By Gary Galles
October 17, 2016
Ignorance Is More Costly in Politics than in Markets
For months, I have seen articles about the massive economic ignorance infesting candidates’ views and how they would “fix” what they think are the nation’s problems. They essentially say that neither candidate knows enough to pass an economics principles course, much less enough to advance Americans’ general welfare. I cannot disagree.
The candidates sometimes say things with some sense (recognizing burdens from regulation). But, they have failed in their understanding of opportunity cost (free college and paid leave) and comparative advantage (protectionism); that market incomes are earned by benefiting others (making “the rich” pay more); property rights and the role of profits (suggestions for mandatory profit sharing); the market for labor (proposals to hike minimum wages and opposition to right-to-work laws); and capital (wanting greater taxation of owners of capital but calling taking your resources for others an investment).
The Difference between Markets and Politics
But why have the candidates marketing such economic snake oil successfully made it to the general election? Thomas Sowell, in Knowledge and Decisions, considered why people’s pervasive ignorance, as well as “knowing so much that isn’t so” leads to more societal damage via politics than market arrangements.
Economic knowledge need not be articulated to the consumer, but is conveyed — summarized — in the prices and qualities of goods. The consumer may have no idea at all — or even a wrong idea — as to why one product cost less and serves his purpose better; all he needs is that end result itself. Someone must of course have the specific knowledge of how to achieve that result. What is crucial to economic competition is that better and more accurate knowledge on the part of the producer is a decisive competitive advantage, regardless of whether the consumer shares any part of the knowledge.
In political competition, however:
Political knowledge is conveyed by articulation, and its accurate transmission through political competition depends upon the preexisting stock of knowledge and understanding of the receiving citizen. … In political competition, accurate knowledge has no such decisive competitive advantage, because what is being “sold” is not an end-result but a plausible belief about a complex process.
In other words, consumers need not correctly understand how something is accomplished for them to be well served by market competition. As long as they can choose which suppliers’ goods better satisfy their preferences and situations, suppliers that solve the relevant problems more effectively will tend to out-survive others. As Sowell summarized it, “Where force is not involved, then whatever methods of coping with these difficulties emerge, the least cost methods among them will have a decisive competitive advantage in voluntary transactions.”
In contrast, voters must understand how something will actually work to correctly evaluate which politicians will serve them better (dis-serve them least), or misunderstanding and misrepresentation by politicians may be rewarded. And the political appeal of inferior understanding is “as widespread as the belief that order requires design, that the alternative to chaos is explicit intention, and that there are not merely incremental trade-offs but objectively specifiable, quantifiable and categorical ‘needs’.”
In markets, “prices convey effective knowledge of inherent constraints,” subject to which, “[c]onsumers buy results and leave the processes to those with specialized knowledge of such things.” In contrast, “ballots do not … there are no constraints on my voting for [mutually inconsistent things] … options simultaneously desired [but] unrealizable from the outset.” Furthermore, “no small part of the political art consists in misstating options and in trying to give them the appearance of simultaneously satisfying competing claims when they cannot be satisfied in reality.” Consequently, “The competition among political groups does not therefore bring to bear more accurate knowledge, as in economic competition, but promotes exaggerated hopes and fears.”
The too-common end result is that:
In their political behavior, the public must judge processes — including economic processes of which they may be ignorant or misinformed. …Once the process is underway, every perceived problem — whatever its reality or origin — calls for political solution, and these “solutions” tend to create a never-ending supply of new problems to be “solved.”
In today’s political landscape, this plays out in many different forms. For people who believe that freer trade harms people rather than creating mutual gains, promises of “cracking down” or imposing higher tariffs on foreign products appears attractive. For people who believe that they earn less because “the 1%” earn too much, “will find punitive taxation attractive.” For people who think various workplace amenities — such as mandatory paid leave — come out of employers’ pockets, rather than from workers’ compensation packages (once there has been time to adjust), new government mandates will appear to be a good idea. For people who think higher minimum wages will benefit “the poor,” and don’t understand the downsides — such as fewer hours worked and greater unemployment — minimum wages will be attractive.
In these and other instances, voter misinformation can lead politicians who engage in economic malpractice to be more popular, imposing a much higher price on society than similar amounts of consumer misinformation in the marketplace.
Echoing Friedrich Hayek’s “The Use of Knowledge in Society,” Sowell saw that “Perhaps the greatest achievement of market economies is in economizing on the amount of knowledge needed to produce a given economic result.” However, he also recognized “That is also their greatest political vulnerability,” which we are seeing acted out before our eyes. The public, benefiting from vast and varying voluntary market arrangements without understanding them, can be lured by siren songs of something for nothing, because they don’t see how it undermines those irreplaceable arrangements which reliably serve them.
Note: The views expressed on Mises.org are not necessarily those of the Mises Institute.
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About the Author
Gary M. Galles is a professor of economics at Pepperdine University. He is the author of The Apostle of Peace: The Radical Mind of Leonard Read and Faulty Premises, Faulty Policies. Send him mail. See Gary Galles’s article archives.