About 15 years ago I ran across this book and read it, just for fun. Rhoads is a (nonquantitative) political scientist and he’s writing about basic economic concepts such as opportunity cost, marginalism, and economic incentives. As he puts it, “welfare economics is concerned with anything any individual values enough to be willing to give something up for it.”
The first two-thirds of the book is all about the “economist’s view” (personally, I’d prefer to see it called the “quantitative view”) of the world and how it applies to policy issues. The quick message, which I think is more generally accepted now than in the 1970s when Rhoads started working on this book, is that free-market processes can do better than governmental rules in allocating resources. Certain ideas that are obvious to quantitative people–for example, we want to reduce pollution and reduce the incentives to pollute, but it does not make sense to try to get the level of a pollutant all the way down to zero if the cost is prohibitively high–are not always so obvious to others. The final third of Rhoads’s book discusses difficulties economists have had when trying to carry their dollar-based reasoning over to the public sector. He considers the logical tangles with the consumer-is-always-right philosophy and also discusses how economists sometimes lose credibility on topics where they are experts by pushing oversimplified ideas in non-market-based settings.
I like the book a lot. Very few readers will agree with Rhoads on all points but that isn’t really the point. He explains the ideas and the historical background well, and the topics cover a wide range, from why it makes sense to tax employer-provided health insurance to various ways in which arguments about externalities have been used to motivate various silly (in his opinion, and mine) government subsidies. I also enjoyed the bits of political science that Rhoads tosses in throughout (for example, his serious discussion in chapter 11 of direct referenda, choosing representatives by lot, and various other naive proposals for political reform).
During the 25 years since the publication of Rhoads’s book, much has changed in the relation between economics and public policy. Most notably, economists have stepped out of the shadows. No longer mere technicians, they are now active figures in the public debate. Paul Volcker, Alan Greenspan, and to a lesser extent Lawrence Summers have become celebrities in a way that has been rare among government economic officials. (Yes, Galbraith and Friedman were famous in an earlier era but as writers on economics. They were not actually pulling the levers of power at the time that they were economic celebrities.) And microeconomics, characterized by Rhoads as the ugly duckling of the field, has come into its own with Freakonomics and the rest.
Up until the financial crash of 2008–and even now, still–economists have been riding high. And they’d like to ride higher. For example, a few years ago economist Matthew Kahn asked why there aren’t more economists in higher office–and I suspect many other prominent economists have thought the same thing. I looked up the numbers of economists in the employed population, and it turned out that they were in fact overrepresented in Congress. This is not to debate the merits of Kahn’s argument–perhaps Congress would indeed be better if it included more economists–but rather to note that economists have moved from being a group with backroom influence to wanting more overt power.
So, with this as background, Rhoads’s book is needed now more than ever. It’s important for readers of all political persuasions to understand the power and generality of the economist’s view. Rhoads’s son Chris recently informed me that his father is at work on a second edition, so I pulled my well-worn copy of the first edition off the shelf. I hope the comments below will be useful during the preparation of the revision.
What follows is not intended as any sort of a review; it is merely a transcription and elaboration of the post-it notes that I put in, fifteen years ago, noting issues that I had. (In case you’re wondering: yes, the notes are still sticky.)
- On page 102, Rhoads explains why economists think that price controls and minimum wage laws are bad for low-income Americans: “It is striking that there is almost no support for any of these price control measures even among the most equity-conscious economists. . . . The real issue is, in large measure, ignorance.” This could be, but I’d also guess (although I haven’t had a chance to check the numbers) that price controls and minimum wage are more popular among low-income than high-income voters. This does not exactly contradict Rhoads’s claim–after all, poorer people might well be less well informed about economic principals–but it makes me wonder. The political scientist in me suspects that a policy that is supported by poorer people and opposed by richer people might well be a net benefit to people on the lower end of the economic distribution. Rhoads points out that there are more economically efficient forms of transfer–for example, direct cash payments to the poor–but that’s not so relevant if such policies aren’t about to be implemented because of political resistance.
Later on, Rhoads approvingly quotes an economist who writes, “Rent controls destroy incentives to maintain or rehabilitate property, and are thus an assured way to preserve slums.” This may have sounded reasonable when it was written in 1970 but seems naive from a modern-day perspective. Sure, you want a good physical infrastructure, you don’t want the pipes to break, etc., but what really makes a neighborhood a slum is crime. Rent control can give people a stake in their location (as with mortgage tax breaks, through the economic inefficiency of creating an incentive to not move). There might be better policies to encourage stability–or maybe increased turnover in dwellings is actually preferable–but the path from “incentives to maintain or rehabilitate property” and “slums” is far from clear.
- On page 139, Rhoads writes: “Most of the costs of business safety regulation fall on consumers.” Again, this might be correct, but my impression is that the strongest opposition to these regulations come from business operators, not from consumers. Much of this opposition perhaps arises from costs that are not easily measured in dollars: for example, filling out endless forms, worrying about rules and deadlines. This sort of paperwork load is a constant cost that is borne by managers, not consumers. Anyway, my point is the same as above: as a political scientist, I’m skeptical of the argument that consumers bear most of the costs, given that business operators are (I think) the ones who really oppose these regulations. I’m not arguing that any particular regulation is a good idea, just saying that seems naive to me to take economists’ somewhat ideologically-loaded claims at face value here.
- On page 217, Rhoads quotes an economics journalist who writes, “Through its tax laws, government can help create a climate for risk-taking. It ought to prey on the greed in human nature and the industriousness in the American character. Otherwise, stand aside.” I have a few thoughts on these lines which perhaps sound a bit different now than in 1980 when they first appeared. Most obviously, a natural consequence of greed + industriousness is . . . theft. There’s an even larger problem with this attitude, though, even setting aside moral hazard (those asymmetrical bets in which the banker gets rich if he wins but the taxpayer covers any loss). Even in a no-free-lunch environment in which risks are truly risky, why is “a climate for risk-taking” supposed to be a good thing? This seems a leap beyond the principles of economic efficiency that came in the previous chapters, and I have some further thoughts about this below.
- On page 20, Rhoads criticizes extreme safety laws and writes, “There would be nothing admirable about a society that watched the quality of its life steadily decline in hot pursuit of smaller and smaller increments of life extension.” He was ahead of his time in considering this issue. Nowadays with health care costs crowding out everything else, we’re all aware of this tradeoff as expressed, for example, in these graphs showing the U.S. spending twice as much on health as other countries with no benefit in life expectancy. It turned out, though, that the culprit was not safety laws but rather the tangled mixture of public and private care that we have in this country. This example suggests that the economist’s view of the world can be a valuable perspective without always offering a clear direction for improvement.
Another example from Rhodes’s book is nuclear power plants. Some economists argue on free-market grounds that the civilian nuclear industry should be left to fend for themselves without further government support while others argue on efficiency grounds that nuclear power is safe and clean and should be subsidized (see p. 230). Ultimately I agree with Rhoads that this comes down to costs and benefits (and I definitely think like an economist in that way) but in the meantime there is a clash of the two fundamental principles of free markets on one side and efficiency on the other. (The economists who support nuclear power on efficiency grounds cannot simply rely on the free market because of existing market-distorting factors such as safety regulations, fossil fuel subsidies, and various complexities in the existing energy supply system.)
- Finally, when economists talk about fundamental principles, they often bring in their value judgments for free. For example, on page 168 Rhoads quotes an economics writer who doubts that “we need the government to subsidize high-brow entertainment–theater, ballet, opera and television drama . . . Let people decide for themselves whether they want to be entertained by the Pittsburgh Steelers or the local symphony.” Well, sure, we definitely don’t need subsidies for any of these things. The question is not of need but rather of discretionary spending, given that money is indeed being disbursed as part of the political process. But what I really wonder is: what does this guy (not Rhoads, but the writer he quotes) have against the local symphony? The Pittsburgh Steelers are already subsidized! (Everybody knows this. I just did a quick search on “pittsburgh steelers subsidy” and came across this blog by Skip Sauer with this line: “Three Rivers Stadium in Pittsburgh still was carrying $45 million in debt at the time of its demolition in 2001.”)
I hope that in his revision, Rhoads will elaborate on the dominant perspectives of different social science fields. Crudely speaking, political scientists speak to princes, economists speak to business owners, and sociologists speak to community organizers. If we’re not careful, we political scientists can drift into a “What should the government do?” attitude which presupposes that the government’s goals are reasonable. Similarly, economists have their own cultural biases, such as preferring football to the symphony and, more importantly, viewing risk taking as a positive value in and of itself.
In summary, I think The Economist’s View of the World is a great book and I look forward to the forthcoming second edition. I think it’s extremely important to see the economist’s perspective with its strengths and limitations in a single place.