Our Economic Illiteracy
“Economics,” wrote Henry Hazlitt, “is haunted by more fallacies than any other study known to man.”
True. No epoch is immune to the scourge of economic illiteracy.
Yet, we find ourselves in a moment of especially unprecedented economic ignorance. We’ve come a long way since the days of Hazlitt’s editorializing in the New York Times. In the 1930s, believe it or not, the Times held the line on economic orthodoxy in the face of emergent quackery.
Fast forward and here are but a few favorite examples of economic illiteracy, ripped from the headlines of our most prominent rags:
- Corporate greed causes inflation
- Price controls are an effective way of “controlling” said inflation
- The minimum wage is a free lunch to low-skilled workers
- Racial discrimination is costless to the discriminator
- China is “beating” us at trade
- Profits are a wealth “transfer” from consumers to producers
- Prices are arbitrary and “set” by sellers
- Rent control expands housing availability for the poorest
- Trade or immigrants “steal” domestic jobs
- Women earn less than men for performing the same work
- Capitalism degrades the environment
- Material standards of living are falling in industrialized societies
- Monopolists can charge whatever they want
- Our economy is positively bristling with said monopolists
- Socialism generates higher living standards and more equitable economic outcomes than capitalism
Where to begin? Each of these statements is demonstrably false—economists propounding them are in a small minority—yet each also boasts many fervent exponents, not to mention shrill Twitterati advocates and an apparent majority of the public.
Take the first vapid claim. It possesses all the analytical horsepower of an engineer proclaiming that a plane fell from the sky due to gravity. For those of us taking our cue from Moses or Solzhenitsyn, we believe greed is a constant running through the center of every human heart. And a basic causal principle holds that explaining variation (changing prices) by appealing to a constant (greed) is a scientific non-starter. The economic point of view directs our attention toward the constraints or opportunities which must have changed to allow for rising prices.
My favorite on this list is the claim about rent control—a recently resurgent policy. You’ll search high and low before finding an economist who believes rent control exhibits a tight link between intentions and outcomes. (For evidence of my claim, see this rent control poll of dozens of the world’s top economists).
And for good reason. Rent control generates a shortage—more people want housing units than there are units available. Housing isn’t special in this regard; we’d see the same outcome if oranges were compelled to sell for a penny a piece. This shortage throws open a Pandora’s Box of social pathologies that certainly no price control advocate intends. I’ll mention just two.
On the supply side, landlords seek to exploit the housing queue to their benefit. Like a careful grocery shopper sorting through the orange bin, the shortage enables landlords to become extra choosy. Unlike a careful grocery shopper, the selection criteria may expand to include arbitrary tenant characteristics like race, sex, or religious creed. Rent control doesn’t make anyone a racist (like greed, racism cuts through the human heart). But rent control does lower the costs of the prejudiced expressing their bigotry.
On the demand side, potential renters often devise clever schemes for nabbing an apartment before it’s occupied. Under rent control, apartments go like hot cakes. In New York City, applicants are known to search the obituaries. In post-WWII Paris, young women stalked the oldest, sickest residents they could find on the presumption that when one failed to appear at his favorite café a room had opened courtesy of the Grim Reaper.
In the long run, rent control devastates the housing stock as landlords are taken to the cleaners. Some owners set fire to their own buildings. Better to collect the one-time insurance payout than to be bled dry by the rent control ordinance. Others simply flee. The predictable result is that the low-income housing stock crumbles. Economist Assar Lindbeck speculated that rent control can be as effective a means of razing a city to the ground as is aerial bombing.
Meanwhile, the relative rate of return to investing in luxury apartments or condominiums, both exempt from rent control, begins looking more attractive. Entrepreneurs respond by redirecting their investments. The supply of high-end housing expands; rent control (can) provide a subsidy to billionaire Manhattanites.
I hesitate to mention it because I don’t want to give a politician the wrong idea, but economics does prescribe a straightforward recipe for boosting the housing supply. It’s simple: Place price ceilings on every other good—oranges, TVs, t-shirts, baby formula, doctors’ salaries—anything and everything but housing. Henceforth, entrepreneurs will invest in nothing but housing, dramatically increasing its availability. Of course, another option for policymakers is to slice through the forest of regulations which have shackled America’s housing supply.
With more colorful examples like these, my 2021 book, No Free Lunch: Six Economic Lies You’ve Been Taught and Probably Believe, pushes back against our culture’s increasingly dominant paradigm which sees society as so much Play-Doh for policymakers to mold.
The great economist Armen Alchian once observed, “Fortunately, societies have progressed despite almost universal ignorance of economic principles.” True.
I wonder, however, if ours hasn’t succumbed to a Gladwellian “tipping point.” After all, economic knowledge needn’t be explicitly articulated for the citizenry to possess a tacit, intuitive “horse-sense” about how the world works. To my mind, that’s been lost in recent years.
Alchian also rightly observed that “economic law cannot be suppressed by legislated law.” With the majority of U.S. citizenry evidently believing that economic reality can be repealed with the stroke of a pen, and substituted by legislative fiat, we may be on the brink of putting Alchian’s first claim to the test. Just how much economic ignorance is compatible with human flourishing?