Can an Economist Make Things Better?

“This is the best of all possible worlds” can be said by an optimist or a pessimist, for the former with emphasis on “best,” for the latter on “possible.”

The defining feature of economics is rationality, the assumption that individuals tend to take the actions that best serve their objectives. That makes it tempting to conclude that nothing an economist can suggest could improve things: If a change would be an improvement it would already have been made.

This point occurred to me reading Douglas Allen’s book, discussed in my previous post, and corresponding with the author. His implicit assumption is that institutions were and are efficient, the best that could be done given existing constraints. The reason England in the Seventeenth Century used patronage and purchase instead of a modern system of employment was not that they were not clever enough to realize the superiority of the latter, it was because, given their technological constraints — no fast communication, ships at the mercy of the wind, agriculture of the weather — our institutions would not have worked as well for them as theirs did.

It makes sense as a conjecture for an economic historian to start with, just as Posner’s conjecture that the common law is economically efficient makes sense for someone using economics to understand the law.¹ The fact that institutions work, provide the results people want, is one reason to adopt or preserve them, so might explain their existence; that suggests the sort of approach Allen adopts. But it is, in both cases, only a conjecture. There is no mechanism to guarantee that societies never make mistakes, never end up with a set of institutions inferior to an alternative, no social planner looking over the set of possible alternatives and choosing the best.

Even at the individual level, optimality in the simple sense of always making the right choice is too simple an assumption. Optimal action is subject to information costs: It is irrational to obtain the information needed to make a better decision if the cost of the information is greater than the benefit. If finding out which of two brands of car you should choose costs more time and money, perhaps renting and driving both, than the information is worth, it is rational to choose at random. A Consumer Reports article comparing the two could lower the information cost below the benefit, so the author of such an article could make me better off. In the same way, an economist could provide me information relevant to some decision, such as how to decide what career to choose, that it would not be worth the cost of working out for myself.²

The point applies more strongly to group decisions; individual rationality does not imply group rationality. Even if the information needed to decide for or against a tariff costs less than the benefit of the correct decision voters may rationally fail to acquire it, since each voter pays the cost of his research but receives only a small fraction of the benefit in increased probability of a correct decision. An economist who lowers that cost by providing an easily understood explanation of the relevant economics could improve the outcome.

A democratic system, like an optical microscope, has a fine control and a coarse control. The fine control is the detailed politics of lobbying, vote trading, and the like. The coarse control is majority voting driven by free information, information acquired not in order to vote more wisely but because it is interesting, useful for private decisions, or valued for some other non-political reason. An economist can change the mix of free information out there. So can a novelist, a preacher, anyone whose activities affect what people believe.

That is part of the reason this Substack exists.

The coarse control matters because it affects the political cost of legislation. If most voters believe that a tariff benefits the country that imposes it by protecting its workers and firms from foreign competition, the political benefits of supporting it will be larger and the costs smaller than if most voters see a tariff as a way in which an import-competing industry benefits itself at a cost to everyone else.³ An economist can shift voters from one view to the other, directly if he is writing for a mass audience, indirectly if he is educating students who will pass on some of his teaching to many others. Research or analysis that changes the views of his colleagues can have the same effect at second hand, in a desirable direction if his work is correct.

Hence even if all individuals are rational it is possible for an economist to make things better. And although assuming that past societies have gotten their institutions right or that existing common law is economically efficient is an interesting starting point, one should be willing to reject that conjecture if the evidence does not fit it.

There is, as my subhead suggests, one way of justifying the claim that existing institutions are the best possible — the determinist claim that whatever is is the only thing that could be, hence that the institutions of the Seventeenth Century, or the Twenty-first, are the only, hence the best, also the worst, possible.

It is not, however, a very productive approach to understanding them, still less to improving them.

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1. For a book length exploration and critique of that approach to the law, see my Law’s Order,

2. For an example of such information, not data but logical analysis, see Chapter 1 of my Hidden Order, subhead “Even More Important Applications.”

3. I sketched the relevant economics in an earlier post.