August 18, 2009
PUNISH THE VANDAL EVEN THOUGH HE DID YOU A FAVOR:
Obama's Doomed Utopia: Hidden assumptions suggest reforms won't work. (Richard A. Epstein, 08.18.09, Forbes)
Unfortunately, his campaign skills have not easily transferred to the humdrum business of governance. So much so, that his best chance for reelection requires the remainder of his legislative program to fail.Why? For decidedly academic reasons: His campaign rhetoric rests on implicit ceteris paribus assumptions that can't hold good. Ceteris paribus is a bit of fancy Latin that means, "all other things being equal." It is an intuitive way to hedge one's bets about the future, by saying that some specified change in a complex system will have its desired effect, assuming that everything else remains unchanged.
This approach is a mixed blessing. On the high side, the ceteris paribus assumption allows for a convenient simplification of what otherwise would be an intractable problem. Thus if one wants to figure out the overall social effects of a rent control statute, it is useful to ignore the possibility that tenants will use their rent savings to bid up the price of tangerines. The prudent analyst is better advised to concentrate on the (dramatic) effects that the regulation has on the supply and quality of housing.
The downside is that in some settings a more capacious view of ceteris paribus lulls people into ignoring issues that are at the core of a problem.
In his classic, Economics in One Lesson, Henry Hazlitt's lesson is that:
The art of economics consists in looking not merely at the immediate but at the longer effects of any act or policy; it consists in tracing the consequences of that policy not merely for one group but for all groups.
The text is only made more useful by the fact that Mr. Hazlitt immediately proceeds to violate the lesson himself:
Let us begin with the simplest illustration possible: let us, emulating Bastiat, choose a broken pane of glass.A young hoodlum, say, heaves a brick through the window of a baker’s shop. The shopkeeper runs out furious, but the boy is gone. A crowd gathers, and begins to stare with quiet satisfaction at the gaping hole in the window and the shattered glass over the bread and pies. After a while the crowd feels the need for philosophic reflection. And several of its members are almost certain to remind each other or the baker that, after all, the misfortune has its bright side. It will make business for some glazier. As they begin to think of this they elaborate upon it. How much does a new plate glass window cost? Two hundred and fifty dollars? That will be quite a sum. After all, if windows were never broken, what would happen to the glass business? Then, of course, the thing is endless. The glazier will have $250 more to spend with other merchants, and these in turn will have $250 more to spend with still other merchants, and so ad infinitum. The smashed window will go on providing money and employment in ever-widening circles. The logical conclusion from all this would be, if the crowd drew it, that the little hoodlum who threw the brick, far from being a public menace, was a public benefactor.
Now let us take another look. The crowd is at least right in its first conclusion. This little act of vandalism will in the first instance mean more business for some glazier. The glazier will be no more unhappy to learn of the incident than an undertaker to learn of a death. But the shopkeeper will be out $250 that he was planning to spend for a new suit. Because he has had to replace a window, he will have to go without the suit (or some equivalent need or luxury). Instead of having a window and $250 he now has merely a window.
Obviously Mr. Hazlitt's example requires that the window industry remain perfectly static over time, rather than so dynamic that the replacement the baker purchases--double-paned, gas-filled, etc.--will not only save dramatically on his own energy bills but benefit the entire society by reducing fuel consumption.
Now, if an economic savant can't consistently apply his own lesson in a book meant only to teach it, what hope does Mr. Obama have of grasping it, given that he has no economic training nor business background?