Seen and Unseen

I think one of the hardest things to do when thinking about economics is to take into consideration the hidden consequences of actions and policies. Here's and example of that in the fallacy of the broken window.



If you didn't know better, you'd think a hoodlum breaking a window creates a bunch of economic activity, and so is actually good for the economy. But of course, the unseen is the economic activity that would have happened anyway as the butcher spends the money, not on a window, but on some other good.

The same problem arises in the debate between free trade and protectionism. We feel bad for people losing their jobs when their jobs go oversees. We see the jobs leaving, and think that they aren't going to come back. But of course, we've had a similar free trade policy for a a couple decades now, and in actuality our unemployment rate hasn't gone up as a result. But real income (when taking into consideration benefits) has gone up. (you can see an hour long, but good debate between Don Bordreaux and Thea Lee here making these points) What we don't see is the net benefit to consumers through lower prices because it's not immediately apparent.

The benefits of past economic growth are also hidden in plain sight. Here's a pretty funny and insightful clip of comedian Louis CK pointing out how far we've come, and how little we appreciate it.  Brink Lindsay makes a similar point in a very interesting but more academic way in this podcast. Basically he talks about how like, 100 years ago 99 percent of us would have been poor farmers toiling day-in, day-out to make ends meet. People talk about how we have meaningless work, but unless you wanted to be a farmer (which is still a possibility), we have endlessly more opportunities for self realization and interesting and meaningful work. We also have 6 hours more free time a week for self realization. Even the poorest of us have a lot more money to buy books, music, musical instruments, to give to charity and to do all sorts of things to make our lives more meaningful, not to mention longer and more convenient.

My final unseen is what is going to happen in the future. Or more specifically what could happened had we pursued a different course. I understand in the early 50s France and the U.S. had approximately the same GDP per capita. That is people made about the same amount of money in each country. Now the U.S makes about $13,000 per person.(and I've read elsewhere that the gap is even larger). It's generally accepted that higher taxes mean less economic growth, and that is exactly what France (and Germany, who has a similar story) have had for the last several decades). We now are now on an unsustainable path of taxes too low to pay for all the great benefits we've promised people. At some point we're going to have to raise taxes. That'll mean less money to invest privately. It'll also mean less incentive to innovate an create new technology, which is really the driving force for economic growth. So we see the immediate benefits to the money that is spent on  benefits, but don't see the companies that were never started and the technology that was never invented.

These four fallacies are so common because people assume that what they see is all there is to reality:

1. We see that inefficient spending stimulates economic activity, but don't see that the money could have been spent in another more efficient way.
2. We see that people lose their jobs to outsourcing, but don't see that trade creates new jobs, and that trade lowers prices for consumers.
3. We see current economic problems and blame them on our economic system, but we don't see, or we take for granted all the progress and benefits our less-than-perfect economic system gives us.
4. We see the current benefits of spending, and we see the path the economy actually takes, but we don't see the opportunity cost of that spending. We don't see technological breakthroughs and innovations we have lost or would have enjoyed earlier with faster economic growth.