Are economists - even when they are right - guilty of ignoring people’s real experiences?
I ask because of the row over business rates. Some businesses face a big increase in these. To this, it’s tempting for economists to point out the incidence of rates. This often falls not upon businesses themselves but upon landlords: higher rates lead to lower rents, which means that rates are in effect a cack-handed form of land tax. The IFS has said (pdf):
Much of the burden of business rates is passed on from the occupiers of non-domestic properties to the properties’ owners (if different), via reductions in the properties’ market rental values.
I believe this. But I sympathize with business owners who aren’t convinced. The question is: how is the burden passed on? One way is through rents being renegotiated – a process which favours bigger businesses against smaller landlords. Another way is by firms moving to cheaper premises, or threatening to do so. Even the latter entails costs – of researching rents on plausible premises and being distracted from the tough day-to-day job of running your business.
Even in cases where the burden of rates is passed onto landlords, business owners suffer hassle. Talk about tax incidence – even if it is true – underplays this hassle. Economists’ analysis of comparative statics overlooks the human difficulties of moving from one outcome to the other. Real life is lived in time lags and in disequilibria.
Rates are not the only example of this. I suspect immigration might provide another. Here’s one study of how immigration affects natives:
Native Europeans are more likely to upgrade their occupation to one associated with higher skills and better pay, when a larger number of immigrants enter their labour market. They are also more likely to start a self-employment activity. As a consequence of this upward mobility their income increases or stays the same in response to immigration.
Again, I find this plausible. And again, it neglects the lived experience of those affected. Even those who make the upgrade well face a period of uncertainty: what job can I do? Will I get it? Will my business succeed? And so on.
Now, I stress here that I’m looking at cases where I believe economists to be more or less right. In other cases, some economists are guilty of a bigger error – of over-estimating the likelihood of a benign adjustment. Those who think that jobs lost because of the UK leaving the single market can be offset by ones created by more exports to Australia are making the same mistake Patrick Minford made in the 1980s when he supported pit closures on the grounds that redundant miners would find jobs as supermodels and astronauts*; they are over-stating people’s flexibility.
Instead, I’m making a point with a heavy heart – that even good, empirical economics can overlook real lived experience. Perhaps economists need more ethnography. This might be one reason (of several) why there is a big and regrettable chasm between economists and lay people.
* He didn’t use these examples, but he might as well have done.