Tuesday, March 2, 2010

How to avoid discussing economics with the ignorant

In my previous post, I lamented against people who like to talk about economics, but can't be bothered to learn anything about it.

Economist David Henderson has termed this concept as "Do-it-Yourself Economics" and defined it as "firmly held intuitive economic ideas and beliefs which owe little or nothing to textbooks, treatises or the evidence of economic history."

It's not easy to spot these people. They aren't just the general public. As Henderson and Paul Krugman have said, they can be politicians, high-ranking civil servants, talking heads and academics.

Clearly a conversation with a common-sense economist/DIY economist/pop internationalist is destined to go nowhere. They are pretty confident in their economic expertise, despite a lack of relevant education. Unless you're good friends, it's probably best to avoid the subject with them entirely - but how do you know when you've got one?

I recommend the following test. Find a way to ask them if they know what comparative advantage is. This can be as subtle as a roundabout inquiry, or as blatant as a direct question.

Comparative advantage is crucial for understanding economics with any sophistication. When Greg Mankiw was asked what three economic concepts every American teacher should know, he listed comparative advantage, supply and demand and market failures.

Krugman once wrote, "If there were an Economist’s Creed, it would surely contain the affirmations 'I understand the Principle of Comparative Advantage' and 'I advocate Free Trade'." In his great essay "Ricardo's Difficult Idea," Krugman listed understanding of comparative advantage as the great divide between the world views of economists and non-economists.

"I believe that much of the ineffectiveness of economists in public debate comes from their false supposition that intelligent people who read and even write about world trade must grasp the idea of comparative advantage. With very few exceptions, they don't - and they don't even want to hear about it. "
Comparative advantage is the great chasm that separates the people who understand economics from those that don't. Imagine having a biology discussion with someone who has never heard of genes. The only difference is most intelligent people have heard of genes. Comparative advantage is sadly obscure.

That doesn't stop a lot of people from talking about who should get paid what and what jobs should be done where. Without comparative advantage, these opinions are painfully uninformed. Someone who does understands comparative advantage, however, will probably have an insightful view of economics and is worth listening to.

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