Commentary

See the Unseen: How to View the World like an Economist

Have you ever wondered why economists hold seemingly counter-intuitive opinions on issue after issue?

It certainly perturbs friends (and my girlfriend in particular). To the non-economist, those of us trained in the dismal science have a frustrating, sometimes inhuman, ability to detach ourselves from emotive arguments, all the while trying to poke holes in popular ideas.

Where does this desensitisation come from?

The best answer was articulated by Russ Roberts on Twitter last week, and originates from an under-appreciated nineteenth century French economist called Frederic Bastiat.

Using the example of a broken window, Bastiat pointed out that with most actions, there is a first order consequence — something directly observable or “seen”. When a window is smashed, a glazier comes to repair it. We may observe this, and in isolation identify this activity as “good” for the economy.

Have you ever wondered why economists hold seemingly counter-intuitive opinions on issue after issue?

Yet too often human beings ignore the “unseen” — the opportunities foregone, and the likely long-term consequences of a choice. “If he had not had a window to replace,” Bastiat explained, “he would, perhaps, have replaced his old shoes, or added another book to his library.” To finance the repair of a broken window, the window’s owner cannot use his money in other ways, which he’d no doubt prefer.

This distinction between the “seen” and “unseen” may seem obvious. But example after example, particularly in political discourse, shows how it strains our human instinct to weigh up alternatives or consider unintended effects.

Remember when the coalition government’s policy of “free” school meals for five to seven year-olds was announced in 2013?

Campaign groups rallied to praise the £600m commitment, claiming it would enhance educational attainment, based upon results from narrow pilot schemes. It was only economists who seemed to question whether this spending really obtained the best bang for the buck to increase attainment, or whether the money could be better used in other departments — or even, heaven forfend, be left with taxpayers.

Similar narrow thinking dominates the debate around the customs union.

Commentators talk about the potential costs for existing businesses of complying with rules of origin tests and other administrative requirements if we leave.

Yet few ever quantify exactly how significant a problem this is. It seems to be taken as given that any new costs are reason enough to either resist leaving or reach some extensive new customs arrangement. Few weight these costs against the potential upsides stemming from an independent tariff and commercial trade policy.

The great thing about economics is that, once you get it drummed into you that (as the great Thomas Sowell once said) “there are no solutions, only trade-offs”, you view social and political phenomena through this inherently sceptical lens. You do not take it as given that intentions will be achieved. You question and speculate on whether the approach or choice is truly the best use of resources, and what may result from it.

When a politician blithely commits to “making childcare higher quality”, you wonder how much any new regulation of the sector will push up prices, and hence make formal care less affordable.

When the living wage campaign demands that all employers pay £10.20 per hour, you consider whether such a cost increase may erode opportunities for young, unskilled workers looking to get their foot on the jobs ladder.

When Jeremy Corbyn states that the existence of profits in certain industries means lower prices could be delivered under nationalisation, you consider whether public ownership is more likely to become captured by producer interests or suffer from worse profitability.

When governments continually tell us that HS2 will be “good for the economy” because the economic benefits exceed the costs, you consider whether other investments, such as road schemes in areas with bottlenecks, would generate even higher returns.

When someone calls for banning plastic bags for environmental reasons, you think about what the effects of paper bags are for the scale of landfill sites, or the health impact of repeat use of linen bags given hygiene risks.

None of this is to say that economists can always give clear and definitive answers. Value judgements are needed to outline what the aims of an action really are. Practitioners disagree on what weight to assign to differing concerns, conclude differently on whether certain consequences are worth tolerating, and use different techniques to calculate effects.

But the reason why economists will counter and question almost every opinion you have about news is not because we are cold or cruel, but because we are programmed to consider opportunities foregone and potential consequences.

Ryan Bourne holds the R Evan Scharf Chair for the Public Understanding of Economics at the Cato Institute.