A recent letter to the editor by my colleague Don Boudreaux got me thinking. In his letter, Boudreaux reacted to a comment by Representative Nancy Pelosi after she won the Democratic Caucus’ support to become speaker of the House. In her speech, she said that she felt good about her party and that “we” (I assume she meant the Democrats) plan to “go forward with confidence and humility.”
The claim of humility coming from the nominee is what got Boudreaux incensed. Boudreaux cited a few policies that Ms. Pelosi supports that demonstrate her lack of humility. Each of these policies rests on the presumption that government officials are better informed than are individuals about what is in individuals’ best interest.
The truth is that when you live, as I do, in Arlington,Virginia, and work near Washington, D.C., you know all too well that humility is a very scarce commodity.
In his 1974 Nobel Prize lecture, economist F.A. Hayek warned his profession against the dangers of what he called “the pretense of knowledge.” Our society, he noted, is so much more complex than we can even comprehend, and essential pieces of knowledge about it are dispersed among millions of individuals. Hayek urged economists and social scientists to maintain humility about the limits of their own knowledge, and to resist the intoxication that comes with the heady authority of “expertise” used to experiment with and control the populations that these “experts” believe need guidance.
To top it off, he noted that thinking of economics as akin to a natural science leads to the very mistaken belief that anyone could know enough to engineer society successfully. In fact, he famously added in The Fatal Conceit, “the curious task of economics is to demonstrate to men how little they really know about what they imagine they can design.”
The Loss of Humility
In recent years, the Hoover Institution’s Russ Roberts has made it his mission to highlight how much Hayek was right to worry, and how our profession, and by extension pundits and think tankers around the country, has lost that humility as many have succumbed to the temptation to make precise predictions and economic forecasts about economic growth and unemployment rates, job loss, and job creation that are then used by politicians to drive policies and are, at best, whimsical.
As he likes to joke, “How do you know macroeconomists have a sense of humor? They use decimal points.” And they will also tell you with a straight face that the 2009 stimulus created anywhere between 600,000 and 1,600,000 jobs, without ever having counted the actual number of jobs created.
Unfortunately, as things stand, it is more lucrative to come up with a precise, even though very likely wrong, number than to say, “I can’t give you an exact figure.” To top it off, no one holds anyone accountable for the countless failed predictions, so Hayek’s warning be damned.
As Boudreaux noted, this call for humility might as well have been directed at the army of well-intentioned legislators and bureaucrats who itch to intervene in our lives on a daily basis, and to do so not only through existing policies, but also through new regulations and government programs.
Examples of such behaviors abound. Boudreaux mentioned the recent implementation in some cities of a $15-per-hour minimum wage (the same level as in the cries for the national minimum wage). Here, government officials presume that it is appropriate for them to set a wage below which employers are not allowed to pay their employees.
I am sure most of these laws are passed out of a genuine concern about workers. They could also be driven by the belief that employers are selfish and unconcerned about their staff. However, these interventions exhibit zero regard for the uniqueness of each employer’s business model, profit margins, and market conditions. They also ignore differences in employees’ skill sets and their preferences for fringe benefits and on-the-job amenities.
The tragedy of minimum wages is understood by most economists: If government jacks up the price of labor, the quantity of labor demanded goes down. This reality doesn’t mean that some workers will not find their incomes increased by the policy. Nor does it mean that no companies can swallow the cost increase and survive. But neither of these possibilities implies the existence of a free lunch.
Sure, some of these employers will raise their prices in response to a hike in the minimum wage. But revenues are not guaranteed to rise as a result; indeed, they might even fall. Either way, having to devote a bigger share of their revenues to pay workers means that employers will respond by economizing on the amount of labor they employ, often by replacing human labor with machines. The workers who will be the first to be fired and last to be hired will be those with the fewest skills.
The same is true of policies meant to force employers to give employees paid leave or paid overtime. Politicians presume to know better than workers what mix of cash payments and fringe benefits is best for them.
When these pretentious interventions aren’t justified in the name of helping workers, middle-class Americans, or children, they come wrapped in a “This is for your own good” bow. This is the case with the Food and Drug Administration’s ban on many cheeses that have been consumed for decades without incident in Europe, and its stopping terminally ill patients from trying new drugs that might save their lives, and its deciding to make it more difficult for the 30 million smokers to switch to electric cigarettes. This lack of regulatory humility combines with bureaucrats’ belief that they are helping people who don’t know what’s good for them to become a powerful driver of regulatory hyperactivity..
On top of it all, legislators and bureaucrats rarely learn from their many and repeated mistakes.
You would think that FEMA’s botched response to Hurricane Katrina would trigger fundamental reforms of that agency, but you would be wrong. You would hope that the mistaken claims of Iraqi weapons of mass destruction that created the momentum for the war in Iraq would reduce politicians’ eagerness to intervene abroad, but you would be wrong, as our doubling down on a failed strategy in Afghanistan demonstrates.
You would think that the epic failure in launching the Affordable Care Act’s federal exchange, or the failure to profitably run the postal services or Amtrak, would make legislators want to return these programs’ functions to the private sector. Again, you would be wrong. You would think that the visible failure of the Trump administration to deliver on its promise that “trade wars are good and easy to win” would make the president abandon tariffs and other protectionist follies. Yet again, you’d be wrong. These are just some of the big failures. Multitudes of others exist. Government programs that promise to end poverty don’t. Government efforts to support small businesses or exports simply amount to picking winners and losers. Schemes to fix the underlying problems that caused the last financial crisis just end up building a wall of protection around the traditional interest groups on Wall Street at the expense of small banks and consumers, while only causing the risks of future financial crises to rise.
The Pretense of Knowledge
So Boudreaux is right: the lack of humility of legislators who believe they can intervene in the economy and make our lives better is real, and it is problematic. It is also well-explained by the incentives that exist within government institutions. These bad incentives were well-explained by James Buchanan, Gordon Tullock, and other public-choice economists. As I have said before, the only way to address this problem is to shrink the size and scope of government.
The bottom line is that the pretense of knowledge is powerful and widespread. It feeds Leviathan at all levels. Calls for humility are too rare, and those who actually take this call seriously are even rarer. It is a shame that we all pay daily for this humility deficit.
These are just some of the big failures. Multitudes of others exist. Government programs that promise to end poverty don’t. Government efforts to support small businesses or exports simply amount to picking winners and losers. Schemes to fix the underlying problems that caused the last financial crisis just end up building a wall of protection around the traditional interest groups on Wall Street at the expense of small banks and consumers, while only causing the risks of future financial crises to rise.