The economics where most people misunderstand
There is a particular kind of confidence that comes from being wrong in a way that feels obvious. Ask people what supermarkets earn in profit and most will say somewhere between a third and a half of what you spend at the till. The real figure is two or three pence in the pound.
Ask people whether capping rents helps tenants, and most will say yes. Ask an economist the same question and you will struggle to find one who agrees. On a surprising number of economic questions, the public and the profession are not just in mild disagreement. They are looking at the same facts and drawing opposite conclusions.
This gap has a name. Frederic Bastiat identified it in 1850, in an essay called ‘That Which Is Seen, and That Which Is Not Seen.’ A good economist, he wrote, takes account of both the effect that is visible and the effects that must be foreseen. A bad economist, or an ordinary voter with no reason to think like one, sees only the first.
Nearly every popular error about economics traces back to this single habit of mind, that of noticing the direct, immediate consequence of a policy and missing the indirect ones that unfold later, spread across people who never connect their misfortune to its cause.
Rent control provides a classic example. The seen effect is a tenant who pays less than the market rate. Everybody can see that, and it feels like a straightforward kindness. The unseen effects take longer to show up. It includeslandlords who stop maintaining property because there is no longer a return to justify it, investment that flows into offices or hotels instead of flats, and new building that never happens because nobody puts up capital for an asset the state has arranged to make unprofitable.
Economists have studied this about as thoroughly as any question in the field allows. A 1990 poll of nearly five hundred American economists found 93% agreed that rent control reduces the quality and quantity of housing. A more recent poll of the profession's elite found 95% rejecting the claim that it increases the supply of affordable homes. Assar Lindbeck, a Swedish economist about as far from a free-market ideologue as the discipline produces, once remarked that rent control appeared to be the most effective technique known for destroying a city, other than bombing it.
And yet every few years some new administration proposes it afresh, because the seen effect is popular and the unseen effect belongs to someone else, usually someone who has not been born yet or has not tried to find a flat yet.
Tariffs work the same way in reverse. The seen effect is a protected factory, its workers cheered by politicians as beneficiaries of a strong national policy. The unseen effect is every consumer who now pays more for steel, cars, or washing machines, and every export industry that suffers when trading partners retaliate.
Economists are about as united on this as economists ever are. When a group of leading American economists was polled in 2018 on whether new steel and aluminium tariffs would improve American welfare, not one of forty respondents agreed, or even said they were uncertain. Twenty-eight said they strongly disagreed. Public opinion runs the other way, and it always has. Surveys since the 1990s consistently find something close to half the public thinking tariffs protect jobs, versus something close to nine in ten economists thinking they destroy more jobs than they save. Protected jobs are visible and photogenic. The costs are invisible, diffuse, and never traced back to the tariff that caused them.
Minimum wage increases show a gentler version of the same pattern, althoughthe economics here has genuinely moved over the past two decades, with more evidence now suggesting modest rises cost fewer jobs than the textbook model previously implied.
But even accounting for that shift, economists remain notably more skeptical than the public of large, rapid increases, and for the same underlying reason: raise the price of something sharply enough and firms will eventually find ways to use less of it, whether through fewer hours, slower hiring, or more automation. The wage rise is seen at once. The jobs that quietly stop being created are not.
Even something as mundane as supermarket profits fits the pattern. Voters asked to estimate grocery margins in Britain put the figure at around 50%, on a par with airlines and property developers. The true figure for food retail is among the lowest of any sector, typically two to four per cent.
Nobody sees a supermarket's cost base, either the wafer-thin margins on milk and bread, the constant churn of stock that spoils before it sells, or the competition that keeps prices pinned down. What people see is a large, visibly wealthy company and a receipt that keeps getting longer, and they draw the obvious but wrong inference.
None of this means the public is foolish. It means the public is doing what anyone does when reasoning about a single transaction rather than a whole system, following the money as far as the eye can trace it, and stopping there.
Economics as a discipline exists largely to trace it further, into the second and third order effects that never announce themselves as clearly as the first. That is also why economics struggles for public trust in a way physics does not.
Nobody has a strong intuitive opinion about the strength of magnetic fields, but everyone has stood behind a supermarket till, everyone has an opinion about rent, and everyone has watched a factory close and wanted to blame something.
The remedy is not to distrust the public's instincts, which are usually sound as far as they go, but to extend the frame past the first consequence. Ask not only what a policy does, but what it does next, and to whom, and for how long before anyone notices. That is the whole of economic literacy in a sentence, and it would save a great deal of bad policy if more people, and more of their representatives, made a habit of asking it.
Madsen Pirie