economists] still haven’t dispensed with models, because there are a few models we believe in pretty strongly, such as that when price goes up, people usually have a lower quantity demanded of that good or service, all other things being held equal.
That’s true, but since it’s impossible to directly observe “quantity demanded,” it’s sort of a weak claim. Don’t we want to show non-economists some sort of claim that can be directly observed? OK, how about this:
We [economists] still haven’t dispensed with models, because there are a few models we believe in pretty strongly, such as that when a frost destroys 90% of the orange crop, people will buy fewer oranges, all other things being held equal.
Yes, that’s true, but it’s also obvious. Supply changes. If there are 90% fewer oranges, it stands to reason that people will consume fewer oranges. It’s so obvious that it won’t even strike non-economists as a “model.”
So let’s do a supply shift that doesn’t obviously reduce the quantity of oranges available:
We [economists] still haven’t dispensed with models, because there are a few models we believe in pretty strongly, such as that when a tax is placed on a good, people will buy fewer of that good, all other things being held equal.
Finally we have something that is both true and observable and also non-trivial. And it’s a public policy issue. Here are some more public policy claims:
1. Increasing the money supply will raise all wages and prices by the same proportion, in the long run.
2. Increasing the money supply growth rate will raise nominal interest rates in the long run.
3. Rent controls will lead to housing shortages.
4. People should be allowed to sell a kidney.
5. Higher tax rates might lead to less government tax revenue.
6. A higher legal minimum wage might hurt low income workers.
7. Mandating certain employment benefits might hurt workers.
8. Mandating higher product quality, or lower service fees, might hurt consumers.
9. Taxes are a more effective deterrent to pollution that regulations.
10. Income from capital should not be taxed at all.
11. Congestion fees are often better than building new roads.
12. Trade barriers hurt the country that imposes them.
13. If an orgy of debt-fueled borrowing leads to a bubble that bursts, the government should borrow dramatically larger amounts during the subsequent recession.
Put aside the question of whether you agree with these claims. I agree with most but not all. The fact remains that these are the sorts of claims that economists make. And they are all about public policy. There are also interesting claims about issues unrelated to public policy, but in my view they are much fewer. What do you think?
Tyler tried to make a claim unrelated to public policy, and fell short. I wonder if it is because economics is so focused on public policy issues that we are not used to making those sorts of non-policy claims.