Tuesday, April 26, 2011

The Seen and Unseen

Our training in economics sensitizes us to unseen effects.  For example, Thomas Sowell, the Sage of Palo Alto, writes in his Basic Economics textbook that the question for any policy is, "What happens next?" In other words, we raise the minimum wage and workers will be compensated more money. Ok, but, what happens next? Mark touched on this in his previous post "Truth or Consequences". And, this was the topic of my last review for the Economics of Compassion class.

Economics fundamentally comes down to the seen and unseen:

  1. What is seen in rent-controlled apartments? Lower prices. What is unseen? The underground market created for sub-leasing. The deterioration of property because landlords have no profit motive to improve the property. 
  2. What is seen with welfare payments? More resources for the poor. What is unseen? The high implicit marginal tax rates that reduces the incentive to work (sometimes for each additional dollar earned the poor lose more than one dollar in welfare receipts). 
  3. What is seen with subsidies to farmers? Farmers benefit from the receipt of money. What is unseen? This artificially lowers the price of the crop which makes it more difficult for developing nations to compete in agriculture.  

***Contribute your favorite seen versus unseen distinction to our comments section***

This is well put by French political economist Frederic Bastiat in his book "That Which is Seen, and That Which is not Seen": 
[The inability to think through beyond immediate effects] explains the fatally grievous condition of mankind. Ignorance surrounds its cradle: then its actions are determined by their first consequences, the only ones which, in its first stage, it can see. It is only in the long run that it learns to take account of the others. It has to learn this lesson from two very different masters - experience and foresight. Experience teaches effectually, but brutally. It makes us acquainted with all the effects of an action, by causing us to feel them; and we cannot fail to finish by knowing that fire burns, if we have burned ourselves. For this rough teacher, I should like, if possible, to substitute a more gentle one. I mean Foresight. For this purpose I shall examine the consequences of certain economical phenomena, by placing in opposition to each other those which are seen, and those which are not seen.
  Moreover, I recently learned of 20th century American journalist Henry Hazlitt (influenced by Bastiat) from the APEE meeting. In the book Economics in One Lesson he writes,

The reason is that the demogogues and bad economists are presenting half-truths. They are speaking only of the immediate effect of a proposed policy or its effect upon a single group. As far as they go they may often be right. In these cases the answer consists in showing that the proposed policy would also have longer and less desriable effects, or it could benefit one group only at the expense of all other groups.
To consider all the ramifications of any policy is wisdom ---at least from my "consequentalist" economic perspective. There is a Jewish aphorism that says (paraphrasing): A clever man can extricate himself from a difficult situation, but, a wise man never gets into such a situation in the first place. There will always be the messy business of trade-offs; however, a little foresight can go a long way to making trade-offs less painful.


MarketKid said...

I think many individuals who are untrained in economics will typically focus on the legal or stated objective of a government's policy. Minimum wage seems to be moral intuitively, but the effect is really economic discrimination against the unskilled labour force whose MPL does not justify an artificially high wage imposed by government.

Doug said...

I agree. The question about, "What happens next?" does not enter their minds. There are, no doubt, people explaining to our lawmakers the consequences beyond stated intentions. But, since policy makers frequently ignore such advice I wonder if it is A) They don't believe the arguments are particularly strong or B) The incentives in the political process and for re-election are just too strong?