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Economists’ Stories Say More about Economists than Real Life

My Great Grandfather's Clock, photo by Artemesia

Economists love stories. They tell stories about self-regulating and efficient markets, an invisible hand that makes everything good as gold as long as government doesn’t interfere, and that thigh-slapper about how free trade benefits everyone. Those stories led to the Great Crash and the Lesser Depression, but that doesn’t slow down the storytellers. The same failed economists trot out new stories. Inflation is just around the corner! Austerity is the only solution! Government action will only make things worse! Oligarchs love these stories, and the political elites buy in thoughtlessly, much to the misery of the Irish, the English, the French, the periphery of Europe, and, of course, the millions of unemployed in this country.

Part of the power of these stories is their simplicity. They start with a small example used to illustrate some point and take on a life of their own. Close examination shows that the stories, like all myths, will bear several different interpretations. I’ve been reading Robert Frank’s new book, The Darwin Economy, which was the subject of a recent Book Salon here at FDL. Frank isn’t any different from any economist I could have chosen. He likes stories, and tells quite a few.

Here’s one. A public radio station is considering whether to move from all music to all talk. Suppose for simplicity that there are only three interested parties, one rich, who wants to switch, and two poor, who want it to stay, all with equal intensity. Everyone else is assumed to be indifferent.

…[T]he rich voter would be willing to pay $1,000 to see the change enacted, while the poor voters would be willing to pay only $100 to prevent it. Should the switch be made?

One obvious consequence of abandoning cost-benefit analysis is that the failure to switch formats results in a net loss of $800 – the difference between the $1,000 benefit forgone by the rich voter and the $200 in combined losses avoided by the two poor voters.

Frank suggests making the switch, conditional on the rich voter paying $500 in taxes and reducing the taxes of each poor voter by $250. We tap the rich guy’s desire to listen to all-talk radio and get him to pay off a couple of people. So, economic efficiency means the rich guy gets what he wants solely because he has money. The two poor people get money to make up for their intense desire to listen to music (it’s public radio, so we know that means classical music, for which there is no private substitute). The rich guy gets what he wants permanently, and the $250 that the poor people got is gone soon, leaving them stuck listening to whatever talkers the station hires. This is certainly an inspiring parable and moral.

Those economists sure love that economic efficiency, don’t they? Other needs don’t count, because we don’t have any way to value them. So much for Mozart and Satie.

Here’s another Frank story. Susan is a single mother of two, a fourth-grade teacher making $28,000 per year. Her hobby is antique clocks, and she spends lots of time learning about them. Malcolm is a trial lawyer making $950,000 per year. He knows nothing about clocks. An antique shop has a 1905 Stickley clock in the window. Susan would pay $5,000 and love it forever. Malcolm would pay $10,000, and put it on the mantle in his reception area. Who should get the clock? Malcolm, of course, because he has the money and can do what he likes with it. This may sound unfair, but Frank insists that we can justify this outcome on efficiency grounds.

Granted, Susan cares more about this clock than Malcolm does. But if we take at face value what the two say about how much they’d be willing to pay for the clock, it really would not be better for her to own it. The reason is that she also has more urgent uses than Malcolm for virtually everything else that money might buy. Because Malcolm earns so much more than she does, the marginal dollar he spends in each arena addresses a less urgent need than the same dollar would for Susan.

According to Frank, Susan should buy a house in a nicer neighborhood, so she could send her kids to a better school. If she did buy the clock, the best thing for her would be to sell it to Malcolm for $10,000.

See, now that’s not how I reacted. I’d tell a story about a hard-working person with two tough jobs who has managed to accumulate $5,000 she can spend to give herself a genuine pleasure, an aesthetic pleasure, one she can share with her kids. It’s the kind of thing we do for ourselves to give ourselves a sense that a hard life is worth living. We aren’t all traders, ready to buy and sell anything we can for a profit. Many of us are content to own lovely things for the sheer pleasure of looking at them, keeping them running, sharing them at conventions of like-minded people, and eventually passing them on to our kids.

To me both of these are stories about something more important than money. They teach us about the good life, and how both the public sector and the private sector can contribute to it.

That’s a foreign subject for economists.

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I read a lot of books.