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Steven Rhoads’s book, “The Economist’s View of the World”

About 15 years ago I ran across this book and read it, just for fun. Rhoads is a (nonquantitative) political scientist and he’s writing about basic economic concepts such as opportunity cost, marginalism, and economic incentives. As he puts it, “welfare economics is concerned with anything any individual values enough to be willing to give something up for it.”

The first two-thirds of the book is all about the “economist’s view” (personally, I’d prefer to see it called the “quantitative view”) of the world and how it applies to policy issues. The quick message, which I think is more generally accepted now than in the 1970s when Rhoads started working on this book, is that free-market processes can do better than governmental rules in allocating resources. Certain ideas that are obvious to quantitative people–for example, we want to reduce pollution and reduce the incentives to pollute, but it does not make sense to try to get the level of a pollutant all the way down to zero if the cost is prohibitively high–are not always so obvious to others. The final third of Rhoads’s book discusses difficulties economists have had when trying to carry their dollar-based reasoning over to the public sector. He considers the logical tangles with the consumer-is-always-right philosophy and also discusses how economists sometimes lose credibility on topics where they are experts by pushing oversimplified ideas in non-market-based settings.

I like the book a lot. Very few readers will agree with Rhoads on all points but that isn’t really the point. He explains the ideas and the historical background well, and the topics cover a wide range, from why it makes sense to tax employer-provided health insurance to various ways in which arguments about externalities have been used to motivate various silly (in his opinion, and mine) government subsidies. I also enjoyed the bits of political science that Rhoads tosses in throughout (for example, his serious discussion in chapter 11 of direct referenda, choosing representatives by lot, and various other naive proposals for political reform).

During the 25 years since the publication of Rhoads’s book, much has changed in the relation between economics and public policy. Most notably, economists have stepped out of the shadows. No longer mere technicians, they are now active figures in the public debate. Paul Volcker, Alan Greenspan, and to a lesser extent Lawrence Summers have become celebrities in a way that has been rare among government economic officials. (Yes, Galbraith and Friedman were famous in an earlier era but as writers on economics. They were not actually pulling the levers of power at the time that they were economic celebrities.) And microeconomics, characterized by Rhoads as the ugly duckling of the field, has come into its own with Freakonomics and the rest.

Up until the financial crash of 2008–and even now, still–economists have been riding high. And they’d like to ride higher. For example, a few years ago economist Matthew Kahn asked why there aren’t more economists in higher office–and I suspect many other prominent economists have thought the same thing. I looked up the numbers of economists in the employed population, and it turned out that they were in fact overrepresented in Congress. This is not to debate the merits of Kahn’s argument–perhaps Congress would indeed be better if it included more economists–but rather to note that economists have moved from being a group with backroom influence to wanting more overt power.

So, with this as background, Rhoads’s book is needed now more than ever. It’s important for readers of all political persuasions to understand the power and generality of the economist’s view. Rhoads’s son Chris recently informed me that his father is at work on a second edition, so I pulled my well-worn copy of the first edition off the shelf. I hope the comments below will be useful during the preparation of the revision.

What follows is not intended as any sort of a review; it is merely a transcription and elaboration of the post-it notes that I put in, fifteen years ago, noting issues that I had. (In case you’re wondering: yes, the notes are still sticky.)

– On page 102, Rhoads explains why economists think that price controls and minimum wage laws are bad for low-income Americans: “It is striking that there is almost no support for any of these price control measures even among the most equity-conscious economists. . . . The real issue is, in large measure, ignorance.” This could be, but I’d also guess (although I haven’t had a chance to check the numbers) that price controls and minimum wage are more popular among low-income than high-income voters. This does not exactly contradict Rhoads’s claim–after all, poorer people might well be less well informed about economic principals–but it makes me wonder. The political scientist in me suspects that a policy that is supported by poorer people and opposed by richer people might well be a net benefit to people on the lower end of the economic distribution. Rhoads points out that there are more economically efficient forms of transfer–for example, direct cash payments to the poor–but that’s not so relevant if such policies aren’t about to be implemented because of political resistance.

Later on, Rhoads approvingly quotes an economist who writes, “Rent controls destroy incentives to maintain or rehabilitate property, and are thus an assured way to preserve slums.” This may have sounded reasonable when it was written in 1970 but seems naive from a modern-day perspective. Sure, you want a good physical infrastructure, you don’t want the pipes to break, etc., but what really makes a neighborhood a slum is crime. Rent control can give people a stake in their location (as with mortgage tax breaks, through the economic inefficiency of creating an incentive to not move). There might be better policies to encourage stability–or maybe increased turnover in dwellings is actually preferable–but the path from “incentives to maintain or rehabilitate property” and “slums” is far from clear.

– On page 139, Rhoads writes: “Most of the costs of business safety regulation fall on consumers.” Again, this might be correct, but my impression is that the strongest opposition to these regulations come from business operators, not from consumers. Much of this opposition perhaps arises from costs that are not easily measured in dollars: for example, filling out endless forms, worrying about rules and deadlines. This sort of paperwork load is a constant cost that is borne by managers, not consumers. Anyway, my point is the same as above: as a political scientist, I’m skeptical of the argument that consumers bear most of the costs, given that business operators are (I think) the ones who really oppose these regulations. I’m not arguing that any particular regulation is a good idea, just saying that seems naive to me to take economists’ somewhat ideologically-loaded claims at face value here.

– On page 217, Rhoads quotes an economics journalist who writes, “Through its tax laws, government can help create a climate for risk-taking. It ought to prey on the greed in human nature and the industriousness in the American character. Otherwise, stand aside.” I have a few thoughts on these lines which perhaps sound a bit different now than in 1980 when they first appeared. Most obviously, a natural consequence of greed + industriousness is . . . theft. There’s an even larger problem with this attitude, though, even setting aside moral hazard (those asymmetrical bets in which the banker gets rich if he wins but the taxpayer covers any loss). Even in a no-free-lunch environment in which risks are truly risky, why is “a climate for risk-taking” supposed to be a good thing? This seems a leap beyond the principles of economic efficiency that came in the previous chapters, and I have some further thoughts about this below.

– On page 20, Rhoads criticizes extreme safety laws and writes, “There would be nothing admirable about a society that watched the quality of its life steadily decline in hot pursuit of smaller and smaller increments of life extension.” He was ahead of his time in considering this issue. Nowadays with health care costs crowding out everything else, we’re all aware of this tradeoff as expressed, for example, in these graphs showing the U.S. spending twice as much on health as other countries with no benefit in life expectancy. It turned out, though, that the culprit was not safety laws but rather the tangled mixture of public and private care that we have in this country. This example suggests that the economist’s view of the world can be a valuable perspective without always offering a clear direction for improvement.

Another example from Rhodes’s book is nuclear power plants. Some economists argue on free-market grounds that the civilian nuclear industry should be left to fend for themselves without further government support while others argue on efficiency grounds that nuclear power is safe and clean and should be subsidized (see p. 230). Ultimately I agree with Rhoads that this comes down to costs and benefits (and I definitely think like an economist in that way) but in the meantime there is a clash of the two fundamental principles of free markets on one side and efficiency on the other. (The economists who support nuclear power on efficiency grounds cannot simply rely on the free market because of existing market-distorting factors such as safety regulations, fossil fuel subsidies, and various complexities in the existing energy supply system.)

– Finally, when economists talk about fundamental principles, they often bring in their value judgments for free. For example, on page 168 Rhoads quotes an economics writer who doubts that “we need the government to subsidize high-brow entertainment–theater, ballet, opera and television drama . . . Let people decide for themselves whether they want to be entertained by the Pittsburgh Steelers or the local symphony.” Well, sure, we definitely don’t need subsidies for any of these things. The question is not of need but rather of discretionary spending, given that money is indeed being disbursed as part of the political process. But what I really wonder is: what does this guy (not Rhoads, but the writer he quotes) have against the local symphony? The Pittsburgh Steelers are already subsidized! (Everybody knows this. I just did a quick search on “pittsburgh steelers subsidy” and came across this blog by Skip Sauer with this line: “Three Rivers Stadium in Pittsburgh still was carrying $45 million in debt at the time of its demolition in 2001.”)

I hope that in his revision, Rhoads will elaborate on the dominant perspectives of different social science fields. Crudely speaking, political scientists speak to princes, economists speak to business owners, and sociologists speak to community organizers. If we’re not careful, we political scientists can drift into a “What should the government do?” attitude which presupposes that the government’s goals are reasonable. Similarly, economists have their own cultural biases, such as preferring football to the symphony and, more importantly, viewing risk taking as a positive value in and of itself.

In summary, I think The Economist’s View of the World is a great book and I look forward to the forthcoming second edition. I think it’s extremely important to see the economist’s perspective with its strengths and limitations in a single place.

10 Comments

  1. Chris says:

    I'm so glad this book is getting some attention. I noticed it in a footnote to Fukuyama's book on neoconservatism, where he calls it a rare example of a productive critique and discussion of economics, and I think it certainly succeeds at that.

    It really deserves a wider audience (to make both economists and non-economists aware of their blinkers), and I'm delighted that it's being updated.

  2. Frank says:

    Sounds like an interesting book.

    Regarding health care…some economists think R&D will continue to produce great improvements (UChicago's Murphy and Topel, 2005/6) http://faculty.chicagobooth.edu/kevin.murphy/teac… The US may do most of the spending (and do it poorly, through its “tangled mess'' of a system, and fail to capture the good externalities of that spending on other countries), but the authors still find it worthwhile (in their model).

    I think most economists would agree that nuclear power safety regulations are a distortion that corrects for the market's insufficient provision of safety. Nuclear power firms only have limited liability, and their managers have only short-term interests; they don't take into account the full costs of unsafe facilities.

  3. http://models.street says:

    In several places you make the argument that costs may not be born by certain people based on the fact that it is different people who argue against them the most. I think this can be explained primarily by awareness and not by the magnitude of the cost.

    For example, the lawn-care person making $8/hr argues for a minimum wage of $10 an hour because he believes that then he will be making $10/hr not really realizing that in fact he might very probably be unemployed at that wage.

    Business managers argue against "excessive" safety regulations because they deal with them every day. They say to themselves "in the absence of these regulations we would save 3% of our overhead therefore making 3% more money". But in reality, in the absence of the regulations, they and their competitors would reduce their prices by 2.8% so they would only be making 0.2% more but consumers would be paying 2.8% less, in other words the consumers are paying for the regulations.

    That sort of short-sighted thinking which leads to the strong opposition or support is great for decision making (it's the "greedy optimization algorithm" of the market allowing people to make everyday decisions relatively efficiently without a gigantic dynamical mathematical model to determine whether they should buy toilet paper in bulk or not) but it's not very good for explaining the global outcome, that is where economists at least look at the picture in the right way if not always with the right quantitative predictions.

  4. Andrew Gelman says:

    Dan:

    You might be right. But I think the argument needs to be made. For example, "Even though rich people favor policy X and poor people oppose it, policy X is actually better for the poor than the rich…" It might be correct but I think public opinion should be acknowledged, because it's a tougher argument if you also have to argue why people are wrong on it.

  5. Malcolm says:

    Apologies for quoting a (partisan) secondary source, but apropos the effects of a minimum wage…

    http://bilbo.economicoutlook.net/blog/?p=13520

    "In the face of the mounting criticism and empirical argument, the OECD began to back away from its hard-line Jobs Study position. In the 2004 Employment Outlook, OECD (2004: 81, 165) admitted that “the evidence of the role played by employment protection legislation on aggregate employment and unemployment remains mixed” and that the evidence supporting their Jobs Study view that high real wages cause unemployment “is somewhat fragile.”

    Then in 2006, the OECD Employment Outlook entitled Boosting Jobs and Incomes, which claimed to be a comprehensive econometric analysis of employment outcomes across 20 OECD countries between 1983 and 2003 went further. The study sample for the econometric modelling included those who adopted the Jobs Study as a policy template and those who resisted labour market deregulation. The Report revealed a significant shift in the OECD position. OECD (2006) found that:

    * There is no significant correlation between unemployment and employment protection legislation;
    * The level of the minimum wage has no significant direct impact on unemployment; and
    * Highly centralised wage bargaining significantly reduces unemployment."

  6. Steve Sailer says:

    "For example, a few years ago economist Matthew Kahn asked why there aren't more economists in higher office–and I suspect many other prominent economists have thought the same thing."

    Well, former economics professor and current head of the IMF Dominique Strauss-Kahn was a frontrunner to be elected President of France next year.

  7. OneEyedMan says:

    Simply comparing spending on health with life expectancy is not a good way of measuring effectiveness because the background hazards are different. If you exclude fatal injuries, Americans have the longest lifespan of the OECD countries.
    http://www.commentarymagazine.com/article/the-wor

    Factor in the ability to save earlier preemies, less exercise, and diet and the results might be starker.

  8. Friedrich von Blowha says:

    The whole intellectual failing of modern economics would seem to me to lie in its inability to internalize the overwhelming importance of public policy to economic outcomes. The recent recession (and its ongoing aftermath) have underlined that in modern America the most important factor in business success is not wisdom, strategic insight, innovation, etc., but merely favorable public policy. We live in a world where him that sets the rules gets the gold. Does anyone still think the Federal Reserve as it drives up the S&P while ignoring extraordinarily high unemployment is really motivated by some conception of the 'public good' as opposed to being a form of corporate welfare for the currently existing financial services industry (and its largest corporate clients)? Is it an accident that the most heavily rescued/subsidized industries in America over the past decade — healthcare and financial services — are also the number 1 and number 2 sources of campaign contributions and lobbying expenditures? The reinforcing reflexive connection between a political process that determines policy via "auction" (with bids submitted via campaign contributions and lobbying) and consequent business success seems not at all well incorporated into current economic thought. Perhaps even more glaringly, the economics profession is itself deeply embedded in this control-of-public-policy-for-private-gain dynamic. After all, where would economics be without the notion that it is possible for the government to 'manage' the macro-economy financially (thus inevitably politicizing the business world)? Yet despite this, economists endlessly proclaim the virtues of 'the market' while knowing full well about all the governmental processes that are available to boost the fortunes of the well connected (Federal reserve loans, intellectual property protection, public subsidies, favorable regulatory treatment etc., etc.) This sums up to a political position known as corporatism, or, in its cruder variant, fascism. I know of few economists who own up frankly to being corporatist or fascist, but it would seem this type of honesty about their agenda would be valuable in evaluating their policy proposals. It is, however, sadly lacking in a group that seems to prefer to delude itself that is is a sort of secular priesthood.

  9. James says:

    "Similarly, economists have their own cultural biases, such as preferring football to the symphony and, more importantly, viewing risk taking as a positive value in and of itself"

    Huh? Every economist I know of would, while their economist hat is on, be neutral about the entertainment and risk preferences of others. I have heard economists explain that "risk-taking" is a terrible way to define entrepreneurship.

  10. Robert Bell says:

    Andrew: Thanks for the post, a great find.

    I agree with you that you could characterize the "economist's view" as a sort of quantitative view, or perhaps a view described by an explicit model of rational self-interested actors. I think there are a couple of really valuable payoffs to this approach. The first is that almost any policy decision may involve multiple effects operating in different directions (e.g. a minimum wage may increase income for those who have a job, and decrease income for those who don't, or who lose their job as a result of the minimum wage). A model can help tease out the relative magnitude of those effects. The second is that such models give us a useful null hypothesis for comparison, as in the studies of simple linear classifiers versus expert judgment.

    I think the downside of the economist's view is the treatment of the psychology of actors as rational self-interested lifetime utility maximizers. So the idea of an economic model as *the* quantitative description of the world is very misleading. Rather it is merely *one possible* description, that may or may not be empirically tenable depending on how people actually behave.