Tags

Economic illiteracy is widespread, but why should this be a problem? Ignorance is even more pervasive in microelectronics and computer programming, and yet computer technology is nothing short of astounding.

In most fields of study, people leave science to experts and trust the correctness of their conclusions. Not so for economics: rather than leaving the matter to economists, people hold strong positions that are plainly false. Economic ignorance by itself is not the problem. As Murray Rothbard put it,

It is no crime to be ignorant of economics, which is, after all, a specialized discipline and one that most people consider to be a "dismal science." But it is totally irresponsible to have a loud and vociferous opinion on economic subjects while remaining in this state of ignorance.

If people trusted economic theory to professional economists, their economic ignorance would be as harmless as their ignorance of most other subjects.

Human Nature

Paul Rubin has called this universal bad economics "folk economics" (like folk physics or folk psychology). Those who have studied economics are well aware of folk economics: the antimarket status quo that we argue endlessly against. We all held these emotionally appealing positions before we learned economics.

Noneconomists are systematically biased against markets, so this is not just a problem of ignorance, in which case we would expect variability, not a one-sided bias. Folk economics is by far the largest barrier that stands in the way of free markets — hence the importance of understanding its cause and cure. Rubin draws on evolutionary psychology to explain the stubborn persistence of folk economics.

Evolutionary psychology explains much about human nature by studying the impact that our evolutionary history has had on our minds. It provides strong evidence against the extreme nurture ("blank-slate") position which states that the mind enters the world empty and is entirely a product of its environment and conditioning, i.e., that there is no human nature. Instead, evolutionary psychology finds that there is a human nature, rooted in our evolved preferences, which explains the existence of cultural universals — behaviors that are present in all cultures. Evolutionary psychology explains the more obvious evolved preferences, such as why we are attracted to opposite sex or why we enjoy eating sugar and fat. It also explains the existence of less obvious elements of human nature, such as our moral intuitions and our folk economics.

The brain is not a homogeneous thinking organ: different areas specialize in different tasks. For example, the brain has regions which are specialized for vision, hearing, language, face recognition, etc. These abilities all come naturally, without any need of teaching. However, the brain also lacks specialization in areas that are very useful today, such as mathematics or reading and writing. Since these things do not come to us intuitively and automatically, we must make a deliberate effort to learn them — often slowly and with difficulty. Moreover, we have intuitive theories for dealing with the world, including but not limited to an intuitive physics, an intuitive morality, an intuitive psychology, and an intuitive economics. Like it or not, this evolutionary baggage is part of human nature and is here to stay.

The Core of Folk Economics

The environment of evolutionary adaptedness (EEA) — the hunter-gatherer societies of Paleolithic Africa — provides the basis for explaining human nature and the roots of folk economics. Nomadic hunter-gatherers lived in small groups with little in the way of property and market exchange. Production was limited to harvesting what nature provided. Our brains are adapted to function in a world very different from our own. Folk economics is an artifact of our evolutionary history.

Two major features of the EEA are of interest here. First, it was a zero-sum world. Our hunter-gatherer ancestors lived on whatever was provided by nature. There was effectively no economic progress — certainly not during a person's lifetime. One person's consumption came at the expense of everybody else's. With little specialization, production, or property, the scope of trade was minimal. Societies were basically small, egalitarian communes. Second, the EEA was characterized by reciprocal exchange, not market exchange. Reciprocal exchange is the receiving and returning of favors, e.g., sharing my kill with you on the understanding that you'll reciprocate in the future. Zero-sum thinking and the logic of reciprocal exchange form the core of our intuitive economics.

In a zero-sum world, an egalitarian distribution of resources would have been advantageous. A wealthy person would be depriving others of crucial resources by taking a bigger piece of the fixed-size pie. As a result, we intuitively feel that one man's wealth comes at the expense of others. Since incentives hardly matter in a zero-sum world, there is little to lose by redistributing wealth. This explains the popularity of socioeconomic egalitarianism.

Furthermore, since hunter-gatherer societies were polygynous, a wealthy male with multiple wives would literally be depriving other males of their genetic survival. There would have been a large benefit for nondominant males to restrain the dominant ones. This explains the antiwealth bias, our tendency to associate wealth with evil.

Today these feelings are not only useless but extremely harmful. In a free market, the more of a good that is demanded, the more of it gets produced, and the cheaper it becomes, thanks to economies of scale. Thus, consumption does precisely the opposite of depriving others. Incentives drive production, but involuntary redistribution harms incentives, shrinking the pie. The acquisition of wealth on the free market is only possible if each trade benefits the other party, so there is no conflict of interests. Finally, we live in a monogamous society, so there is also no conflict of genetic interests.

"Just as everyone is born ignorant of math, so everyone is born a folk economist."

The logic of reciprocal exchange sheds light on several economic fallacies. It leads straight to the objective-value fallacy. When I do you a favor, you "owe me one" whether or not supply and demand conditions have changed. The value of this favor is objective and constant, and I expect an equivalent favor in return. This explains the popularity of such confused notions as just prices and price controls, especially usury laws.

The widespread antimiddleman sentiment is also a result of the objective-value fallacy. Middlemen add nothing physical to the good, so their transactions appear to be exploitative. Likewise for the antiprofit bias: if I make a profit in a reciprocal exchange, then our exchange was not of equal goods and I have cheated you. Another factor contributing to the antiwealth bias is that a rich person in the EEA was most likely a nonreciprocator or a cheater.

The point of reciprocal exchange is to help those in need so that they will help you when you are in need. In a market exchange, the market price is charged whether or not the buyer is in need. As a result, our economic intuitions favor reciprocal exchange — market exchange is uncaring and cold-hearted toward people when they are in need! This is why so many people are unwilling to allow free markets in anything involving the poor and needy: it simply feels wrong to charge poor people for necessities. In such situations, market exchange runs against our altruistic feelings, which form the basis of reciprocal exchange.

More Folk Economics

Mental heuristics that worked well in the EEA can be a major obstacle to clear thinking about the modern world. One such mental shortcut of particular chagrin to economists is our tendency to judge acts by their intentions rather than their results. In the EEA, motives would have been closely aligned with outcomes: selfish motives would have brought selfish outcomes and altruistic motives would have brought altruistic outcomes. This is because reciprocal exchange is the exchange of altruistic favors: selfish acts did not count as favors. This heuristic completely breaks down in a market, where selfish individuals producing and exchanging benefit not only themselves, but many others.

Another obsolete heuristic is our bias toward identifiable individuals. We place considerably more weight on people with names and faces compared to people in statistics. In the EEA, everybody in a band would have known each other by name or face, so this bias worked in favor of the group. In a market society, this results in the focus on things seen and the ignorance of things unseen. This is a veritable font of economic error. Practically all instances of favoring producers' interests over consumers' interests flow from this bias. A few examples: the emphasis on job creation rather than production, protectionism, localism, bailouts, favoring spending over saving, and so on. In all such cases, the benefits accrue to identifiable individuals while the costs are borne by countless anonymous individuals.

Our antiforeign bias, which is so harmful today, would have been useful in the EEA. Intertribal warfare is very common among hunter-gatherers. It would have been extremely dangerous to attempt to establish cooperation with another tribe, since they would stand to benefit by murdering your tribe's males and taking the women, all while increasing the amount of natural resources left to themselves. As a result, we have evolved a mistrust of foreigners that can easily escalate into hostility. We pay dearly for indulging these preferences: trade restrictions leave us all worse off, immigration restrictions needlessly deprive us of cheap labor (and more importantly, deprive potential immigrants of a vastly better life), and to top it all off, there is the devastation of war.

A related bias is the dislike of big corporations. We prefer to deal with the small local guy over the big faceless corporation. In the EEA, it would have been much safer to deal with a known person than with a large group of strangers. In today's world of large-scale production, indulging this preference is becoming increasingly costly. We now routinely witness the spectacle of people who loudly bemoan how Walmart is ruining local business, and yet they shop there because it is simply that much better.

Loss aversion, our tendency to place more weight on losses than on gains, is another bias that undermines free markets. Loss aversion served humans well in the EEA, where losses could easily mean death — having two offspring is twice as good as having one, but having one is infinitely better than having none. In the modern world, loss aversion presents problems. Workers resist decreases in their nominal wages (even if real wages have increased) preventing smooth adjustments to changing market conditions. People prefer inflation over deflation because it gives them the impression of rising incomes. One particularly bad result is the political ratchet effect: repealing bad policies is extremely difficult, because those who stand to lose are highly motivated to prevent the repeal; but introducing bad policies is relatively easy, because the losses are generally spread thin over the bulk of consumers.

Undoubtedly, there are many more examples of folk economics. After all, we are a highly social species, and social organization has been a very important factor in our evolution — much of the brain is dedicated to dealing with the social environment. From this brief overview, it is clear that the systematic antimarket biases are an artifact of our evolutionary past.

The Universality of Folk Economics

The main line of evidence for this evolutionary explanation is that folk economics persists across time and place — it is a cultural universal. Folk economics has always been around. A look back through history reveals that people of all times and places have held these same biases. Thomas More's Utopia is an excellent example from the 16th century that reads just like the socialist fantasies of today. Furthermore, folk economics remains as strong as ever, in spite of the progress of economic science. The same errors that were utterly refuted centuries ago still enjoy wide currency with the public today. Simon Newcomb's 1893 lament about the economic nonsense of the public rings just as true today. Economic science has barely made a dent in public opinion.

These two facts — its universality and its resistance to reason — strongly suggest that folk economics is a cultural universal, attributable to the genetic makeup of the species. If it were not, we would expect that libertarian ideas would bring success to cultures that adopted them, and that they would spread via growth and imitation. Needless to say, this is not the way things have turned out. Evolutionary psychology provides the only reasonable explanation for this universal antimarket bias.

The Importance of Economic Education

With the cause identified, the cure for folk economics becomes clear: persistent education. Although we are stuck with these evolved preferences and biases, we are not slaves to them: we can control them — those of us who prefer free markets are living proof. The only realistic solution is for people to make a conscious effort to learn the logic of markets. Economic education is a powerful tool, the challenge is only to get people to make the effort to learn.

A free society cannot exist where folk economics runs rampant. Economic literacy must be considered essential for all members of society in the same way that basic math skills are considered essential. The errors of folk economics must be directly addressed with education in the basic principles of economics. The task of economic education is never over: just as everyone is born ignorant of math, so everyone is born a folk economist. Every new generation must be taught economics in order to sustain the ideological foundation of the free market. The importance of this cannot be stressed highly enough. As Mises warns in the closing words of Human Action,

The body of economic knowledge is an essential element in the structure of human civilization; it is the foundation upon which modern industrialism and all the moral, intellectual, technological, and therapeutical achievements of the last centuries have been built. It rests with men whether they will make the proper use of the rich treasure with which this knowledge provides them or whether they will leave it unused. But if they fail to take the best advantage of it and disregard its teachings and warnings, they will not annul economics; they will stamp out society and the human race.

This underscores the tremendous importance of teaching economics to the public, and the fine work already being done by many individuals and organizations. Needless to say, there is plenty more to be done here.