Wednesday, August 27, 2014

Trade-Offs, Opportunity Costs and Unintended Consequences; Or There’s No Such Thing as a Free Lunch

I had a long conversation with an old friend of mine this weekend, and although I’m not about to disclose what we were talking about (yet!), it brought to mind how fundamentally different economists think to the way other people think.

Economists are always thinking in terms of trade-offs – you can’t do something without affecting something else. In a proverbial world of scarce resources and unlimited wants, every action has some form of reaction, even if these don’t conform precisely to Newton’s Third Law of motion. In Milton Friedman’s evocative language, “There’s No Such Thing as a Free Lunch”.

This is especially true of the policy-space. Every change in policy has both costs and benefits, though some of those costs or benefits might not be readily apparent. Replacing SST with GST for instance, or going forward with the TPPA – there are pros and cons, winners and losers in each decision, and the cost-benefit analysis is not always as clear as people think. Take for example the ever contentious issue of petrol and diesel subsidies – most people don’t see (or won’t see) the flip side of artificially cheap energy.

So we come to this (excerpt):

Economics for the masses

…are economists actually able to win hearts and change minds? Or is economics merely used to justify and reinforce pre-existing beliefs?

A new paper* from political scientists at Duke University suggests that economists can influence public opinion, but only on technical policy issues. They are less effective when it comes to politically contentious questions….

…So how did the dismal profession stack up? First the bad news. Despite the expert consensus, the majority of respondents, excluding those that were uncertain, disagreed with economists on every issue….Wheras [sic] this distrust was equally spread amongst most demographic groups, the authors found that right-wing respondents were significantly less likely to trust economists.

There were, however, some more positive findings. When they were informed of the consensus position of economists, respondents were more likely to agree with them. However, the size of this effect varied according to the nature of the policy issue. Members of the public were more likely to agree with economists when quizzed on technical issues, such as the gold standard or forecasts for tax revenue. But on politically charged topics, for example trade with China or the merits of immigration, the economists’ consensus was far less likely to sway public opinion. Not only that, but when the respondents were informed that their own views did not match those held by most economists, their level of trust in them decreased markedly. This was not the case with the more technical issues – even when they disagreed with economists their trust was unaffected. It seems that on hot-button issues, the public uses economists to validate prejudices, and loses faith in them when they fail to do so.

Confirmation bias is alive and well. One wonders how many bloggers and social media activists are wasting time and doing nothing more than preaching to the converted, present self included.


  1. I seriously doubt that it is a matter of how politically charged the issue was originally. That would imply the non-existence of neutrality in analysing an issue.

    The problem arises when economists themselves are pushing a specific agenda or proposal and by default "charge" the issue with "political electricity". Additionally, the nature of democracy itself provides the default leeway for ideologies to warp issues across party affiliations.

    Finally, that trust on technicalities is essentially blind trust as ordinary folks are ill-equipped with requisite modalities/knowledge to test the assumptions being made. I blame the education system for this precisely because it does not have econometrics as a compulsory subject within the curricula hence the pervasiveness of ignorance and hence blind trust. Those non-economists in the know are few and even if these people throw a spanner in the works, the wider audience, by default mode, are more likely to blindly trust the economist. Equip these folks with rudiments, rerun the survey and the outcomes change with regard to technicalities as well.

    But then ordinary, sane, normal folk would cease being sane and normal, wouldnt they? (wink..wink....hahahahaha)

    Warrior 231

  2. Warrior, "charge with political electricity" - a new one.

    But it is people who accept "utterance" by "known" person(s) as the truth nothing but the truth without even lifting an iota to check. This is especially so for those so call "tertiary" educated masses. To me "tertiary" education trained one to question everything and anything.

    Zuo De