Economic Theory

The continuing power of intuitive or do-it-yourself economics (DIYE)


Government and Institutions
Tax and Fiscal Policy
This article is based on Chapter 7 of David Henderson’s 2004 book ‘The Role of Business in the Modern World,’ published in Wellington (by the New Zealand Business Roundtable), London (by the Institute of Economic Affairs), and Washington D.C. (by the Competitive Enterprise Institute).

The story of the long-continuing official prohibition on Australian iron ore exports provides a copybook illustration of a pervasive influence on events and policies which economists, and others too, are inclined to overlook or play down.  The pressures for maintaining the statutory export ban did not at all arise from material interests, whether business or non-business: they arose from mistaken economic arguments and assumptions. The key assumption was that Australian resources of iron ore were strictly limited; and the inference drawn was that the Commonwealth government should ensure that these valuable scarce resources were reserved for future exclusively Australian use. Despite their obvious flaws, these arguments were accepted uncritically in official circles, technical and political. Policy was determined, not by interest group pressures or opportunist vote-catching by politicians, but by what were wrongly seen as the merits of the case. The governments concerned, and their professional advisers, were guided by a shared mistaken conception of the public interest.

This episode is one of the countless instances, ancient and modern, in which economic policies have been influenced or decided by firmly held intuitive economic ideas and beliefs which owe little or nothing to economic textbooks or treatises, or to the evidence of economic history. These various notions can justly be termed ‘pre-economic’. I have classed them together under the heading of ‘do-it-yourself economics’ (DIYE).  All over the world, as each day’s news bears witness, they retain their hold over people and governments, and their power to influence events.[1]

As this past Australian example illustrates, what is in question here is not just ‘popular economic fallacies’, the uninstructed beliefs of unimportant people. To the contrary, leading ideas and beliefs that go to make up DIYE are sincerely held, and voiced with conviction, by political leaders, top civil servants, chief executives of corporations, general secretaries of trade unions, well known journalists and commentators, eminent religious persons, senior judges, and established professors across the whole range of academic disciplines (not excluding economics itself).  That is why they have to be taken seriously as an influence on events. This is not ‘pop economics’ (pace Paul Krugman), since it is embraced by leaders as well as led; it is not ‘voodoo economics’ (pace Ronald Reagan), since those who practice it are not just cranks; and it is not ‘businessmens’ economics’ (pace Samuel Brittan), since its adherents are equally to be found in other walks of life.

Some characteristic long-established DIYE notions have already made their appearance in earlier chapters of this book. The oldest and perhaps the most influential of these is the belief, or presumption, that actions undertaken for profit, or more broadly for reasons of self-interest, are open to question as suchThis typically goes together with an intuitive mistrust of markets: they are seen as anarchic and disruptive, as well as amoral if not driven by sinful greed. An observation made about socialists in a recent book by Anthony de Jasay applies more broadly to today’s exponents of DIYE, many of whom might not wish to describe their views as socialist – namely, that they

‘ … tend to speak of the “market” as though it were a person, and a downright dangerous character at that, inclined to malignant deeds. They make accusations against the “market” that they would never make against the “set of voluntary exchanges”, overlooking that these two are synonymous of each other’.[2]

Another characteristic feature of DIYE, likewise noted in earlier chapters, is a collectivist vision of economic change, in which the material progress of ordinary people chiefly depends, not on the growth of productivity and output per head through investment and innovation, but on centralised deliverance from above. One aspect of such deliverance is government regulation to protect workers against what are taken to be chronically and ruthlessly exploitative profit-oriented enterprises which, if left unregulated, would supposedly have the power to impose terms and conditions of employment of their own choosing and to give free rein to prejudice and intolerance in their treatment of different groups. Such firmly held intuitions are typically linked with others that also point in a collectivist direction and are often mutually reinforcing. Among these is what I have termed ‘unreflecting centralism’, that is, the attribution to states and governments of roles, powers, duties and functions which are not necessarily theirs. One aspect of this centralism is the belief, or presumption, that when transactions take place across national boundaries the state is necessarily involved, so that cross-border economic competition is between states. This presumption provides a rationale for interventionist trade and industrial policies, the more so when combined with the still-prevalent mercantilist conviction that exports are to be counted as a gain to a country and imports as a cost.

Another common DIYE presumption is that goods and services, and specific industries or activities, can be usefully classified as essential or non-essential, or alternatively, in a more refined taxonomy, ranked in order of priority. In either case, it is presumed to be the responsibility of governments to ensure essential supplies or to see that priorities are enforced.

In today’s DIYE, some already established ways of thinking have been given a new flavour. The resulting notions include several that have already been referred to in earlier chapters:

·         that reducing ‘the gap’ between rich and poor, often greatly overstated when international comparisons are in question, should be a primary concern;

·         that the goods and services at the disposal of human kind are made available by Planet Earth and unjustly pre-empted by people in the rich countries;

·         that in a market economy the progress of ordinary people is dependent, in the absence of effective official redistributive measures, on a not-to-be-relied-on process of ‘trickle-down’; and

·         that recent globalisation has ‘marginalised’ poor people and poor countries and shifted the power to act and decide from governments to multinational enterprises.

To this list has now been added the more far-reaching presumption that the great majority of the world’s population, and not just the poor and those employed by private businesses, are actual or potential victims, whose status as such can be remedied only by far-reaching actions on the part of ‘society’ or ‘the international community’. All these various notions fit well with the prevailing alarmist beliefs and assumptions relating to population, resources and the environment, and the supposedly dire consequences of economic activity, that were likewise outlined above in Chapter 4: the newer or refurbished elements in DIYE form an integral part of today’s version of what I have termed (initially, in 1999)  global salvationism.[3] In turn, global salvationism itself fits well with, and is reinforced by, some older staple elements of DIYE, such as unreflecting centralism and the conviction that good results can reliably flow only from conduct that is not based on self-interest.

While interests and ideas are often separate influences, they can be especially effective when linked and mutually reinforcing. Pressure groups typically carry weight not just through skilful lobbying and persuasion directed towards those in power, but also by winning assent or support from a wider public opinion which sees the objectives in question as fair, reasonable or in the national interest. Indeed, without such public support, or at any rate acquiescence, interest groups are unlikely to achieve their aims. Now as in the past, many of the strongest interventionist pressures, and the resulting official policies, arise from the combined influence of DIYE and the lobbies.

Prof David Henderson is a former (founding) chairman of the Global Warming Policy Foundation’s (GWPF) Academic Advisory Council. He was formerly Head of the Economics and Statistics Department of the OECD.

[1] Evidence as to the character, pervasiveness and influence of DIYE, together with many specific instances of it, can be found in my short book, Innocence and Design: The Influence of Economic Ideas on Policy, (Oxford, Blackwell, 1986), the published version of my 1985 BBC Reith Lectures. A prize specimen of highly influential DIYE fantasy, referred to on pp. 44-5 of the London edition of my 1999 book The MAI Affair, was the best-selling book published in 1967 by the French author, Jean-Jacques Servan-Schreiber, Le Defi Americain, brought out in English translation as The American Challenge ( London, Hamish Hamilton, 1968.)

[2] Anthony de Jasay, Justice and Its Surroundings, Indianapolis, Liberty Fund, 2002, p. xxiii.

3 Over the past half-century or more, two strands of thinking about world problems have been much in evidence and have received continuing widespread support. The first relates to problems of poverty and economic development, and the second to environmental issues. In both, two elements are combined.  One is a generally dark – not to say alarmist – picture of the world’s current state and future prospects, at any rate unless timely and far-reaching changes are imposed. The second element is a conviction that remedies for the present highly alarming situation are known, and that they require the adoption by governments and ‘the international community’ of concerted strategies and programmes. ‘Solutions’ are at hand, given wise collective decisions and actions. It is the combination of alarmist visions with confidently radical collectivist prescriptions for the world as a whole that characterises and defines global salvationism.