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Wednesday, September 13, 2006

Economists, What Are They Good For?

On economists:

Reasons to be happy about the dismal science, by Ross Gittins, Sydney Morning Herald: The older I get as an economic commentator the more I see my job as providing readers with a critique of the performance of economists and their economics. But don't think that makes me anti-economist. Far from it. Economists make an invaluable contribution to society. Which is? To make themselves unpopular by pointing out uncomfortable truths...

We live in an age of rampant populism. As the media have become more commercial and less idealistic they have turned increasingly to reinforcing their audience's prejudices and telling people what they want to hear.

Isn't it shocking about the high price of petrol! Why doesn't the Government do something? What about that terrible Reserve Bank raising interest rates! And why doesn't the greedy Government cut taxes?

The politicians have become more populist, too. With their greater use of focus groups and opinion polls, the art of politics has become more ... efficient at knowing exactly what people want to hear and at aiming policies at the swinging voter, not the party faithful. Because they're better-informed about what the public's thinking, politicians are more inclined to follow rather than lead and to pander to ignorance rather than educate.

Not so the economists... Everything about their training makes them want to blurt out [difficult] truths - and they rarely resist the urge.

Economics ... grapples with the problem of scarcity, which arises because, though our wants are infinite, the resources available to satisfy those wants are finite. From this comes the first way in which economists make themselves unpopular: by banging on about "opportunity cost". This is the notion that anything you decide to do has a cost...  Opportunity cost is a pathetically simple concept, but it's remarkable how often we forget to apply it...

A second way economists make themselves unpopular is by telling us that, often, high and rising prices are good for us. That's particularly true of the price of petrol. The pollies would be crazy to try to get that price down by artificial means. Why? ... Where prices rise because demand exceeds supply - as is certainly the case with oil - the higher price will eventually fix the problem by discouraging demand ... and encouraging supply...

A third unpopular message of economists is that "there's no such thing as a free lunch". ...

A fifth ... message ... is that every upside has its downside. Just about everything that happens in the economy has pluses and minuses, advantages and disadvantages. ...

The final uncomfortable truth from economists, a consequence of opportunity cost, is that "the whole of life's a trade-off". There are a lot of good things in the world and we'd like to max out on all of them.

But they're actually in conflict. The more we have of one, the less we can have of all the others. The trick is to find the particular trade-off between our conflicting objectives - the optimum combination - that maximises our satisfaction. We spend our lives in search of a slightly better trade-off.

We live in a world of marketing hype, ingratiating politicians and a suck-up media, which means we need the antidote of all the grumpy, killjoy economists we can get.

What's the fourth way? I read the article several times, but I couldn't find the fourth way economists make themselves unpopular. Maybe it's pointing stuff like that out.

    Posted by on Wednesday, September 13, 2006 at 12:25 AM in Economics | Permalink  TrackBack (0)  Comments (13)

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