Mere Economics Isn't - Social Engineering
In this series of posts, I'll describe five things that mere economics is not. Note, this post was written with Scott Burns and was originally published at The Independent Institute.
Social Engineering
This leeriness of making pinpoint forecasts also helps explain why economists are so wary of large-scale government intervention.
Throughout the 20th century, governments have tried to enlist economists to help devise policy “tools” to improve on the “invisible hand” of the market. As many of these planners learned the hard way, economics is not a how-to guide for social engineering.
Quite contrary to the lofty aspirations of social tinkerers, economics teaches us humility. Its core task is not to advise policymakers about how they can engineer the economy in top-down fashion. Its task, as F.A. Hayek argued, is instead to “teach men how little they truly know about what they imagine they can design.”
Nothing better illustrates this than what was arguably the greatest economic debate in history: the clash over markets vs. central planning—capitalism vs. socialism.
In the early 20th century, many intellectuals held that Soviet-style central planning was the wave of the future. Wouldn’t the economy be more efficient if it were scientifically managed by a cadre of experts rather than being left to the whims of the invisible hand?
Living in an era of unprecedented scientific achievement, it’s easy to see why many thought so. In the decades leading up to the Bolshevik Revolution, engineers had developed the internal combustion engine, the automobile, the airplane and many more groundbreaking inventions. In one generation, mankind went from walking to driving to flying. If the world’s greatest minds could accomplish all this with such limited resources, just imagine what great heights they could reach if they were given control over all of the economy’s resources.
Or so the thinking went.
Good economists, however, objected. For them, the economic problem of how to efficiently allocate scarce resources wasn’t an engineering problem. It was an institutional problem and an epistemic one—one that market economies were best suited to solve.
Why would markets outperform central planning? The first reason revolves around incentives. The key institutions of market economies—respect for private property, voluntary exchange and contracts—give people better incentives to work hard and produce things people value.
Ask yourself: would Steve Jobs or Bill Gates have any incentive to create world-changing products if they were born in the Soviet Union? It’s unlikely they would’ve taken the risk necessary to start Apple or Microsoft if they’d had the misfortune of being stuck in a system where they couldn’t keep their hard-earned wealth or run their businesses as they saw fit.
The second reason why markets outperform central planning has to do with what economists call “ economic calculation.” Market institutions that protect private property and facilitate voluntary exchange led to the emergence of market prices. These prices allow entrepreneurs to calculate profits and losses. Profit and loss signals give them critical information about not only what consumers want but also how to produce it efficiently (i.e., at a lower opportunity cost).
When it came to producing cars, Soviet planners had the same raw materials and technology at their disposal as Henry Ford. The difference was that Ford could rely on market prices to help guide his decisions. He could also manage his business as he liked and keep the fruits of his good decision-making—he didn’t have to wait to receive production quotas from bureaucrats with no skin in the game. Ford thrived where the Soviets failed because he operated in an economic system which guided his decision-making in a way that ultimately satisfied consumer preferences. Planners don’t have an analogous guide.
Good economists understand the economy is not some machine that could be fine-tuned or engineered in a top-down fashion. It is more like a complex and delicate garden. Policymakers seeking the flourishing of their populace will not try to recreate or redesign that ecosystem.
Conclusion
Contrary to popular belief, economics isn’t a branch of psychology holding that people are omniscient robots or self-absorbed hedonists.
It isn’t a political ideology aimed at defending free market orthodoxy.
It isn’t a system of ethics that argues for atomized individualism or declares “greed is good.”
It isn’t a crystal ball for forecasting the economy that will help you “get rich quick” playing the stock market.
It isn’t a tool for social engineering that allows politicians to design utopia.
Rather, economics is a framework for making sense of society. It is a remarkably powerful lens for understanding the seemingly chaotic social world we all inhabit.
Economics claims a limited scientific scope. It examines the implications of the fact that people are decision-making beings, and that their decision-making occurs in the context of scarcity, time, and uncertainty.
Occasionally, students become frustrated when we insist that “economics can’t say such and such.” Ultimately, our seemingly unsatisfactory reply carves out space for disciplines like ethics, psychology, and political philosophy to speak to these other aspects of human life.
Economics is not a substitute for these other branches of social science. Still, its insights can complement those fields and provide us with a much richer understanding of the social world. What is remarkable is the sheer volume of social phenomena that can be rendered intelligible when these insights are taken seriously. And to our minds, there’s no more thrilling task than teaching these insights to our students.