Sunday, 18 December 2016

How wrong may we be?



Consider these propositions:
1.        Mandatory licensing of professional services increases the prices of those services.
2.        Overall, the standard of living is higher today than it was 30 years ago
3.        Rent control leads to housing shortages.
4.        Third World workers working for American companies overseas are not exploited.
5.        Free trade does not lead to unemployment
6.        Minimum wage laws raise unemployment
Do you think they are true or false?


There is a strong and wide consensus among economists that these propositions are all true. Yet according to a recent research[1] non-economists tend to get these, and a further 15 economic propositions, wrong. Moreover, there is a significant difference in what proportion of people get them wrong on the left and the right. Roughly 60% get them wrong on the left whereas roughly 20% get them wrong on the right. Nor is this a matter of economists ideological bias, since the average economist is slightly on the left, and in any case, the propositions chosen are ones for which the consensus spans from left wing to right wing economists.

Clearly economic facts are important for political decision making and false beliefs about those facts are likely to result in bad policies. Given that in a democracy the rule of the political class is somewhat tuned to our approval, if we have false economic beliefs we are likely to approve of policies which we would not approve of give true economic beliefs. Furthermore, because policy and law are imposed on us all by coercion, our misplaced approval and disapproval has (indirectly) bad effects on others. 

So an important question arises of how wrong, that is to say, how much in error, is it permissible for our economic beliefs to be and how wrong is it to be in error. Given our general ignorance of economics, I suspect that most of us are massively overconfident in our economic beliefs and the our overconfidence is a significant wrong because of the harm it contributes to. 

Take only the minimum wage law: we tend to think this is good because we think of the people whose wages are increased. Politicians bluster about a living wage leads us to ignore the jobs that are lost and that are never created because they are not productive enough to be paid the minimum wage. These are jobs that the least skilful and the poorest among us would have were it not for the minimum wage law. We also know that for such individuals who are young and perhaps have done poorly at school, a low paying job may be an important first stepping stone into the employment market, giving them job specific training that can increase their productivity and thereby lead them to better paid work. A minimum wage law removes that stepping stone. The numbers of people harmed here may not be a large proportion of the working population. Nevertheless, the minimum wage law benefits a similar proportion who are just slightly more able at their expense. So the law is capriciously harmful and discriminatory. It harms the most economically vulnerable in the population.

The politicians who advance minimum wage laws bear the largest part of the blame for this harm, since I believe they know that the laws are harmful but advance them anyway in pursuit of their interest in remaining in power. Nevertheless, I doubt very much that we would have such a law were it not that very many people have overconfident false beliefs about minimum wage laws. Were they not overconfident the politicians promoting such laws would not easily survive the exposure of the truth about them and hence we would not have the laws. So our overconfidence is harmful and thereby wrong.

Originally at http://blog.practicalethics.ox.ac.uk

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