The Big Econ Error
As a professor of economics, I feel obligated to publicly declare what I see as the biggest error that we economists promote to the world, using our authority as experts on economics. It is an error that we disseminate quite widely, and that substantially influences the world.
Economists’ most powerful conceptual tool is: supply and demand. It robustly explains a wide range of important phenomena, and also serves as an important normative benchmark. When simple supply and demand actually describes a market well, then gains from trade are maximized by letting markets do their thing with little interference.
There are two key facts near this:
Government, law, and social norms in fact interfere greatly in many real markets.
Economists have many ways to understand “market failure” deviations from supply and demand, and the interventions that make sense for each such failure.
Economists’ big error is: claiming that fact #2 is the main explanation for fact #1. This strong impression is given by most introductory econ textbooks, and accompanying lectures, which are the main channels by which economists influence the world.
As a result, when considering actual interventions in markets, the first instinct of economists and their students is to search for nearby plausible market failures which might explain interventions there. Upon finding a match, they then typically quit and declare this as the best explanation of the actual interventions.
The inadequacy and sloppiness of this process is easily discovered by digging just a bit further into such cases. Usually the evidence is weak for the particular market failure being a big issue there, and the actual interventions there and nearby are quite different from the ones recommended by econ theory. Furthermore, economists agree little on which failures best explain which interventions. Each seems to notice the inadequacy of other explanations, and so makes up their own new story on the spot.
It would be pretty easy to make this case clearly in a book length treatment. And in fact many books have made this case. There’s room for better written versions, but alas there seems to be very little demand for them. Most want to believe that our culture’s key interventions are sensible, and are reluctant to believe otherwise.
Yes, economists have a whole subfield of public choice that helps explain why interventions would be so often so far from sensible. But most economists who don’t study that field, and many who do, quickly default to assuming sensible interventions.
Some examples would drive your point home for those of us outside the field. Perhaps Professor Hanson has a book in the works?
I would explain #1 as being caused primarily by a desire for the market to behave differently. Most interventions don't happen because something is WRONG, but because somebody wants something else. Like right now people are complaining about high grocery prices, not because high grocery prices are unwarranted, but because they do not like it.
If I go to the store and find the shelf where the Oreos are completely empty, it is clear to me as someone with a moderate understanding of economics that demand is exceeding supply and the price of Oreos can be expected to go up until Nabisco can reliably increase production. But the average shopper complains that the stupid grocery store didn't order enough Oreos. When the store does restock, and the price goes up, the same shoppers will piss and moan that greedy corporate jackholes are price-gouging them. Then someone will write an article about record profits and shortages when the cost of production has barely gone up at all, but literally nobody asks "have people been eating a lot more Oreos lately?"
And if you make new price-gouging laws to interfere in the market WITHOUT asking that, you're gonna fuck things up. It's not a market failure when prices are high. It's only a failure when prices are IRRATIONALLY high, and I don't think people are even entertaining the idea that maybe the current prices are perfectly rational.