There Is No Way You or Anyone Can Fully Understand the Economy

The economist’s main value to society is not to give forecasts or deliver economic plans. As Don Boudreaux reminds us in this guest post, it lies in his or her ability to reveal that which in the economy typically remains unseen....

The economist’s main value to society lies in his or her ability to reveal that which in the economy typically remains unseen  [memorably summarised in Henry Hazlitt's one lesson as the art of economics consisting of "looking not merely at the immediate but at the longer effects of any act or policy ... in tracing the consequences of that policy not merely for one group but for all groups."].

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 specialised 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, say, first-five in rugby at an elite level merely by observing with the naked eye the play of Beauden Barrett.

There are indeed a small number of things that can be learned about playing by observing an all-time great such as Barrett. How many steps, on average, does he take back from the line of scrimmage after receiving the pass from halfback? What kind of physical condition is he in: lean, or bulked-up muscular? Does he kick most or pass? How often does he attack the line?

Observing Barrett’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 Barrett performs and relies upon to play first-five well are unobservable and unmeasurable.

Indeed, Barrett himself is unaware of many of the facts that contribute to his skilful play. For example, he surely knows nothing of the particular genetic code that determined the precise arrangement of the muscles and ligaments in his legs that make it possible for him to have such a devastating change of pace – an arrangement that, were it just slightly different, might prevent him from succeeding as a first-five.

Behind what is seen in Barrett’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 Beauden Barrett and other successful athletes. No one would propose that careful observation and measurement of Barrett’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 first-five at any skill level, and much less at the high level routinely achieved by Barrett.

And yet an even more ridiculous supposition about the economy is regularly made by pundits, professors, and politicians. They suppose that through statistics and theorising 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 or Robert Reich -- or Max Harris or Toby Moore -- or MBIE or David Parker -- propose so-called "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 New Zealander today takes for granted, an indescribably complex, extensive, and globe-spanning division of labour 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. Parker and Harris, 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.

Donald J. Boudreaux is a senior fellow with American Institute for Economic Research and with the F.A. Hayek Program for Advanced Study in Philosophy, Politics, and Economics at the Mercatus Center at George Mason University; a Mercatus Center Board Member; and a professor of economics and former economics-department chair at George Mason University. He is the author of the books The Essential Hayek, Globalization, Hypocrites and Half-Wits, and his articles appear in such publications as the Wall Street Journal, New York Times, US News & World Report as well as numerous scholarly journals. He writes a blog called Cafe Hayek and a regular column on economics for the Pittsburgh Tribune-Review. Boudreaux earned a PhD in economics from Auburn University and a law degree from the University of Virginia.
This article has been adapted from its first appearance at the AIER blog.
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