Tough Times

For practitioners of the dismal science, these times are both disturbing and heady. Economists are chided for their failure to foresee the current recession, but are consulted more frequently than ever to venture their guesses about when it will end. Obviously, we need people who can explain economics clearly, but those who do often disagree. That is because—economics’ scientific pretensions to the contrary—an economy is run by people, not on the basis of physical laws, and people are not nearly as predictable as some economists like to think. Two recent books aimed at a broad audience take very different approaches to demystifying economics.

The first comes not from an economist, but from a philosopher who believes that economics is accessible to anyone willing to do some reading and to think logically about a subject that is unfortunately rife with fallacies—notions that sound plausible, but whose correctness wilts under further analysis. Joseph Heath has waded into the realm of economics before, with The Efficient Society: Why Canada Is As Close to Utopia As It Gets and (as co-author) The Rebel Sell: Why the Culture Can’t Be Jammed. His latest book is devoted to exposing a dozen economic fallacies. Six are beloved by the right, six by the left, making Heath nothing if not even-handed, which perhaps qualifies him for honorary membership in the fellowship of on-the-one-hand-on-the-other-hand economists.

The catchy title—Filthy Lucre: Economics for People Who Hate Capitalism—is somewhat misleading. A budding leftist who is predisposed to hate capitalism will find comfort only in the first half of the book, where Heath tackles six right-wing fallacies. Conservatives, who tend not to hate capitalism, will enjoy the second half, in which left-wing fallacies come under attack.

Heath is quite squarely in the middle. He “share[s] the unease that most people feel with the capitalist system” but thinks “critics of capitalism have not done nearly a good enough job at learning their economics.” Free market cheerleaders clearly get his hackles up. He acknowledges his debt to Henry Hazlitt, whose 1946 book, Economics in One Lesson, is still a valuable analysis of popular political arguments that rest on economic fallacies. But he resents Hazlitt’s bullying: “Having one’s deeply felt moral convictions about social justice dismissed as either rationalized self-interest or unadorned stupidity is unlikely to put many people in a mood that is receptive to argument.” Most economic popularizers have followed this approach, he says, with the inevitable result—a failure of communication. Since people like him find the premises morally repulsive, they reject the arguments put forward, so the fallacies persist.

“I’d venture to say that pretty much everything that the average person thinks he or she knows about how the economy works is wrong (or is one degree of separation from something that is wrong),” writes Heath. An overstatement? Of course, but he knows it. “Effective popular writing requires a willingness to assert in an unqualified way things that are not, strictly speaking, true, but close enough to be worth asserting,” he tells us on his website. He is in good company here. Walter Bagehot, the 19th-century constitutionalist and editor of The Economist, is reputed to have advised his writers: “Simplify, then exaggerate.”

Heath first flicks off the notion that capitalism is humankind’s natural way of organizing an economy. Property rights, voluntary exchange and enforceable contracts, all beloved by those on the right, are underpinned by the state, which writes laws and “spends enormous sums” to protect commercial transactions. Heath regards incentives as important, but says economists do not really understand them; psychologists’ studies have shown that economic and financial incentives are not the only things that motivate people, and these incentives are far more complex than most economists realize.

A favourite of the right, of course, is that “taxes are too high.” Well yes, Heath concedes, but the issue is more that “people hate paying for stuff.” As he sees it, the idea that government is a consumer of wealth while the private sector is a producer of wealth is just dead wrong. It is people who both produce and consume wealth; institutions such as the state and the market are simply the mechanisms through which people organize their production and consumption.

He explores the concept of public goods, the kind that markets alone will never deliver and that taxes are often used to finance. What governments often provide are not strictly public goods but what economists call club goods, items we choose to buy as part of a group—like the services of a fitness club, because that makes more sense than buying our own personal exercise equipment or even a swimming pool. From there, he delves into social insurance schemes, such as medicare in Canada. “I pay taxes, and what I get in return is a basic health-insurance policy, provided by the state,” he observes. “It doesn’t necessarily impose a drag on the economy to raise taxes in this way, any more than it imposes a drag upon the economy when the residents of a condo association vote to increase their condo fees.”

Heath’s discussion of moral hazard should be required reading in these days of government bailouts and requests for more of the same. When the right rails against welfare handouts, it loves to talk about personal responsibility; if these people need such help as a result of their own moral failings, why should I help them? The real issue is what economists call moral hazard, with its roots in the insurance industry. If you are insured against a particular risk, you are more likely to take such risks. In a business context, you are more likely to adopt high-risk strategies that promise vast rewards if the pain of failure will be softened by a virtually assured government bailout. When ordinary people are involved, the right complains that government welfare programs generate irresponsibility.

But conservatives do not understand the issue, Heath argues. “What conservatives fail to realize is that the moral hazard effect in question is a generic feature of any type of insurance system—it has nothing to do with the question of public or private ownership.” Private insurers try to weed out likely high-risk clients, which drives them to the insurer of last resort, the state. If the state runs a program to help people in such cases, it automatically assumes the moral hazard problem, since as insurer of last resort it has no choice but to provide services for these people. U.S. conservatives who hate Canadian-style medicare fail to understand that we do not have socialized health care, but socialized health insurance. Do we want health insurance to cover all a country’s citizens? If our answer is yes, then the problem of moral hazard will necessarily arise, regardless of whether health insurance is socialized or private. So “the conservative critique of socialized medicine is not actually a critique of public ownership and provision. It is a critique of health insurance in general, both public and private.”

If at this stage of the book, your garden-variety leftie is feeling freshly armed with new arguments to use against an ideological adversary, the second half comes as a bit of a shock. It opens with a broadside against the “just price fallacy,” when people directly blame prices for injustices that arise from distribution. “The almost unanimous preference among economically sophisticated leftists is to let the market set prices in cases where a reasonably competitive market can be organized, and to tackle distributive justice problems from the income side.” Jack Layton and the NDP do not qualify since they favour not only “cheap gas, in times of shortage, but also … cheap housing, cheap tuition, cheap banking services, cheap anything-that-the-poor-happen-to-consume-some-of.” But as Heath notes, artificial price caps help the rich more than they help the poor (because the more you spend on the capped item, the more you benefit), and they interfere with the crucial rationing function of prices. If you want to help the poor consume goods and services deemed too dear, give them enough extra money to cover the cost.

An abhorrence of profits—and the “psychopathic” pursuit of them—that is so popular with the left is also wrong-headed. Yes, business tries to make a profit, but it also tries just to stay in business, which means it has to keep customers, pay suppliers, cover the interest on its bank loan and meet a lot of other obligations. “Paying out profits to shareholders is actually the most expendable item on the list.”

The persistent—almost touching—faith on the part of some leftists that capitalism is doomed also takes a drubbing from Heath. The current economic crisis brought on by subprime mortgages is not the end of the capitalist world as we know it. Yes, it’s a big deal, but “the fact remains that upheavals on this scale used to be a lot more common.” In the 19th century, economic crashes (as recessions were called then) were far more frequent and much more violent, but capitalism survived them all. Heath’s discussion of the left’s failing here—its belief in the idea that “overproduction” leads to recessions—is fine as far as it goes; his grasp of Keynes’s recommendations is stronger than that of many on the left, who persisted far too long with the idea that governments must run deficits to prop up demand, even in good times. But this chapter could have been strengthened by a more complete picture of the role of central banks in the business cycle. It used to be said that economic expansions do not die of old age, but are killed by central banks that raise interest rates to cut off rising inflation. The current recession, of course, is different; it was triggered by the bursting of a debt bubble created by subprime mortgages that were securitized into packages of debt so complex that neither investors nor regulators understood them. We might not have gotten into this mess had one central bank in particular done more four or five years ago and risked annoying Wall Street by deploying higher interest rates to throttle the beast before it got so big (step forward, Alan Greenspan).

Heath’s treatment of the idea of a “fair” wage is typical of his approach. In one perceptive observation, he notes that the labour market performs a necessary but rather heartless role as it diverts people from overcrowded occupations into needed occupations. No kid grows up aspiring to be a waiter or a sales clerk, but those jobs get filled. The fact that people choose their jobs “should not obscure the fact that the labor market is still, at some level, serving a coercive role—pushing people to give up on their dreams and to accept a more pedestrian life than they might have hoped for.” Just because a given occupation—art-house film maker, perhaps—does not pay a living wage does not mean that wage is unfair; it’s just that too many people are doing that work already and society does not need any more of them. All in all, this is a useful—and often unpredictable—survey of the major economic issues that occupy public debate. It is entertaining too, although more so in the first half than the second, parts of which are a tougher slog through some rather turgid territory.

The second book is more predictable. Jim Stanford, the Canadian Auto Workers union economist, is well known to Canadians through his pithy newspaper columns and frequent TV appearances. His Economics for Everyone: A Short Guide to the Economics of Capitalism appeared last year; it is built on a basic economics course that Stanford developed for union members and, for the most part, is structured like a textbook. Stanford, of course, has an obvious bias. He concludes with a report card on capitalism that gives it only a C–, which he calls a marginal pass.

Stanford is trying to arm union members with the arguments they need to advance their interests, beyond the basics of how the economy works. His report card on capitalism is revealing. His “marks” range from an A– for innovation to an F for equality; no surprise there. He gives it a mere C for prosperity (although modern mixed economies, with much capitalism in the mix, are more prosperous than those at any previous time in history) and a D for security because—as we are learning all too vividly these days—the fear of losing a job, a home or a pension is always with us. Stanford’s solutions to the ails of capitalism are obvious. Governments should offset the negative effects as much as possible, which is what many try to do through social safety nets of varying strength or environmental rules to prevent the worst excesses of companies whose natural inclination is to off-load the costs onto society as a whole.

Paul Krugman, the Nobel Prize–winning economist who writes a trenchant column for the New York Times, once commented that there are only two real issues in economics—the creation of wealth and the distribution of wealth. Capitalism is terrific at the former but lousy at the latter; it is up to governments to redistribute income and wealth to attain society’s broader goals, to bring—dare we say it?—the moral dimension to economic affairs that Heath wants. Stanford gets this too. An understanding of this point would elevate public debate enormously. Let capitalism deliver as much wealth as it can and insist that governments use some of that wealth to alleviate the social and environmental problems that capitalism cannot cure and may often exacerbate. Ideologists don’t like middle ground, but often it is the only ground firm enough to stand on.