Economics: It's Complicated

This interview with labor economist David Card makes for interesting reading. The predominant theme, I suppose, is that after Economics 101 comes . . . a whole bunch of additional stuff. Which is to say that things -- in Card's case, labor markets -- turn out to be complicated, and it's at least not obviously true, in practice, that policy shifts have the consequences that very simple models of the situation would indicate. One needs to do the work. Not, obviously, that Card's views on any of these questions are the last word either, but simply that a lot of the economic policy issues that get discussed these days don't have answers that can be read off a really basic supply and demand curve.

Will Wilkinson's post lauding John Rawls and Friedrick Hayek got me thinking along somewhat similar lines. The thing about Hayek that's always worth keeping in mind was that things were quite different in his day. In particular, lots and lots of people thought that the Great Depression had totally discredited capitalism, since the more command-oriented economies of Nazi Germany, Soviet Russia, and Fascist Italy were thought to have weathered it better. At a minimum, there was a widespread belief in a sharp trade-off between freedom (capitalism) and efficiency (planned economies). Consequently, it you hard parties of the moderate, democratic left nationalizing industry and trying to implement large-scale economic planning.

Hayek's big intellectual achievement (and not his alone, obviously) was to show that this was all wrong, and that large-scale economic planning wasn't going to work out.

In part thanks to the influence of people like that, contemporary political debates, especially in the United States, take place across a wildly narrow spectrum of possible outcomes. Nobody with any degree of influence denies that economic relations should by and large be arranged by markets. People aren't calling for the abolition of private property, or for the government to take over the banks or the mines or the steel companies or what have you.

Instead, we have a lot of arguments about the sorts of things Card is engaging with -- basically what kind of difference to do quite small policy interventions make? Not should the government set wage scales across the economy, but should the government set a minimum wage of $0.00, $5.00, or $8.00? What happens if the top income tax rate goes from 30 percent to 37 percent? Precisely because these policy changes are small, the smallish ways in which actual markets deviate from idealized markets winds up potentially making a big difference. If you talk about giant question -- what happens if we set a minimum wage of $50.00? -- then simple approximations of human behavior give you extremely reliable answers. When you talk about changes across a much smaller range, things becomes much less clear.