Two recent economics articles provide great examples of “what is seen and what is not seen.” That was the title of an 1850 book by Frederic Bastiat, a French political economist. Bastiat’s point:
In the sphere of economics an action, a habit, an institution or a law engenders not just one effect but a series of effects. Of these effects only the first is immediate; it is revealed simultaneously with its cause, it is seen. The others merely occur successively, they are not seen; we are lucky if we foresee them.
The entire difference between a bad and a good Economist is apparent here. A bad one relies on the visible effect while the good one takes account both of the effect one can see and of those one must foresee.
Scott Lincicome of the Cato Institute got into this issue in an article on industrial policy yesterday for the Dispatch. Lincicome wrote:
Economic analysis doesn’t simply point to some event and some subsequent outcome, and boldly proclaim that the former caused the latter. (Indeed, there’s a whole hilarious website that generates these “spurious correlations” on demand.) Economists don’t just declare a policy change—a new tax or subsidy, for example—a “success” or “failure” because something good or bad, respectively, happened thereafter. Doing that ignores whether the result at issue was already happening before the policy was implemented; whether unrelated stuff—wars, recessions, famines, other policies, whatever—occurred around the same time and actually caused the result; whether policymakers actually intended the result (or just got lucky); whether the data at issue are of high quality and truly representative; where there’s a strong and intended connection between a policy and an outcome, how much it all cost (overall and for particular groups); and, relatedly, what didn’t happen as a result of the policy choice.
The stuff that didn’t happen is the unseen that Bastiat was talking about. If the government spends a bunch of money to encourage a specific sector, and that sector builds new facilities and adds new jobs, everyone sees the new facilities and the new jobs. But an economist will consider whether the money could have been better spent elsewhere, whether there would have been more facilities and more jobs if it had been spent differently, or if the program was structured better, whether it could have achieved the same results at a lower cost.
Economists aren’t being party-poopers when they do that kind of analysis. As Lincicome points out, adults understand it almost intuitively. He gives the example of growing pineapples in Europe, which was a hobby of aristocrats in the 1700s. If it’s just for fun, that’s one thing, but we all know it would be really silly to try to grow pineapples in Europe at scale. You’d end up with pineapples (seen), but they’d be really expensive, and as a result of spending money to artificially engineer the conditions to grow pineapples in Europe, other things that money could have been spent on will not exist (unseen).
In an article today for Economic Forces, Josh Hendrickson of the University of Mississippi also gets into the seen and the unseen. He’s writing about skeptics of his ideas for reforming government deposit insurance. One common argument raised in favor of government deposit insurance is that depositors aren’t capable of evaluating the stability of banks on their own. That may be true right now, Hendrickson says, but that’s only what you’re seeing as a result of government deposit insurance’s existing. With government deposit insurance, depositors don’t need to pay attention because their money is safe regardless. In the absence of that, things we don’t see now would come into existence.
Hendrickson writes:
The idea that neither shareholders nor depositors are capable of reading balance sheets or evaluating the stability of the bank seems a bit odd. There are many goods and services that consumers have little knowledge of or experience with. Yet, somehow consumers learn how to discern the quality of these goods and services. I’m willing to bet that many consumers could not explain how a microwave works and certainly wouldn’t know how to build one. Nonetheless, somehow consumers are able to figure out which microwaves are “good” and which ones are “bad.” They are able to do so because of the reputations, brand names, trial-and-error, and word-of-mouth.
Also, when information problems exist, specialist middlemen tend to emerge. These middlemen specialize in having the necessary information and providing it to consumers at a cost. For ordinary household goods an obvious example is an organization like Consumer Reports, which tests out products and offers reports of their findings. In an earlier era of banking, in scenarios in which bank notes didn’t trade at par, there were firms that published books with the relevant discounts on particular notes. Clearinghouse associations provided information about bank balance sheets to the public as a way of disciplining its member banks, thereby reducing the risk of the association.
Lincicome talks about the seen and unseen as a result of government enacting a policy, and Hendrickson talks about the seen and unseen as a result of government getting rid of a policy, but they’re both doing what Bastiat wrote about over 150 years ago.