POLICY BRIEF 3 • NOVEMBER 2012

Economists and Res Publica The Virtues and Limits of Economic By Steven E. Rhoads

This policy brief is the third in a series by AEI’s Program on American Citizenship. The program is dedicated to strength- ening the foundations of American freedom and self-government by renewing our understanding of American citizenship. For more information about our work, visit www.citizenship-aei.org.

With the possible exception of lawyers, economists are prices coordinate the activities of millions of people in a now the profession with the most influence on public remarkable and typically sensible way. Understanding policy. In the 1960s, when I began working at the US both the principles that drive this outcome and how to Bureau of the Budget, Charles Schultze, an economist apply them to new situations is what allows economists to and then-director of the bureau, tried to ensure that most see themselves as uniquely equipped to design sound pub- of the public policy and program evaluation offices were lic policies. headed by economists. Economic thinking still domi- nates the Office of Management and Budget, the Con- gressional Budget Office, and the General Accounting The Economist’s Toolbox Office, and it is influential in policy and program evalua- tion offices across US agencies and departments. More- Noneconomists usually associate economists and policy over, economic thinking is at the forefront of most public analysis with the macroeconomic questions of inflation, policy schools at our leading universities. Intentional or unemployment, and economic growth. This is understand- not, economists now have a large say in forming the laws able since macroeconomic issues are always in the news and regulations we make as a polity. The question that and economists are generally thought to be the experts in naturally arises is: what are the civic benefits that accrue this area. In the wake of economists’ failure to warn of the from adopting the economist’s view of the world—and, 2008 financial collapse, and their failure to quickly rem- in turn, what are the limitations? edy it, respect for the discipline is not now high. No doubt, economists have a distinctive way of look- Nevertheless, it would be unfair to tar microeconom- ing at the world—one that often runs counter to the ics with the failures of its flashy sister macroeconomics. views of noneconomists. Economists generally agree that, For every government economist using macroeconomics once distributional and equity issues have been sorted out, when making policy recommendations, many others are commercial, capitalist societies best allocate resources in a using applied microeconomics methods such as benefit- way that satisfies most people’s desires. Yet it is not intu- cost analysis. Applied microeconomics deals with the itively obvious that an economic system in which every- allocation of scarce resources between alternative and one can work at whatever they want and wherever they competing ends. For years this was the standard definition want will work better than one that asks our smartest of economics, and most mainstream economists still con- minds to plan the economy. As Nobel laureate Kenneth sider microeconomics to be the more solid of the two Arrow noted, to one unschooled in economics, an econ- branches of the discipline. omy motivated by greed and controlled by no one brings The resource allocation side of economics provides to chaos.1 But, in fact, free markets with flexible two types of policy guidance. The first type derives from POLICY BRIEF 3

microeconomic concepts that are not meant to be checkbook knows something of opportunity cost in the comprehensive or conclusive. They are instead things to family context. But in the public policy context, it is eas- be kept in mind, or factors to be weighed against other ily forgotten. Thus, when Congress proclaimed that the relevant factors. Though these concepts are less ambi- discharge of pollutants in navigable waters “shall be elimi- tious, they are not necessarily less useful. Noneconomists nated by 1985,”2 it appeared to ignore the resulting costs can learn much from the concepts of “opportunity cost,” in terms of more air pollution and solid waste disposal, “marginalism,” and “incentives.” since achieving zero discharge in all areas simultaneously The second type of guidance, stemming from is impossible. Similarly, when government reports discuss welfare and benefit-cost economics, is very ambitious. environmental damage from offshore drilling without Appealing to the principles of welfare economics, econo- mentioning tanker spillage of oil which would have to be mists speak with conviction about subjects as grand as the imported if the drilling does not proceed, they are ignoring justifiable objectives of public programs and the appropri- the opportunity costs of a reduction in offshore drilling. ate functions of government in a capitalist system. Exter- nalities help shape economists’ views on appropriate government programs, while benefit-cost economics, the Critics sometimes define economists applied branch of welfare economics, goes even further and advises policymakers about how much money should as those who know the price of be spent on justifiable objectives and functions. everything and the value of nothing. Opportunity Cost. There is much talk these days about government programs that do not achieve their objec- tives. The economist, however, sees a bittersweet quality Economists duel with noneconomists because the in even those programs that do achieve their objectives. latter too often say that costs should never prevent policy The crowd at the groundbreaking for a new community changes that would lead to lives being saved. But “safety recreation center finds it a happy occasion that will soon first” is a good principle only if opportunity costs are rea- make available wholesome sports for the young and sonable. An unending number of hypothetical programs community-building opportunities for senior citizens. could save lives. Take highway safety. We could save lives The economist broods, “Yes, but by spending the money by banning all left turns, by doubling the size of road here and not elsewhere, we give up road improvements shoulders, or by cutting speed limits in half. Even if we that could save two lives a year, the remedial reading pro- did all this, we could save even more lives if we redoubled gram that might raise low-income students’ test scores a the size of road shoulders and cut the speed limit in half full grade, and the larger jail that could reduce our crime once more. Few of us, however, would want to abandon rate. And what about the other recreational opportunities all our other goals so as to save fewer and fewer lives for that local families might enjoy if the tax dollars to pay for any given marginal cost. this center were left in their pockets?” Economists are convinced that many intelligent Critics of the latter line of reasoning sometimes noneconomists do not know how to about costs. define economists as those who know the price of every- When a local official, for example, explains that city recre- thing and the value of nothing. In economists’ defense, ation policy gives primary consideration to public welfare however, a concern with costs is really a concern with val- but that cost considerations are also important, he suggests ues. Our brooding economist is worrying about recreation- that costs are something other than public welfare forgone center costs precisely because he cares about the victims in other public programs and in the private sector. of road accidents and about disadvantaged children. Added costs leave us with fewer resources available to Marginalism. Marginalism involves understanding that pursue values in other policy areas. In other words, when- most budgeting decisions concern whether we should ever the costs (and benefits) of one program increase, the spend a little more or a little less—not whether we should costs and benefits of some other program decrease. This is address a problem at all. Marginalism means giving up on the opportunity-cost insight—the understanding that the old proverb, “Anything worth doing at all is worth spending and regulatory decisions that use scarce resources doing well.” As we reduce pollution, car accidents, incur costs in terms of forgone alternatives elsewhere. crimes, and fires, reducing them still further becomes This seems so obvious that one wonders why it is more costly. At some point the marginal costs of a pro- worth discussing at all. Anyone who has to balance a gram’s expansion will exceed the marginal benefits, and

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we will have to settle for less than what interested citizens As seemingly simple as this concept is, it is often or professionals think is necessary if we are to “really” ignored by policymakers. For example, the tens of billions solve the problem. of dollars spent since 1936 on flood-protection projects Some years ago, the president of a religious associa- and disaster-relief programs has not reduced total flood tion wrote that health care is an “essential community damages as expected for the simple reason that the service.” He called it essential because “persons requiring reduced risks of building on flood plains has led to more health care have no options other than to seek health building in those same or adjacent areas. Similarly, a pay- care.”3 But when I visit a physical therapist for treatment roll tax nominally paid by the employer is more likely to of my tennis elbow, I am not near death, nor even in be borne by workers in the form of lower wages than great pain. The treatment I receive may not even help me they would otherwise receive. Although women take get back on the tennis court more quickly. However, my most paid post-birth parental leaves, they lose as well as low copayment leads me to see a physical therapist on the gain from this benefit. Since mandatory leaves increase chance that I will get back on the tennis court a week or businesses’ costs, they are less likely to hire women of two earlier. childbearing age in the first place. Similarly, on one college campus, a health facility was moved so that it took 20 minutes rather than 8 min- utes for most students to reach the facility. After the infir- Economic efficiency may be served mary was moved, visits declined by 40 percent. Whether the health services forgone in this case would have pro- by government intervention in vided an important benefit remains an open question, but surely the patients felt that they had a choice about the case of market failure. going to the infirmary or not. Most health plans have copayments because in their absence people frequent health facilities when their complaints are relatively minor Economists have been particularly insistent that and when it is unclear whether a doctor can help. incentives offer the best solution to environmental pollu- Marginalism also throws cold water on the frequent tion, and they have been sniping at the Environmental attempts by politicians to protect from budget cuts those Protection Administration (EPA) for decades over the programs that seem to be most fundamental, such as pub- EPA’s resistance to this approach. Under the prevalent lic safety. At the local level, this may lead to privileging the “command-and-control approach,” regulators must deter- police department. But just because public safety may give mine how much air pollution each plant may omit. But us our greatest total utility does not mean that the last dol- more than 200,000 sources of stationary air pollution lars spent for police departments add the most well-being exist in the United States. Some of these companies are at the margin. There may be plenty of inefficiency in the planning to replace old machinery in a few years and police department. Perhaps high-paid police officers are could easily move up their time frame, strengthening sitting behind a desk taking phone calls when a secretary environmental standards for very little additional cost. could do the same job for much less money. To make sen- Other companies have a low profit margin and use old sible budgetary choices, one must focus on what can be equipment. They might well have to go out of business if gained with increased expenditures at the margin and lost they have to get rid of all their old equipment and find with decreased expenditures at the margin. low-polluting replacements. EPA regulators cannot know the details of each com- Economic Incentives. Both theory and evidence have pany’s costs and benefits or their alternative production convinced economists that if the price of something val- processes. They necessarily end up being too tough on ued goes up, some people will consume less of it, and if some plants that have extremely large costs of cleanup the price goes down, some will consume more. Econo- and too lenient on others with much lower costs. mists thus spend much of their time thinking about the One proposal many economists support is a tax on public-sector applications of supply and demand curves carbon emissions, whatever their source. A carbon emis- and then measuring those curves’ slopes or elasticities. For sions tax would encourage those firms that could cut pol- example, because electricity users, air travelers, and tennis lution at lower cost to clean up while the firms that could players respond to price signals, higher prices at periods clean up only at high cost would do less but pay a higher of peak use can spread out demand and thus avoid tax. Since zero pollution is neither an achievable nor a expensive capital investment. desirable outcome (remember opportunity cost), this

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process would bring lower pollution at dramatically lower Economists find the concept of externality particu- costs than historic EPA policy. larly useful in determining or structuring debate about Another major advantage of these incentive-based the role of government in a policy area. Pollution is the approaches is that a tax encourages technological change, classic case of an external cost which justifies government spurring further environmental improvement even after intervention. All of us are bothered by dirty air, but that firms have already cleaned up substantially. Under an cost to us is not paid by polluting firms or their cus- EPA “permit approach,” once a firm has cleaned up to tomers. Thus profit-maximizing firms and the market the level allowed by its permit, it has no incentive to mechanism will not take adequate account of the “exter- clean up further. nal” costs of pollution unless government intervenes in The last 40 years have seen some progress in get- some fashion. ting the EPA to use incentive-based approaches. The When externalities can justify government programs, greatest success has been in efforts to reduce acid rain. economists then look at the geographical scope of the ex- The particular incentive approach used here involved ternalities to help decide whether federal, state, or local not taxes but, instead, the trading of allowances to pol- governments should take the lead. For pollution, much lute. Electric utility companies were given allowances depends on what type of pollution we are talking about. for particular plants, but the allowances could be sold Air pollution travels beyond localities and states, and thus among companies. Over time, the number of allowances some federal role seems desirable. On the other hand, needed to emit any level of pollution increased so that noise pollution is usually a local matter, so federal inter- the environment gradually became cleaner but in a way vention seems unnecessary. that firms could plan for. Of course, as useful as incentives can be in designing Benefit-Cost Analysis. Benefit-cost analysis compares in good public policies, it would be a mistake to just think dollar terms the worth of government programs and their about the first incentive to come to mind. To do so cost. It rests on the same consumer sovereignty assump- means to risk the fate of the poor little town of Abruzzi, tions as welfare economics. Determining how much indi- Italy. The city was plagued by vipers, and the city fathers viduals are willing to pay for government goods and determined to solve the problem by offering a reward for services is thus the crucial part of the cost-benefit analyst’s any viper killed. Alas, the supply of vipers increased as task. But since citizens rarely pay directly for government townspeople, eager for the reward, started breeding them services, discovering what they would be willing to pay in their basements. rather than do without those services can be difficult. Still, over the years economists have developed a Externalities. Welfare economics rests on two fundamen- number of methods for operationalizing their theory. tal normative assumptions: that societal welfare depends Where the government provides an intermediate good, upon individuals’ subjective senses of satisfaction and that such as irrigation water, its value can be estimated by satisfaction is best achieved by letting individuals decide looking at the value of the increased output (crops) less for themselves how to use their resources. If a society the cost of the other inputs needed to produce it. accepts these assumptions, it should seek to achieve eco- One way to estimate the benefits of programs to nomic efficiency. reduce air pollution is to look at how property values vary Economic efficiency may, however, be served by gov- across a single urban area (or among urban areas) with ernment intervention in the case of market failure—that differences in air pollution levels. As expected, economists is, when there are obstacles to the allocation of resources find that after controlling for other variables, such as in accord with what consumers would want under gen- accessibility to employment centers and neighborhood uinely free market conditions. Monopolies may need to characteristics, property values are higher where pollution be regulated or broken up, and externalities (nonpriced is lower. The extent of the higher property values in effects on third parties not part of the market transaction) cleaner neighborhoods can approximate the value of pol- may need to be taken into account. lution reduction in residential neighborhoods. Markets fail completely for some goods, such as national defense. Only a few individuals could afford to buy a nuclear-powered aircraft carrier, and even if large Criticisms of the Economic Approach numbers of people were to come together to purchase one, they could not keep citizens who were not part of the deal The vast majority of mainstream economists, liberal and from enjoying the benefits as fully as those who chipped in. conservative, would agree with most of the above. They

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believe that our public policies tend to neglect opportu- than when they discuss equity. Nevertheless, they talk nity costs and marginalism, that they make too much use about equity and the distribution of income a great deal. of rules and regulations and not enough of incentives, But while considerable consensus on efficiency exists, so that market processes are generally more efficient than do sharp differences about appropriate societal values government ones, and that government programs should when discussing equity. be supported only if their benefits exceed their opportu- Economists generally agree that the distribution of nity costs at the margin. income has become more unequal over recent decades. They also agree about some of the reasons why this has happened. In the late 20th and 21st centuries, technolog- In many cases, public policy would ical progress tended to favor those with greater skills. In 1970, college graduates’ earnings were 60 percent more be much improved if we followed than those of high school graduates. By 2009, college grads were earning 84 percent more.7 Economists also economists’ recommendations. point to increased foreign trade that has led to foreign unskilled workers making some products previously pro- However, the economic way of duced by domestic workers and increased immigration that has driven down the wages of high school dropouts thinking has its own limitations, already in the United States. Where economists differ on equity is on how we should handle increased inequality. Liberal economists and economists often fail to think that it is outrageous that household income between 1979 and 2007 went up 275 percent for the top appreciate them fully. 1 percent, 65 percent for the next 19 percent, just under 40 percent for the next 60 percent, and only 18 percent As a result, economists do tend to agree more on the for the bottom 20 percent.8 Conservative economists appropriate role for government than noneconomists.4 A argue that the top 10 percent of earners already pay 71 2006 survey of the American Economic Association by percent of total income taxes and that the top 1 percent economist Robert Whaples found consensus on a num- pays 37 percent.9 They note that 51 percent of all US ber of hot-button issues: 90 percent of economists believe households now pay no income tax whatsoever10 and that that employers should not be restricted from outsourcing according to the Organisation for Economic Co-operation jobs; 87 percent agree that the United States should elim- and Development, the United States has the most pro- inate all remaining tariffs and trade barriers; and 85 per- gressive tax system in the developed world. cent say that agricultural subsidies should be removed.5 Economists do spend considerable time and effort Another survey found substantial agreement about the on questions of equity and have analytical tools that can effects of tax policy on capital formation, the efficacy of shed important light on those questions. But they should pollution taxes or tradable permits versus emission stan- not apologize for being unable to agree about the justice dards, and the impact of other nations’ trade barriers on of any particular distribution of income. In the final the US trade deficit.6 analysis, society as a whole must decide what is a just dis- Many economists look at this consensus and con- tribution of income and how the tradeoff between equity clude that economists’ views should have even more and economic efficiency should be resolved. (Almost all influence in public policy. Certainly, in many cases, pub- redistributive programs will reduce efficiency and eco- lic policy would be much improved if we followed econo- nomic growth to some degree.) mists’ recommendations. However, the economic way of Once society has decided on the right balance thinking has its own limitations, and economists often between equity and efficiency, economists can do useful fail to appreciate them fully. work in shaping the necessary programs. In these efforts, economists often agree more on how aid to the poor Equity in the Distribution of Income. Those critical of should be structured than on the level of aid to offer. For the economic approach to public policy sometimes accuse example, in the last third of the 20th century, many economists of being preoccupied with economic effi- agreed that welfare programs discouraged work. When ciency and neglectful of equity. Economists are more con- low-income people worked more, they lost their welfare fident about their expertise when they discuss efficiency money. Economists designed the earned income tax credit

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to supplement low-income wages with a grant per hour Economists sometimes assume materialistic motives even worked. Now, fewer work hours means a smaller grant, when those motives are absent. For example, they believe thus encouraging work among the lowest-paid workers. that most voters vote with selfish interests in mind although there is good evidence that they vote based on Selfishness. People who think that the best things in life what they think is in the public interest.12 are free are less likely than most to become economists. Human beings are often torn—while they may People who think money matters and narrow self-interest anticipate receiving their dying father’s inheritance, they makes sense are more likely than most to become econo- would, in most cases, chastise themselves for any thoughts mists. Experiments by Robert Frank and others show that they were looking forward to his death and would that, taken as a whole, economists tend to be more selfish not want to endorse a policy that would lead to his earlier than other folks and that studying economics makes stu- demise. A man could frequent prostitutes, hate himself dents more selfish still.11 for doing so, and strongly oppose legalizing prostitution. Sometimes, the market analogues that economists use in their cost-benefit work will discover people’s revealed Once society has decided on the preferences, which are not, in fact, their values. The term “self-satisfied” is one of reproach. Many right balance between equity and people are not entirely happy with the preferences they “reveal” through their behavior. People aspire to be better friends, better parents, and better teachers. These aspira- efficiency, economists can do tions may mean that their past consumer behavior is too simple a reflection of who they are. useful work in shaping the When most of us read Charles Dickens, we see Scrooge as contemptible, but also pitiable. He has no necessary programs. close family and no friends. No one likes or respects him; he is not a happy man. But too much of the economic literature suggests that he was, in fact, a model maxi- The self-interest assumption is a good rule of thumb mizer. Or at least he would have been if he had shown for most market activity. But it is much more problematic more interest in consuming some of his loot. when evaluating public programs. Through their training, Sociologists find that one recipe for an unhappy economists learn that they and their discipline can be marriage is keeping close track, in a narrowly self-interested more powerful if money and self-interest matter even way, of how many chores you do and how many your more than they first thought. If monetary gain is what spouse does. Psychologists increasingly find that happy people care about, it is much easier for economists to esti- people are those with strong families and friendships. mate the benefits and costs of many government pro- One study finds that when A’s happiness improves, his grams. If, on the other hand, people support programs friend B’s also improves, and so too B’s friend C, even that provide direct benefits to others, predictions and though C may not know A.13 Welfare economics, with benefit-cost calculations become much more difficult. its rootedness in individualism and the self-interest For example, economists’ emphasis on self-interested assumption, needs to reflect more broadly on the con- assumptions leads some to argue that the benefits derived nectedness that seems to make people thrive. from programs designed to extend the lives of people in their 80s must be weighed against those programs’ costs, A Second Look at Externalities. Though economists which include both the costs to workers in the form of invented the concept of externality and use it in their payments into the Social Security fund and the diminish- daily work, the concept can undermine the power of ing nature of that fund given the ongoing drop in the their studies. Some men who frequent prostitutes do not worker-to-beneficiary ratio. Nevertheless, regardless of regret doing so, but others who do not solicit prostitutes these monetary costs, most noneconomists would feel themselves can reasonably say that they are nevertheless uncomfortable with a mathematical equation that weighed harmed by this transaction. Prostitution spreads venereal the benefits to octogenarians and costs to workers of such disease and weakens families. Economists tend to consider programs and ended up eliminating efforts to extend prostitution a victimless crime, partly because taking full lives. There is no reason to assume that most citizens account of all the externalities of something like prostitution would want their public preferences tallied in this way. would take economists well beyond their technical skills.

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It is easy to see that an expansive view of externalities When volunteers provide social services, we get opens up a can of worms. It could lead to more decisions more public benefits without the costs of bureaucracy by government, decisions which are frequently plagued and taxes. And if people get pleasure from giving others by inefficiency, and fewer by markets that perform pleasure, society obviously gains. The externality concept important, if limited, functions well. should make economists eager to consider policies—tax But the “can” should be opened up more than it breaks, public-service television announcements, and currently is because many intangible externalities are civic education in the schools—that seem likely to important to societal well-being. Because externalities are increase voluntarism. so pervasive and so frequently expensive to correct for, laws can affect only a small fraction of them. Higher eth- ical standards, together with greater goodwill and civility, Conclusion could increase societal well-being in most areas where externalities remain uncorrected. If people were more In his seminal book on the uses of economics, The Pub- law-abiding, our roadsides would be cleaner and, more lic Use of Private Interest, Charles Schultze praises eco- importantly, much violence and fear would disappear nomic incentives because they “reduce the need for from our lives. If only the law-abiding were more willing compassion, patriotism, brotherly love, and cultural soli- to report violators and step forward as witnesses, signifi- darity as motivating forces behind social improvement.” cant gains along these lines might be possible; and there Schultze goes on to say, “Harnessing the ‘base’ motive of are many other small things that collectively could make material self-interest to promote the common good is a big difference in the quality of our lives. Just imagine a perhaps the most important social invention mankind world where almost everyone was helpful when your car has yet achieved.”15 The policy implication is that altru- broke down, where people greeted one another with ism is a scarce resource that society should avoid deplet- friendly words and smiles, where few made noise in ing recklessly. movies, libraries, or late at night, and where people At first reading, this seems a far cry from Adam almost always left public campsites and restrooms as Smith, who wrote: “The man of the most perfect virtue, clean as they found them. the man whom we naturally love and revere the most, is Evidence exists that good character is a far more he who joins, to the most perfect command of his own effective cause of moral and law-abiding behavior than original and selfish feelings, the most exquisite sensibility are financial or other types of legal incentives. The find- both to the original and sympathetic feeling of others.”16 ings of criminologists about the relative importance of Schultze’s public , as expressed above, is moral commitment and fear of punishment are relevant clearly inadequate. As Smith says, we do revere virtuous here. Matthew Silberman, for one, looked at the impact people, and their virtue often consists of putting the com- of a number of variables on the crime rate. He found that mon good ahead of their own. In wartime, we need patri- moral commitment explained most of the variance and otic soldiers who are willing to sacrifice their lives for that certainty of punishment was far less important. their country and war-fighting brothers. Moreover, altru- Once patterns of behavior that generate external ism is not a normal scarce resource since its practice can costs or benefits have taken hold, they often mushroom lead to more altruism rather than less. The examples of in a way that can dramatically affect a community’s way good character collected by William Bennett in his Book of life. Two social scientists, James Q. Wilson and George of Virtues should not be supplanted by the collected Kelling, have noted that seemingly small signs of disorder works of Ayn Rand. in a community—loud, ill-smelling drunks; rowdy Still, Smith would understand that there is wisdom teenagers; broken windows—send signals that “no one in Schultze’s high praise of economic incentives. In The cares” and weaken “mutual regard and the obligations of Wealth of Nations, he writes, “In civilized society [man] civility.”14 Vandalism and crime often follow. stands at all times in need of the cooperation and assis- By the same token, goodwill and civility often spread tance of great multitudes,” and he believed that when a rapidly once they make their presence felt. Psychologists businessman intends only to increase his profits, “he fre- have found that if they set up situations calling for an quently promotes” the interests and general welfare “of altruistic response—for example, a woman looking help- society more effectually than when he really intends to less beside a broken-down car—more people will respond promote it.”17 with offers of help if they have recently witnessed some- Altruism cannot coordinate the work of a complex one else behaving altruistically in a similar situation. economy. Even if altruism were a strong enough motive

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to produce clean air and water, how could an altruistic branches in five European locations, despite its below- businessman know what he should do? Because the water average returns for over 30 years. cleanses itself to some degree and because opportunity Economists can play a useful role in this sort of costs are relevant, all effluents should not be eliminated. “groping upward” by reminding enthusiasts of the impor- An altruistic businessman could not know what his fair tance of opportunity costs and by pointing out the best share of reduction would be. Though incentive schemes means to advance worthy goals. Bjørn Lomborg has done substitute self-interest for altruism, they actually help sig- such worthy work with his research on global warming.18 nal and achieve fair-share results by, in effect, telling peo- Perhaps more economists will follow suit once they recog- ple when they are the ones who can clean up at relatively nize that socially responsible consumption and invest- low expense. Those with high cleanup costs clean less, ment are growth industries precisely because there is more but compensate society for their pollution by paying to human nature than self-interest. higher pollution taxes. It would be easier for economists to see the limita- Capitalism is worth defending for more than the tions of their current discipline if the history of economic efficiency reasons economists trumpet. For example, it thought were more widely taught. In such a course, econ- creates more fellow feeling than it is given credit for. A omists would see that past luminaries regularly challenged baker may, for self-interested reasons, ask a new customer the view that one consumer taste is as good as another. the name of the baby she carries and tell her that the For example, Alfred Marshall, generally considered the baby is beautiful; she hopes the customer will return. But “father of neoclassicism,” believed that “the power of if the customer returns again and again, the baker will rightly using such income and opportunities, as a family take note of how little Anna grows, and as time passes, has, is in itself wealth of the highest order, and of a kind she may well become genuinely interested in little Anna. that is rare in all classes.” He maintained that “the discus- At the very least, the baker in a capitalist system is likely sion of the influence on general well-being which is to be courteous and eager to satisfy her customer. Cus- exerted by the mode in which each individual spends his tomers in stores in the Soviet Union would have been income is one of the most important of those applica- grateful for even this much. tions of economic science to the art of living.” Marshall More important still are the political benefits of capi- encouraged “wisely ordered magnificence,” philanthropic talism. Smith believed that commerce made possible the expenditures on objects such as public parks and art col- liberty and security of ordinary folk. The tradesman who lections. Such expenditures are at once “free from any could sell the wealthy landowner a golden watch was no taint of personal vanity on the one side and envy on the longer so completely under the landowner’s thumb as other” and make available “an abundance of the higher those who worked the landowner’s lands had been. Simi- forms of enjoyment for collective use.”19 larly, the independence of small-business owners makes Economists of the past thought it was part of their them more able to counterbalance government power task to remind readers that there are high and low pleas- than would be possible in a more centralized, govern- ures, that we aspire to tastes better than our current ones, ment-guided economy. Economists tend to favor decen- and that such aspirations are sometimes hindered by tralizing institutions and policies to further economic profit-seeking businesses. Economics today is more tech- efficiency. For example, states and cities can experiment nical and more insular. The older economists read widely with various policies, and the good ideas are more likely beyond economics, and they felt the need to respond to be imitated. But decentralization is also important when one such as Thomas Carlyle said they were profess- because it allows more individuals to exercise their civic ing a “pig philosophy.” Economists will be able to defend responsibilities by governing. themselves more effectively when they can see the limita- Compared to a century ago, it is clear that more of tions as well as the uses of the self-interest assumption. the public today wants to consume and invest in ways that serve the public interest as well as their own. Con- Author Biography sumers buy Toyota Priuses, and investors try to invest in a socially responsible way with organizations such as the Steven E. Rhoads is professor of politics at the Univer- Global Alliance for Banking on Values and the Forum for sity of Virginia and author of The Economist’s View of Sustainable and Responsible Investment. Triodos Bank, the World: Government, Markets and Public Policy and which invests in enterprises that seek positive social and Taking Sex Differences Seriously. environmental changes, is an ongoing concern with

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Notes 7. Anthony P. Carnevale, Stephen J. Rose, and Ban Cheah, The College Payoff: Education, Occupations, Lifetime Earnings, 1. Kenneth Arrow and Frank Hahn, General Competitive Georgetown University Center of Education and the Work- Analysis (San Francisco: North-Holland, 1971), vii. force, 2000, http://cew.georgetown.edu/collegepayoff/. 2. 33 U.S.C. § 1251: US Code – Section 1251. 8. Congressional Budget Office, Trends in the Distribution 3. John E. Curley Jr., “For the Record,” Washington Post, of Household Income between 1979 and 2007, www.cbo.gov July 19, 1985, A24. /publication/42729. 4. Certainly, economists agree more on the appropriate role 9. David S. Logan, “Summary of Latest Federal Income for government than do politicians. Republicans typically Tax Data,” Table 1, Tax Foundation, October 20, 2011, http:/ complain about regulations, and they dislike taxes. Economists /taxfoundation.org/sites/taxfoundation.org/files/docs/ff285.pdf. disagree about whether taxes are too high, but almost all argue 10. Tax Policy Center, “Tax Units with Zero or Negative that some regulations are necessary. On the other side of the Tax Liability, Current Law, 2004–2011 (T11-0173),” June 14, aisle, Democrats tend to want to interfere with market forces 2011, www.taxpolicycenter.org/numbers/displayatab.cfm? even when there are no externalities or other market imperfec- DocID=3054 (accessed October 9, 2012). tions. For example, Lawrence H. Summers, then President 11. Robert H. Frank, Thomas D. Gilovich, and Dennis T. Obama’s chief economic adviser, famously criticized the gov- Regan, “Do Economists Make Bad Citizens?,” Journal of Eco- ernment loan to solar-panel manufacturer Solyndra, calling the nomic Perspectives 10 (1996), 187–92. government a “crappy vc [venture capitalist].” In that respect, 12. Bryan Caplan, The Myth of the Rational Voter: Why mainstream economists unite behind the founder of the disci- Democracies Choose Bad Policies (Princeton, NJ: Princeton Uni- pline, Adam Smith, in arguing that “the statesman who should versity Press, 2007). attempt to direct private people in what manner they ought to 13. James H. Fowler and Nicholas A. Christakis, “Dynamic employ their capitals would not only load himself with the Spread of Happiness in a Large Social Network: Longitudinal most unnecessary attention, but assume authority, which Analysis over 20 years in the Framingham Heart Study,” BMJ could safely be trusted not only to no single person, but to no 337 (2008): a2338. council or senate whatever, and which would nowhere be so 14. James Q. Wilson, “Broken Windows,” Atlantic Monthly dangerous as in the hands of a man who had folly and pre- (March 1982): 29–38. See also chapter two of Wilson’s Think- sumption enough to fancy himself fit to exercise it.” Eric Lip- ing about Crime (New York: Basic Books, 1975). ton and Matthew L. Wald, “E-mails Reveal Early White 15. Charles Schultze, The Public Use of Private Interest House Worries Over Solyndra,” New York Times, October 3, (Washington, DC: Brookings Institution Press, 1977), 17–18. 2011; and Adam Smith, The Wealth of Nations (London: 16. Adam Smith, The Theory of Moral Sentiments (White- Methuen & Co. Ltd., 1904), IV.2.10, www.econlib.org/ fish, MT: Kessinger Publishing, 2006), 133. library/Smith/smWN13.html. 17. Smith, The Wealth of Nations, IV.2.9. 5. Robert Whaples, “Do Economists Agree on Anything? 18. Bjørn Lomberg, Smart Solutions to Climate Change: Yes!,” Economist’s Voice, November 2006, http://ew-econ.typepad Comparing Costs and Benefits (Cambridge, UK: Cambridge .fr/articleAEAsurvey.pdf. University Press, 2010). 6. Dan A. Fuller and Doris Geide-Stevenson, “Consensus 19. Alfred Marshall, Principles of Economics (London: among Economists: Revisited,” Journal of Economic Education Macmillan, 1920) III.VI.26, www.econlib.org/library/Marshall 34, no. 4 (2003), 369–87. /marP14.html#III.VI.26.

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