We all make the error of confidently saying that this or that governmental policy is certain to have this or that effect. But while studying history and economics is important, perhaps a little humility is in order.
I have told you that I am a fan of Russ Roberts’s Econ Talk podcast. Today I listened to one in which the guest questioned whether people can confidently use economic (and other social science) theory to confidently predict the effects on human behavior of changing certain variables. Do we truly know that a stimulus is going to increase GDP . . . or that it is not?
The hour-long podcast summarizes concepts in a denser and more complex book. I’m going to dumb it down even further and summarize three or four of the points the guest made that stuck in my head. I’ll do so over a series of posts, so let’s start with a single observation that is central to the guest’s thesis.
Essentially, the guest distinguished social sciences from hard sciences that give one the ability to make consistent non-obvious predictions about the future. One example he gave to make the point:
[I]magine you are the President of the United States and you are receiving, you are considering an Iranian nuclear weapons program, what to do about it.
And into the room walks your science advisor and she says: Look, if the Iranians take the following amount of physical material and combine it in this size and using this method, it will create an explosion big enough to blow up the city.
And next into the room comes an historian. And the historian says: Well, you know, if an attempt to subvert the Iranian nuclear weapons programs, my reading of the history of Iran is that the people will want this enough they will continue to replace, one way or another, the government until this happens. So it really is not a good idea to try and stop this.
And what I say is, no, even if this happens to be President Carter, trained as a nuclear engineer, even if you know nuclear physics, for the President to sit there and begin debating the empirically validated laws of physics with his physics advisor is kind of foolish. On the other hand, not debating the historian, not bringing in different historians of different points of view, talking to people who have lived in Iran, personal introspection about human motivations, would be equally foolish.
And so really you ought to treat the prediction made by the physicist very different from the one made by the historian. Both are very valuable. I would never advise taking action without listening to both those. People make lots of use of historian experts and non-historians make lots of useful predictions about this situation.
And then imagine, third, his economic advisor walks into the room. And she says: Well, you know, the CIA has a program to counterfeit currency in Iran. And this amount of currency will create this amount of inflation and unemployment. The question I pose is: Should you as the President treat the economist’s prediction more like the historian’s prediction or more like the physicist’s prediction? And what I say is: A lot more like the historian’s prediction.
Economics is not hard science like physics. It’s more like history. There are too many complex variables to make consistent predictions about exactly how changing one variable will affect the economy.
This, by the way, is why I tend to oppose any government intervention in the economy. There are so many documented examples of unintended side effects that I think it’s best to leave a complex system to the distributed intelligence of the nation and indeed the world, rather than trust a group of supposedly smart guys in a room with their hands on the financial levers. The more humility you have, the less apt you are to opt for the government solution.
The big government guys are the arrogant ones. We free marketeers believe in the market precisely because we don’t think we know everything.
UPDATE: It’s also worth noting, as I have noted many times, that capitalism is the only economic system fully compatible with freedom. My comments about supporting capitalism in this post are made in the context of discussing what economic system is most likely to work. But freedom is an independent reason for supporting capitalism. Everyone who regularly reads my blog understands this.