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Second Quarter 2010 - Ignorance Is Bliss. Or Is It?

Submitted by frost on Fri, 08/06/2010 - 13:34
[ Second Quarter 2010 - Ignorance Is Bliss. Or Is It? ]

Ignorance Is Bliss. Or Is It?

There has been a great deal of volatility in the market over the last quarter, and I believe much of it is driven by pure ignorance.

I came up with this theory when I saw an article written by Daniel Klein, professor of economics at George Mason University and editor of Econ Journal Watch. Klein’s article was about a survey done by Zogby International Measuring basic economic understanding.

Of the eight questions, people who identified themselves as “progressive/very liberal” were correct about basic economic questions only 34% of the time. A third of them did not understand what it meant to have a monopoly.  people who described themselves as “very conservative” did best, scoring an 83% on the test, followed by libertarians, who scored 82.75%.

When one sees these survey results from an organization as widely respected as Zogby, it should make one ask, Does this have anything to do with Europe falling apart? Could the crisis in Greece be a byproduct of the far left being blind to economic consequences? Throughout the world today we see a strange confluence of events: leftward-leaning economies collapsing and a backlash against private enterprise.

I know it is always dangerous to bring up politics, and we certainly do not mean to offend, but as I have said before on these pages, there are plenty of things about which Democrats and Republicans, liberals and conservatives can legitimately disagree, but the general direction of economic policy is not one of them.

I think Bryan Caplan explains it magnificently in The Myth of the Rational Voter. Caplan points out that the vast majority of voters are economically illiterate, which explains why American “politics” so frequently devolves into divisive social issues like abortion or gay marriage. How many times in the last twenty years has Congress voted on abortion legislation or a gay rights bill or any other social issue that takes up so much of our political air? Compare that to the daily decisions being made that impact economic policy. Industry regulation, appropriations, taxation – these are the daily business of government, and unfortunately they are ignored until we end up at the place we are today.

Political scientists and economists have traditionally believed that the average voter had no real idea of the economic consequences of his vote, but that these errors were random. So while the economically educated were a small minority of the voters, the belief was that their view would win the day because the economically illiterate voters cancelled each other out. Caplan argues, convincingly, that this is not true because the erroneous views of the masses are in fact not random, but systematic. Most people do not just have random misconceptions about economics that cancel each other out at the election box, but in fact they have the same misconceptions that end up swaying elections in favor of sometimes very damaging economic policy.

Caplan identifies four basic biases that the vast majority of people share, all of which lead to undesirable policies. Those biases are:
1) anti-market, 2) anti-foreign, 3) make-work, and 4) pessimism.

Let’s start with the anti-market bias. Most people simply do not understand the “invisible hand” of the market and its ability to harmonize private greed and the public interest. This has certainlybeen true over the last few years during the financial crisis. There has been much blame placed on the market, even though the facts of the case clearly show failures of government policy and regulation. We speak of these failures often as the “unintended consequences” of well-meaning policies.

Greece, for example, paid its public employees 14 months salary for every 12 months worked. They provided full retirement benefits at age 50, and covered all medical expenses. When all is well, the vast majority of voters would be in favor of such bountiful benefits. Unfortunately, these generous gifts come with an unintended consequence: Greece is now broke.

It is important to see that while these results may have been unintended, that does not mean they were unforeseeable. Governments do a far worse job of making economic decisions than does the mysterious power of the market. History if full of such examples.

Twenty years ago the greatest example of all presented itself. The collapse of the Soviet Union, combined with the economic success of the pro-market reforms in the US and the UK, put an end to what had been a debate about how to best run an economy. Bill Clinton declared the days of big government to be over. Yet somehow this poisonous idea that government regulation is superior to free market forces survived only to resurface today.

I want to be clear here. I am not saying – nor was Caplan – that conservative economists or economists from the ‘Chicago School’ have more faith in the market than the average lay person; I am saying that the consensus view of all economists is more favorable to the market. John Maynard Keynes himself was a true believer in the free market and did not believe in socialistic government regulation or control of the economy. In his own words, “Marxian Socialism must always remain a portent to the historians of Opinion — how a doctrine so illogical and so dull can have exercised so powerful and enduring an influence over the minds of men, and, through them, the events of history.”

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