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There Is No Way You or Anyone Can Fully Understand the Economy – Donald J. Boudreaux (03/06/2020)

The economist’s main value to society lies in his or her ability to reveal that which in the economy typically remains unseen. This function of the economist is explained most famously by Frédéric Bastiat. But also, of course, this understanding of the economist’s role is implicit in Adam Smith’s mention of the “invisible hand.”

Smith’s An Inquiry Into the Nature and Causes of the Wealth of Nations is a brilliant treatise using the economic way of thinking to pull back the curtain on economic consequences – good and bad – that are usually out of the line of sight of people who focus only on what Deirdre McCloskey calls the economic drama’s “first act.”

It’s easy to see the immediate consequences of economic actions, whether these actions are those of private parties or of government officials. No economic understanding or unusual acumen is required. But seeing beyond immediate consequences is more difficult – or, at least, such vision doesn’t come naturally to most people. To change the analogy slightly, it’s the job of the economist to equip people with intellectual lenses that bring into their line of sight economic phenomena that would otherwise remain hidden.

Workaday examples of economists revealing that which is unseen include showing that protectionism which decreases imports artificially protects lower-productivity jobs in the domestic economy by destroying higher-productivity jobs in the domestic economy – showing that minimum-wage legislation worsens employment prospects for the very group of low-paid workers that such legislation is ostensibly meant to help – and showing that government officials’ incentives are very often at odds with the public interest that these officials boast of promoting.

Vast, Undesigned, and Invisible Coordinated Actions

There is, though, a different, if related, realm of the unseen that competent economists sometimes reveal – although not, in my view, often enough. This different realm is the modern economy’s unfathomable complexity.

Leonard Read’s “I, Pencil” is the best-known attempt to convey the vital insight that economies are far more complex than they appear to the naked eye. “I, Pencil” reveals that behind even an item as seemingly simple as a pencil there teem untold numbers of specialized workers, from around the world, who are, without knowing it, cooperating with each other to make possible an abundance of pencils. Yet judging from the incessant stream of naïve proposals that issue forth from the commentariat and politicians, very few people understand just how complex the economy actually is. The assumption seems to be that the economy is no more complex than are the words, graphs, and columns of data that are commonly used to describe it.

This assumption is wildly mistaken. It’s the equivalent of assuming that anyone can play quarterback in American football at an elite level merely by observing with the naked eye the play of New Orleans Saints’ star quarterback Drew Brees.

There are indeed a small number of things that can be learned about quarterbacking by observing an all-time great such as Brees. How many steps, on average, does he take back from the line of scrimmage after receiving the snap from center? What kind of physical condition is he in: lean, or bulked-up muscular? Does Brees throw overhead or side-armed?

Observing Brees’s play isn’t utterly without value to anyone who aspires to play well at that position. But the overwhelming majority of conscious actions, reflexive movements, thoughts, split-second decisions, knowledge, and ‘feel’ that Brees performs and relies upon to play quarterback well are unobservable and unmeasurable.

Indeed, Brees himself is unaware of many of the facts that contribute to his skillful play. For example, he surely knows nothing of the particular genetic code that determined the precise arrangement of the muscles and ligaments in his throwing arm – an arrangement that, were it just slightly different, might prevent him from succeeding as a quarterback.

Behind what is seen in Brees’s play teem an immeasurable amount of relevant, factual details all of which contribute to his success yet none of which is visible to the naked eye, and very little of which is accessible to third parties even with close diagnoses and high-tech statistics.

If only implicitly, everyone understands the above-stated reality about Drew Brees and other successful athletes. No one would propose that careful observation and measurement of Brees’s play could result in a written set of rules and instructions that when articulated to a careful reader thereby enable that reader to play quarterback at any skill level, and much less at the high level routinely achieved by Brees.

And yet an even more ridiculous supposition about the economy is regularly made by pundits, professors, and politicians. They suppose that through statistics and theorizing they can learn enough about how the details of how the economy actually works in order to enable government to mimic the economy, but in ways that rid it of real or imagined ‘imperfections.’

The Arrogance of ‘Men of System’

When the likes of Oren Cass, Michael Lind, Daniel McCarthy, Robert Reich, or Marco Rubio propose industrial policy, they reveal their unawareness of the indescribable complexity – of the unfathomable details – of the immeasurable number of local, time-sensitive decisions that give rise to the surface phenomena that they and the rest of them see only as “the manufacturing sector,” “ordinary workers’ wages,” “changes in imports relative to exports,” and on and on and on. Such “men [and women] of system” – being either ignorant or contemptuous of the market’s invisible hand – arrogantly presume that that which they see and can describe using words and numbers is a sufficiently large proportion of economic reality to enable them to guide the government to intervene in ways that will result in the happy outcomes that float in their minds as lovely imaginings.

Such arrogance is fatal.

This reality is inescapable: if we want an economy that makes readily and steadily available to the masses such goods and services as every American today takes for granted, an indescribably complex, extensive, and globe-spanning division of labor guided by market prices is necessary. The details that enable this economy to work are too many and too invisible to be conveyed to a central agency charged with overriding and improving upon the market’s processes. 

To the extent, then, that Messrs. Cass, et al., get their wish for industrial policy, they will curse the rest of us with an economy operated according to a childishly simple set of commands. This economy, insofar as it is ‘governed’ by industrial policy, will be reduced to the puny dimensions and limitations of the human mind. We will all, as a result, be made poorer and, also, not incidentally, less free. It’s that simple.