Friday, June 20, 2014

Accounting vs. Economics

I've never been a big Scott Sumner follower, but I read something he wrote earlier this month and I haven't been able to get it out of my head.

Here's a common theme I see. Most liberals prefer to think like accountants, not economists. The dismal science focuses too much on the "no free lunch" concept. The idea that there are trade-offs, that incentives affect behavior. The idea that making failure less costly, also makes it more likely to occur.

That was a huge eureka moment for me. A few days after I read that I attended a left-wing anti poverty conference for work. I wasn't impressed with the framing most of the issues received, and I felt like Scott Sumner was yelling in my ear the whole time. The policies they advocated assumed a static world, where people will keep doing what they're doing now ever after new policies are introduced that will change their incentives.

For example, the minimum wage was introduced as a way to help the impoverished. It came up over and over again as a basic transfer of wealth from the business owners to workers. There was zero pushback, such as concerns about jobs being cut, people with more impressive resumes taking the jobs away from unskilled poor workers or price increases that will harm poor consumers. They simply assumed a static world, except with money moving from one pile to another.

Frédéric Bastiat famously wrote:

There is only one difference between a bad economist and a good one: the bad economist confines himself to the visible effect; the good economist takes into account both the effect that can be seen and those effects that must be foreseen.

Sumner did not call liberal economists bad economists. In fact, he praised them for coming around in the 1990s and championing market-based policies - something left wing economists still embrace. Instead, he was talking about the left in general.

It's normal for non-economists to have terrible, warped view on economic matters. It is the default, sadly. But what's troubling here is the way progressives attempt to mettle with economic matters by treating it as a series of accounting issues. They don't seem to realize that their attempts at moving money around changes the way people behave, and it explains why so many of their policies don't work as planned.

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