Humility in Economics

First Published: 2010-12-11

On December 6, 2010,  Dr. Kevin E. Schmiesing published an article entitled "Humility in Economics"  for the Acton Institute.  The article is reprinted below with the kind permission of the author.


In the 2004 independent hit film, Napoleon Dynamite, the title character expresses his opinion in absolute terms: “This is pretty much the worst video ever made.” His brother, Kip, replies with incisive logic, “Like anyone can even know that.” In an age of government aggrandizement and intellectual vanity, Kip’s words could become a useful slogan.

The stimulus bill of 2009 is Exhibit A. When it was passed in February of that year, President Obama and his economic advisers insisted that it would prevent unemployment from exceeding 8 percent.

Like anyone can even know that.

By October 2009, unemployment stood at 10.1 percent. It has now remained above 9 percent for 19 months, the longest such stretch since World War II. Politicians and the economists who serve them believe that the government can “create” jobs by spending money, oblivious to the short-term and long-term costs of higher taxes and/or higher deficits. The economy is a complex system influenced by innumerable factors—psychological and material—which cannot be effectively tinkered with by injecting a few billion dollars here or there.

Similarly, Congress, proposing to reform the health care sector, posited that the industry was so complicated that the market could not adequately and accurately adjust to the vagaries of supply and demand. Instead, government boards and panels would calculate what insurance should cost; which health procedures represent necessary and valid expenses for 300 million people of diverse belief and practice; and what amount of end of life health care would be reasonable in every individual case of a dying Medicare patient.

Like anyone can even know that.

Conservatives, too, can be presumptuously wrong. Critics of President Bush’s 2003 Medicare drug bill argued that its costs would far exceed estimates and that the program would become a bottomless pit for federal dollars. (I count myself among these doubters.) Yet when the 2009 numbers were reported earlier this year, we discovered that expenditures came in $40 billion under the initial estimate. The seemingly inconceivable result of a government welfare program costing less than anticipated was due to a combination of factors whose effect had been underestimated, including insurance company competition and a slowing demand for prescription drugs.

And maybe some other causes that no one has yet been able to identify. The point is that a comprehensive rendering of the full effect of large and complicated interventions in the economy is impossible.

Among the reasons socialism does not work is one that Austrian economists Ludwig von Mises and Friedrich Hayek called the economic calculation problem. The economy cannot be planned but must develop organically. A central role in this development is the market price, which, they observed, functions as a carrier of information. The amount of information the price carries is so large that it defies the capacity of any central authority or single intelligence to gather and analyze it.

Hayek put his finger on the source of the error that leads governments to attempt—usually with disastrous results—to manage centrally an economy or any piece of it. He called it the “fatal conceit.” The agnostic Hayek did not write about it in religious terms, but his language rightly identified this seemingly political-economic mistake as, at root, a moral failing.

The market is an instrument that relies on humility and circumspection. It reflects and reveals the actual (not the avowed) values that we place on respective goods and services. It demands that we create through our work something that other human beings value, rather than tend exclusively to our own preferences. And it more efficiently meets the everyday needs of other people better than we could through an application of our own intelligence and sincerity to the problem of matching scarce goods with real demands.

The market requires us to submit our own ideas about how society might be better served to the actual wants and needs of our fellow citizens as expressed through their billions of everyday decisions to buy or not to buy. In this way, the market is an antidote to arrogance. Humility tempers our inclination to believe that the economy can be shaped to fit our notions of what it should look like.

There are some general principles that seem to hold true and that not coincidentally are commonsensical. For example, higher taxes discourage economic growth; lower taxes encourage it. Beyond such basic principles lie mostly speculation and conjecture. The unintended consequences of policy changes often outweigh the intended effects.

The next time you hear a politician or economist state matter-of-factly that a certain government intervention will have precisely this or that effect on the economy, pause for a second, narrow your eyes slightly, and say deliberately:

“Like anyone can even know that.”

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