John Lott writes in Barron’s that we should be sceptical of the populist economics trend that’s been prevalent in the past few years. Specifically, Lott criticizes Steven Levitt and Stephen Dubner, authors of Freakonomics, for peddling a kind of “naïve economics” that fascinates readers, but doesn’t hold up to serious scrutiny (rather than “naïve economics,” maybe “economics for the naïve” would be better).
I’ve been working through some similar ideas myself, especially in a new paper criticizing aspects of the pop econ literature. I should point out that these books—including Freakonomics and its many imitators—do have a reasonable goal, namely, to bring the economic point of view to the general public. Now, the fact that economics needs a special literature to explain its ideas to the public is telling, and to some extent an indictment of how the profession has developed (e.g. into an abstract and often excessively technical discipline). Still, as writers like Hazlitt show, it’s a great advantage to be able to communicate economic ideas simply and powerfully. But while in general we should welcome economic writing for non-economists, too often pop econ forgets to stop when descending the ivory tower, and ends up on the intellectual parking sublevel.
Of course, there is a lot that could be said for and against pop writings, which come in all shapes and sizes. But there are a few common threads in the literature that I think give a misleading view of what economics is fundamentally about. One of these is the tendency of pop writers to define economics as the study of incentives. This idea goes back at least to Steve Landsburg’s book The Armchair Economist (1993), which was basically the founding document of pop economics. As he puts it, “Most of economics can be summarized in four words: ‘People respond to incentives.’ The rest is commentary” (p. 3).
The same idea is repeated in other books in the pop genre. Freakonomics, for instance, states that “Incentives are the cornerstone of modern life. And understanding them—or, often, ferreting them out—is the key to solving just about any riddle” (p. 13; emphasis in original). The hyperbole about incentives is impressive: “An incentive is a bullet, a lever, a key: an often tiny object with astonishing power to change a situation” (p. 20).
The trouble with the incentive-based view of economics is that it is far too narrow. An incentive is just something an individual finds valuable, so when economists speak of the importance of incentives, they’re really just saying that people pursue things that will make them better off. This is an important fact, but it’s only one of many insights at the core of economic science. The proclamations “people respond to incentives,” and “incentives matter” are certainly true, but they’re so true that they’re trivial.
Furthermore, there are important problems in economics that cannot be solved with reference to incentives. A good example is the socialist calculation debate. Many economists believe the major problem with socialism is that it doesn’t properly incentivize people to organize production efficiently. Of course, socialism certainly does offer poor incentives, but as Mises and others demonstrated, the central problem of socialism is that without private ownership of the means of production, it is impossible for entrepreneurs to use monetary calculation to appraise the prices of the factors of production, and hence, to allocate them. This problem does not hinge on the presence of “good” incentives for socialist managers. If anything, struggling to arrange incentives for effective production is an alternative that central planners try in the absence of calculation.
In any case, economics—even at the introductory level—is about a lot more than the carrot-and-stick logic of incentives. As Austrians in particular have emphasized, economic laws exist that trump the preferences of individuals, especially those seeking to impose their will on other members of society. Mises puts it nicely in Human Action:
Despots and democratic majorities are drunk with power. They must reluctantly admit that they are subject to the laws of nature. But they reject the very notion of economic law… economic history is a long record of government policies that failed because they were designed with a bold disregard for the laws of economics. (p. 67)
Such was the case with socialist economies as well as many other small-scale experiments in economic planning. Now, pop econ writers are not despots, but I do think there are definite traces of the “planning mentality” in books like Freakonomics, which always seem to hint that if we pay enough attention to incentives, we can use them to tweak economic policy by “urging people to do more of a good thing and less of a bad thing” (p. 5). These kinds of value judgments are usually only implied in the pop literature, but for that very reason readers should take care not to fall prey to the “fatal conceit” of focusing too much on incentives and how to engineer them.
By the way, the paper I refer to above was published in The Review of Social and Economic Issues, which has just launched its inaugural issue. The journal welcomes research in Austrian economics and related topics, and the editorial board features several prominent Austrian scholars, including Joe Salerno, Guido Hülsmann, Peter Klein, Jesús Huerta de Soto, and (not so prominent) yours truly.