Then a Miracle Occurs… | AIER

There is a famous single-frame cartoon by Sidney Harris from many years ago that captures what’s wrong – what is deeply unscientific – about far-too-much modern economics. In the cartoon, two professors stand beside each other in front of a chalkboard filled with complex mathematics. The more senior professor points to one part of the elaborate line of reasoning depicted on the chalkboard and counsels his younger colleague, “I think you should be more specific here in step two.” 

Step two, sparse and simple in the middle of complicated math on both sides reads, “Then a miracle occurs…”

This cartoon is undeniably funny. It’s also remarkably revealing of the decidedly unfunny reality that much of modern economics is akin to the chain of elaborate reasoning depicted on the cartoon’s chalkboard. In doing economic policy analysis, economists too readily assume that miracles regularly occur.

The main miracle assumed by the unscientific ‘scientific’ modern economists who recommend government intervention is that government officials will act apolitically, and do so not only without any of the human imperfections, myopia, and psychological quirks that (are assumed to) give rise to the market imperfections that allegedly justify government intervention, but act also with more information and wisdom than is discovered and used in markets.

All of the elaborate reasoning that leads up to the occurrence of this miracle, and all that is used to describe matters following the occurrence of this miracle, might well be the flawless product of unquestionable brilliance. But this brilliance neither excuses the trick step of assuming that a miracle occurs, nor renders the results of such theorizing valid. It is inexcusably unscientific for economists (or any one, for that matter) to merely assume that government will perform miracles.

But this is exactly what they assume. 

Advocates of industrial policy are among the chief offenders. Seemingly without exception, these advocates assume that the government officials charged with carrying out industrial policy are, when they take office, miraculously transformed into apolitical angels who have access to all the detailed knowledge that must be known for them to replace the market’s allocation of resources.

Other officials who are assumed to work miracles are politicians, with the power to implement minimum wages. Economists, ever-clever and recollecting their undergraduate course in labor economics, recall that it’s possible to draw on a whiteboard a pretty picture that reveals conditions under which a minimum wage will raise the wages of low-skilled workers without pushing any of them into the ranks of the unemployed. Mirabile dictu! Actual politicians who impose minimum wages somehow discover these conditions in reality and, with no thought of political advantage to themselves, impose minimum wages that are scientifically and precisely calibrated to these theoretical conditions.

Miracles are also performed by bureaucrats at agencies such as the Food and Drug Administration and the Federal Reserve. Never so venal as to concern themselves with the sizes of their budgets, or with their future employment prospects, these officials are concerned always and only with improving the well-being of their fellow citizens. FDA scientists, to perform their duties as advertised, need to know the different risk-preferences of hundreds of millions of Americans in order to decide which pharmaceuticals and medical devices are sufficiently “safe and effective.” How do they come to possess such knowledge? Why, by some miracle!

Fed savants, to perform their duties as advertised, must have knowledge of just how and when to manipulate the supply of money so that maximum economic growth is fueled. While many of these savants insist that while ‘optimal’ supplies of the likes of machine tools, mangoes, steel, and stilettos can only be discovered through the competitive market process, the ‘optimal’ quantity of money must be divined by them as they confabulate in a majestic office building. Such divination is miraculous!

Miracles are also assumed to be at work whenever economists advise governments on how to protect the environment. The same clever economist who is enchanted with diagrams showing optimal minimum wages is similarly enthralled by the ability of carbon taxes to reduce carbon emissions. This economist is indeed correct that higher taxes on emissions of carbon result in reduced carbon emissions. This outcome is the stuff of ECON 101; it requires no miracle. The miracle occurs when the economist concludes that government officials can know in practice, with sufficient certainty, that carbon emissions ‘should’ be reduced and by how much. (Another, more-minor miracle is assumed to occur when the economist divines the exact impact on carbon emissions of proposed higher taxes on such emissions. But I’ll here ignore this minor miracle.)

For government to intervene to reduce carbon emissions is for government to intervene to reduce economic activities that either rely on carbon-based fuels or that produce carbon emissions as a by-product (or both). While one need not possess god-like powers to understand that costless reductions in carbon emissions would be a blessing, because reductions in carbon emissions are emphatically not costless, one does need god-like knowledge to know if any proposed government-engineered reduction would, in the real world, yield benefits greater than those costs.

Economists and environmentalists can speculate until cows stop flatulating about what the benefits of reduced carbon emissions will be, and how these benefits stack up against the costs. But the unfathomable complexity of the modern economy combines with the extensive use of carbon fuels to render all such speculation little better than voodoo. We can all agree that if an omniscient, omnipotent, and omnibenevolent god were to appear on the scene and offer his services to optimize environmental policy, we’d be bonkers to reject this offer of assistance. God, after all, can work miracles!

But we are equally bonkers to swallow much of the interventionist advice of flesh-and-blood economists. These people only think that they are miracle workers. And so their advice too often, if unintentionally, furthers only the designs of the devil.