Why the Intelligent Forget the Obvious
Economics has a small stock of principles that a first-year student can recite and a Cabinet minister can forget within the hour. Incentives matter; Taxes change behaviour; Prices are signals. These are not obscure theorems. They are closer to proverbs, the kind of thing an intelligent teenager grasps within an afternoon. Yet politicians who could tell you the exact yield on a ten-year gilt will propose a policy that assumes people respond to subsidies but not to taxes, or that a price can be fixed by decree without anyone noticing.
The puzzle is not that people are stupid. Despite obvious counter-examples, few politicians are. The puzzle is that intelligence and economic literacy are almost unrelated skills, and the political process actively selects against the second.
Bastiat identified the mechanism of the seen and the unseen in 1850 and nobody has bettered it since. Every policy has a visible effect and a set of invisible ones. The visible effect is the ribbon-cutting: the new factory subsidized into existence, the rent capped at a friendly level, the tariff that saves a domestic industry. The invisible effects are the factory that was never built because the subsidy went elsewhere, the flats that were never converted because the return no longer justified the risk, the cheaper import that would have freed a household's income for something else.
Politicians are rewarded for the seen. Nobody holds a ceremony for the business that would have expanded had the tax not been raised. The unseen has no lobby, no press release, and no grateful constituent turning up at a surgery. A principle such as ‘all taxes change behaviour’is intellectually trivial and politically invisible, which is a bad combination if you want it acted upon.
There are concentrated benefits and diffuse costs, and the second reason follows from the first. A tariff on steel imports delivers a large, visible benefit to a small number of steel producers and a small, invisible cost to a very large number of consumers of steel products. The producers organize, lobby, and thank the minister. The consumers, each paying a few pounds more for a car or a washing machine, never notice the connection and would not bother to organize even if they did.
This is not a failure of intelligence. It is a rational response to a diffuse cost. Nobody studies the incidence of steel tariffs before buying a fridge. The politician, meanwhile, faces the steel producers at every election and the dispersed consumers never at all. The incentive to learn and apply the economics runs precisely backwards to the incentive to win.
A minimum wage is meant to help low-paid workers, so it is judged a success by the intention rather than the outcome. Rent controls are meant to help tenants, so their effect on the future supply of rented housing goes unexamined. This is moral reasoning masquerading as policy analysis; the goodness of the aim is allowed to stand in for evidence of the result.
Economics has nothing to say about whether an aim is good. It has a great deal to say about whether the chosen means will achieve it, and the answer is frequently no, because the policy assumes landlords, employers, or consumers will absorb a cost without adjusting anything else about their behaviour. That assumption is where ‘incentives matter’ is quietly discarded. A rule that changes the price of an action changes the amount of that action. This holds whether the action is employing a teenager, letting a spare room, or importing steel, and it holds regardless of how virtuous the rule's authors believe themselves to be.
Trade, in the popular imagination, is still a contest with a winner and a loser, an intuition inherited from a world of subsistence and conquest, where one man's gain genuinely was another's loss. We ask ‘Who gets the better of the deal?’ but the fact that both parties to a voluntary exchange can be better off, is not a difficult theorem. It is a counter-intuitive one, and counter-intuitive results do not survive contact with a five-second political soundbite. ‘British jobs for British workers’ fits on a placard. ‘Both countries specialize according to comparative advantage and both are wealthier as a result’ does not.
The same zero-sum reflex explains the persistent appeal of the wealth tax and the belief that a fixed pool of prosperity merely needs to be redistributed rather than to grow. Prices, profits, and wages are treated as arbitrary numbers to be argued over, rather than as signals co-ordinating millions of decisions nobody could plan centrally. A price is not merely a number on a till receipt. It carries information about scarcity that no committee possesses and no decree can improve upon, and price controls do not abolish scarcity, they merely hide it, usually behind a queue.
Every choice forecloses an alternative. A pound spent by government on one programme is a pound not spent on another, and not spent by the taxpayer on whatever they would have chosen. ‘The cost is worth it’ is not an answer until the alternative use has been named.
As Robert Heinlein and Milton Friedman told us, there ain’t no such thing as a free lunch.Resources are scarce, so every commitment of them is a commitment against something else. A promise that a policy is costless should be read as a promise that its cost has not yet been located.
Complex systems respond to intervention in ways the intervener did not plan for, because everyone affected by the rule has their own aims and will adjust their behaviour to it. The morphine of a well-meaning regulation is rarely felt where it was administered.
The first unit of anything, aid, regulation, taxation, tends to deliver more than the tenth. Policies calibrated on the first unit's success are regularly pushed well past the point of usefulness.Economists call this ‘diminishing returns,’ but politicians don’t call it anything at all.
Money already spent is irrelevant to a decision about what to do next, however painful that fact is to a minister who has staked reputation on a project. A tossed coin’s outcome does not bear upon the next throw.
None of this is difficult. It is neglected because the political market rewards visible generosity over invisible efficiency, concentrated gratitude over diffuse silence, and good intentions over measured outcomes. A politician who internalized all of it fully would frequently find the economically good answer to be a political bad one. Rational ignorance, on this view, is not really ignorance. It is a sensible response to an incentive structure that punishes anyone who says the popular remedy will not work.
The economist's task, and it is a modest one, is not to make politicians cleverer. It is to keep restating the unseen until it becomes a little harder to ignore.
Madsen Pirie