Infernal Ramblings
A Malaysian Perspective on Politics, Society and Economics

Economics for Politicians

Written by johnleemk on 10:59:42 am Apr 23, 2007.

One of the worst things about economics is how it is abused by politicians from both sides of the political spectrum. An economist once remarked that economics is nothing more than "common sense, consistently applied".

Naturally, politicians feel free to leave out the last half of that definition at their own convenience. Thus, you see right-wingers applying the "common sense" of the free market while leisurely ignoring the caveats of a free market that most economics students are well aware of, while left-wingers apply "common sense" to criticise free trade while ignoring the mathematical common sense behind it.

I sometimes wonder if politicians are really that stupid. After all, most politicians have been to a university. I bet more than a few have even taken economics classes. So why are they so uninformed about how economics actually works?

One would be tempted to blame democracy for dumbing down our politicians. After all, politicians can't afford to get ahead of the crowd — sure, you can try, but this generally leads to failure. If the voters can't understand a policy, they will reject it.

Still, even the voters can't always be stupid (or, as the common aphorism has it, you can't fool all of the people all of the time). And the same misconceptions and misunderstandings which politicians labour under are the same which many of their followers — some of whom are even quite bright and educated — labour under.

I suspect that part of the problem may be pedagogy — how economics is taught. Most economics textbooks I've read rarely deal with the big picture, the heart of economics.

Rather, the common academic approach seems to be divide the subject into bite-sized chunks for those at the lower level to consume, and only filling in those who study economics deeply with the big picture. The natural problem with this approach is that politicians, who rarely (if ever) are academically-trained economists, will only take the lower-level classes and thus fail to grasp the greater picture of things.

The natural caveat to this is that this is purely my speculation; I have never taken a higher level economics class than an A Levels class. But still, there are noticeable differences in how economics is peddled by the textbooks, and how it is treated by economists who write non-fiction for a general audience.

Normally, the picture presented by the economist authors is much clearer and much more encompassing of the basic point of economics: incentives. At the heart of it, economics is about human behaviour. The numbers economists study are all abstractions of human behaviour; economics is basically about how we behave, and how our actions are shaped by incentives.

This sort of thinking has far-reaching consequences that go beyond mere economic policy. Economics has been applied to a number of other fields, such as sociology, with some interesting results.

Steven Levitt of the University of Chicago, for instance, has suggested that the legalisation of abortion in the United States resulted in a downturn in the crime rate. A colleague of his has argued that economic reasons, and not the stereotyped reason of culture, lie behind the AIDS epidemic in Africa.

Even these extraordinary examples aside, simply thinking in terms of incentives is very helpful for those in the business of government. When you want to shape the behaviour of humans, of society, nothing works better than incentives.

Want to reduce the abortion rate? Ferret out the incentives for women to have abortions, and attack these. Want to protect the environment? Figure out the incentives behind pollution, and think about how to counteract them.

These seem like simple things to do, and yet politicians often only think in stark terms such as total bans. A total ban on abortions would reduce the abortion rate, but there's no evidence that it would reduce the social problems caused by abortion as much as attacking the incentives that cause abortion in the first place.

It seems to me that politicians ought to have the basic principle of economics drummed into their heads. Some of the most foolish policies undertaken by governments arise from a complete misunderstanding of how humans think and behave, and certainly many economic follies can be blamed on the poor economic understanding of politicians.

When an economist does take the reins, as Manmohan Singh has in India, the results are often impressive. Politicians are often able to deal with the emotional and irrational aspects of human behaviour — charisma is a requisite trait for election, after all — but it is not often that they are equally capable of understanding the rational aspects of behaviour which is what economics is all about. Politicians must familiarise themselves with how economics works in the first place, before taking the reins of any, let alone economic, policy.

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Infernal Ramblings is a Malaysian website focusing on current events and sociopolitical issues. Its articles run the gamut from economics to society to education.

Infernal Ramblings is run by John Lee. For more, see the About section. If you have any questions or comments, do drop him a line.

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