Tuesday, February 05, 2008

I just report the greed, I don't make it 

John Palmer has an excellent post this morning on how people misunderstand economics as "making people greedy". Phil Miller recommends this as an antidote to those who argue that economists are evil.

I remember a great lecture in public economics that Tom Willett, my advisor in graduate school, gave on the use of assumptions in economics. It was not that we believe that individuals are greedy, but that the self-interest axiom leads to more correct predictions of human behavior. The realism of the assumption is irrelevant; if you need that assumption to make the model give you good prediction, keep it. Perhaps you can model a policy with enough public exhortations that would change people's motivations; perhaps not. The history of the world indicates that using policies that align incentives with individual self-interest work better in the aggregate. That is all. A single policy that might have worked because of public moralizing doesn't disprove the validity of the economic method.

Or, in John's terms, legislating for nirvana is usually disastrous. And worse, it leads one to think one can create nirvana; such a thought process lies behind this gem found by Angus that would argue for messing with incentives to live longer because you might be a net cost to government. (I hear Pigou rolling over in his grave.)

UPDATE: Peter Boettke reminds us of Deirdre McCloskey's observation that nobody writes folk songs for capitalism. Obviously Rush isn't folk, but it is capitalism.