On misunderstanding economics

Most of us have long lamented the general public's lack of understanding of economics. A new paper by David Leiser and Zeev Kril sheds interesting light upon this.

The human mind, they say, "is not particularly equipped to think about economics":

People are remarkably poor at combining causal links into a system [and] are ill-equipped to cope with the aggregate effects of the individual decisions of many people...Thinking in terms of how an interlocking system of causal links produces an emergent outcome does not come naturally to laypeople.

This helps explain the bias against markets of which John Rentoul and Bryan Caplan have complained: because people underestimate the tendency of emergent processes to produce benign outcomes, demands for price and rent controls are stronger than most economists think they should be.

Faced with this complexity, say Leiser and Krill, people resort to metaphors - the most notorious being that governments should manage the public finances as if it were a household. Worse still, they are often overconfident about the applicability of these metaphors. Both of these habits were encapsulated by the silly BBC Question Time audience member who was so ably corrected by Yanis Varoufakis.

There is, though, another heuristic laypeople use, which Leiser calls the "good begets good heuristic" (pdf). He shows that people believe that good things cause good things to happen, and bad things to cause bad things. For example, they think a rise in unemployment is associated (pdf) with a rise in inflation because both are bad - in contradiction of the standard economists' belief in a short-term Phillips curve.

Such a belief, whilst irrational, is not always wrong*: the standard Phillips curve doesn't jump out of the UK data, in part because supply shocks are common. What might be more problematic is that people think government spending is bad, and so associate it with rising unemployment.

I've got three observations here. First, the poor public understanding of economics is NOT a partisan matter. It leads both to anti-market attitudes and to anti-Keynesian ones.

Second, the issue here is not confined to the UK: the bad habits described by Leiser can be found among Israelis, Americans and Australians (and I suspect Europeans too) as well as Brits.

Thirdly, our political and social institutions do not adequately correct these problems, and might exacerbate them. Politicians and the media tend to pander to misconceptions rather than correct them: Mr Varoufakis's reply to that audience member was welcome because it was so rare. There seems little effort to educate the public in economics: the BBC, perhaps because of its commitment to due impartiality, has failed. And I'm not sure academia can or will do the job. It's not just economists who should lament this, but everyone who cares about the quality of our democracy.

* The distinction matters; rationality is about how beliefs are formed, rightness about their congruence to reality. You can be rational but wrong or irrational but right.

Comments

[Deviation From The Mean]

So what if the general public are ignorant about economics, what say do they have?

The bigger problem is that those who have the real power, you know those boards of directors, your friends in the city etc, only see their own little world. What capitalist thinks of the impact on the rest of society when reducing wages , making working conditions worse or firing people? Those costs are simply shit someone else has to deal with.

It is no surprise the company has been called psychopathic

https://en.wikipedia.org/wiki/The_Corporation_(film)

The problem is not a lack of understanding but a lack of democratic responsibility, or responsibility being a status symbol of power.

[Phil Beesley]

"Most of us have long lamented the general public's lack of understanding of economics."

Others have despaired patronising comments.

[Luke]

Well, it's quite difficult. Maybe if we non-economists could grasp that, it would be a start (I speak as a non-economist guilty of sounding-off from time to time, though not on question time as yet).

[e]

My emotional/expressive rationality prompts me to challenge DL’s notion that ‘economics’ is “absent from that of our evolutionary forebears” A desire to fashion environments is surely innate; and what is economics if it is not the means by which we fashion our environment? And not necessarily trusting to emergent process, equally innate I would have thought. Seems to me both these propositions imply a passivity which human history doesn’t support.

[Dave Timoney]

"Faced with this complexity ... people resort to metaphors". This ignores that we don't just pluck metaphors out of thin air. Ideology is, in part, the monopolisation of metaphorical thinking. The fact that the word "economy" comes from the Greek for household management reflects a discipline in which private property is central and indisputable. This isn't random.

The good-begets-good heuristic might be better-termed the bad-begets-bad, in that "lay-people's" thinking is probably driven more by negative media coverage than positive. In other words, we associate higher unemployment with higher inflation because both are framed as bads. As we are now in an era in which (modest) inflation must be framed as a good, it will be interesting to see what happens to popular perceptions over the rest of the decade.

[Lord]

I think a larger problem is what may be benign or even beneficial for the whole is often personally bad for some individuals and these have much more motivation to oppose them than those for whom they are good to support them.

[Shuggy]

If you don't mind me saying so, a post about why people don't understand economics that doesn't even mention the other-worldliness of the average economist isn't really addressing the problem.

[George H. Blackford]

I sometimes wonder how much of the problems is that the public doesn't economics and how much of the problem arises from the fact that economists understand neither the public nor economics. http://www.rweconomics.com/Deficit.htm

[Min]

"Politicians and the media tend to pander to misconceptions rather than correct them"

I think that that aspect of the problems is extremely important. Economic misconceptions are propagated by politicians, the media, and, I dare say, economists. What is a child growing up in such an environment to think? What people believe about the economy depends in no small part what ideas were current, generally accepted, and propagated when they were children and young adults. People who remember the stagflation of the 1970s are aware that the combination of high inflation and high unemployment was considered unusual. When I was growing up, adults in my home town who had lived during the Great Depression believed that it was caused by too much private debt and by speculation in the 1920s. I was taught the Bible story of the Seven Fat Years and the Seven Lean Years, as so I believe in countercyclical gov't policy. Also, in high school we had old textbooks that taught that unbridled laissez-faire economics had been disproven by the events of the late 19th century. Popular beliefs about economics are publicly propagated and taught.

[macheath]

Although the paper has some insights, it is harmed by its embrace of conventional economics as gospel. The authors assert at various points "retirement funding is untenable...", "persistent inflation has a tendency to become the normal state of affairs in an economy.." and that people who agree with the statement that the government "acts as puppets in the hands of wealthy and powerful individuals, who promote their interests before those of the people" are prone to "conspiratorial" thinking rather than reasoning. All three of those propositions, the first two asserted as obvious fact, are questionable and betray the authors' own conventional economic thinking.

[Marko]

The public , at least , doesn't make a habit of rejecting the most obvious explanation for a given question.

On the other hand , economists are drawn ,like moths to a flame , to the non-intuitive explanation.

Sometimes things are blatantly obvious , like , for example , current global over-capacity in the face of weak demand , lack of spending power of the bottom 90% in multiple major markets , with corresponding concentration of income and wealth in the hands of the low-MPC top 1% , etc . Yet we still have economists of all stripes , all over the place ( maybe not Japan - ouch!) , favoring consumption taxes to other forms of taxation.

To the extent that the public misunderstands economics , they're that much better off in the real world.

[Andrew Curry]

Rent controls? The UK rental maret isn't a particularly good example of emergence in a market based system producing benign outcomes...

[Anselem]

Economics is easily misunderstood by many who already have a wrong pre-knowledge of the course...

[Nanikore]

If only everybody was as brilliant as Lucas, Sargent, Krugman and Romer.

[Min]

"because people underestimate the tendency of emergent processes to produce benign outcomes, demands for price and rent controls are stronger than most economists think they should be."

Do people underestimate the tendency of emergent processes to produce benign outcomes? A lot of people believe that nature will provide, that is, that emergent processes will produce benign outcomes. OTOH, people doubt that processes largely under the control of powerful people whose interests conflict with those of the common people will produce benign outcomes. Perhaps economists are too optimistic. Vide the belief of Fed chair Alan Greenspan, "The Maestro", that financial fraud was not a problem. In fact, financial fraud in the U. S. was a huge problem implicated in the recent financial crisis, and remains so in U. S. mortgage foreclosures.

[ChrisA]

If you read about macroeconomics, you will find just as much range in policy prescriptions among the so called experts as among the general public. So how could better education on economics help the general public? People would simply agree with the expert that was closest to their existing policy prescriptions.

[Bob]

"So how could better education on economics help the general public? People would simply agree with the expert that was closest to their existing policy prescriptions."
By understanding the government is not revenue constrained and resources, not money, is the limit.
http://heteconomist.com/mmt-is-politically-open/

[Igor Belanov]

Only this morning they had the usual posh eccentric City guy reviewing the newspapers and stating that 'we' should teach schoolchildren about investing when young because there won't be enough money around to provide for there old age. Unsurprisingly, the presenters did nothing to challenge this highly partisan position and seemed to accept the usual TINA stance.

The whole issue of 'educating the public on economics' is extremely ideological and didactic.

[Igor Belanov]

Whoops, shouldn't really rush these things and put in 'there' instead of 'their'....

[Igor Belanov]

Scrub that, I'm going insane this morning.

[Theophrastus]

"Most of us have long lamented the general public's lack of understanding of economics."

Cheer up! Richard Murphy's lack of understanding of economics is often hilarious.

[Bob]

Could you give us some examples then, Theo? I would say Murphy understands economics very well.

[Churm Rincewind]

So the general public lacks understanding of economics because "the human mind is not particularly equipped to think about economics" (academic speak for most people are too stupid).

So what? The general public also has views about politics without understanding the nature of politics, has opinions about music, drama and literature without any knowledge of aesthetics, and pronounces on moral questions without any acquaintance with, say, the writings of Kant or Hume.

The given example of Varoufakis is condign; he may be an expert in economics but sure as anything he doesn't understand politics.

As Phil Beesley points out above, some of us despair of being patronised by posts like this.

[Bob]

"GOTO statements considered harmful"
https://www.cs.utexas.edu/users/EWD/ewd02xx/EWD215.PDF
"... our intellectual powers are rather gathered to master static relations and that our powers to visualize processes evolving in time are relatively poorly developed. For that reason we should do (as wise programmers aware of our limitations) our utmost best to shorten the conceptual gap between the static program and the dynamic process, to make the correspondence between the program (spread out in text space) and the process (spread out in time) as trivial as possible"
It's the same with economics. Good to explain things with dynamic diagrams. Harder with words.
Could you use more diagrams in your work Chris? Or even just for one post? Please. Just for me.

[Metatone]

Worth stating (as usual) that the preponderance of evidence from the study of complex adaptive systems does not support the religious belief of economists that there is a "tendency of emergent processes to produce benign outcomes."

If people aren't good at systematic thinking, it is in part because they are not taught to do it - or in the case of economists, they are taught only to do it very badly...