Donald Boudreaux: Three critical economic realities |
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Donald J. Boudreaux

Although research on its frontiers is often expressed in dense mathematics and murky jargon, economics’ core is quite straightforward. And it’s as important as ever for public policy. Here are three keys for doing practical economics well.

First: recognize that many economic “problems” or “failures” are not real; they are simply trade-offs.

For example, the fact that not all workers have paid leave is called by some a “failure.” Yet it’s no such thing. It’s merely the result of a trade-off. If more workers wanted paid leave, employers would have every incentive to provide it. But because paid leave is costly, employers who provide it do so by keeping the value of wages and other fringe benefits lower than otherwise.

Further, for workers as a group there’s no correct amount of paid leave. Both Paul the plumber and Jane the journalist would, of course, like paid leave if it were free. After all, the amount of things that each of us would want if they were free is unlimited.

But given that paid leave is costly means that, while Paul might value such leave highly enough to “purchase” it at the price of lower take-home pay, Jane might not. Each of these workers makes the trade-off in a way that’s best for him or her. And so Jane not having paid leave is no more a “failure” that must be corrected than is Jane not having employer-provided piano lessons.

Second: recognize that intentions are not results.

We applaud good intentions. But we should also have the maturity to understand that intentions are not automatically fulfilled just because they are good.

Politicians who vote to mandate that employers provide all workers with paid leave might operate with sublime intentions. But because Jane prefers higher take-home pay to paid leave, when Jane’s employer lowers her take-home pay in order to cover the cost of her mandated paid leave, Jane is harmed by these well-intentioned politicians.

To recognize that intentions aren’t results is to recognize the reality of unintended consequences. When, for example, President Trump raises taxes on Americans’ purchases of imports, he doesn’t intend to reduce the export sales of American farmers. But this ill consequence is no less real for it being unintended.

Third: recognize that government office doesn’t infuse those who hold it with superhuman knowledge.

A modern economy is an inconceivably complex series of trillions of exchanges daily between billions of individuals. For each potential exchange, the handful of individuals who are part of it typically have enough information to know if going through with that exchange is good or bad for them. Each individual who believes that an exchange will be good for her will agree to that exchange — and will not agree to it if she believes that the exchange will not be good for her.

Politicians and bureaucrats given power either to prevent individuals from exchanging, or to compel them to exchange do not have the detailed knowledge that is possessed by individuals on the spot. And so to empower government to regulate industries or trade in the expectation that this regulation will improve matters is to presume that these officials possess an amount of knowledge that is accessible only to a superhuman intelligence.

But of course government officials are not superhuman. To substitute their decisions for those of individuals on the spot is to substitute ignorance for knowledge.

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