How to Think About Social Issues: Tips 9-10

9. Who benefits:

When thinking about a government policy, always ask the question: who benefits? For example, take  licensing requirements for doctors. In the United States, all practising doctors are required, by law, to be members of the American Medical Association (AMA). The AMA does not let just anyone who says that they want to practice medicine into their ranks. To become a member, the candidate must go through AMA-approved medical schools (whose enrolment numbers are limited by the AMA) and must meet certain standards while a practising doctor. The AMA and its supporters claim that this policy is designed to protect consumers from sub-par doctors and quacks. But, let us inquire, who benefits from this policy?

Like any license-based restriction system, the AMA’s monopoly serves to reduce the supply of people who can do the work assigned to “doctors” and, as elementary economics will tell us, when the supply of something goes down (in this case the supply of medical practitioners), other things equal, the average price paid for the good in question will go up. In this case, the good in question is medical services, and when the average price of medical services goes up, the ones that benefit by receiving extra income are the doctors who are allowed to supply the good. The established doctors who already have their membership in the AMA enjoy these higher prices for their services, they are the ones that materially benefit from the policy.

But what of their claim that they are protecting consumers? This claim is disingenuous because, either the consumers do not want their protection and would prefer to take their chances, or they would only patronize AMA-approved doctors at a higher price if the choice between AMA and non-AMA doctors was available to them. Thus, as a voluntary association of medical professionals that certified doctors they deemed competent, the AMA could perform all their positive functions without the negative side-effects of their enjoying a coercive monopoly over medical consumers. The social scientist who asks: who benefits?, with regards to this policy will be in a position to evaluate the policy more realistically, as a monopoly scheme to reap the established doctors more monopoly gains and protect them from competition, at the expense of the consumers and potential doctors who are barred from the profession.

10. Seen versus Unseen:  

This tip I have taken from the works of the 19th century French classical economist Frederic Bastiat and the work, Economics in One Lesson by the American economist Henry Hazlitt. Inspired by Bastiat, Hazlitt recognized that the most important lesson in economics is to always think about the unseen costs of each economic policy. Bastiat and Hazlitt identified a major error known as the “Broken Window Fallacy”. Imagine that a juvenile delinquent throws a rock at a shopkeeper’s window, shattering it. Seeing it, most observers deem it a bad thing, but one observer says: “Don’t you see that this boy has done a service to the community by breaking this window? Now the glazier (the person who fixes windows) has work!”. This observer recognizes that the shopkeeper must give employment to the glazier and that this will make the glazier happy, this is the seen. What the observer does not recognize is that if the window had not been broken, the shopkeeper could have, say, bought a new suit with the money that now has to go towards repairing the window, and this would, besides making the tailors happy, have made the shopkeeper happy too because now rather than just replacing something that already existed, he can buy something new that will add to his well-being. This beneficial purchase that could have been made but has been forestalled by the act of destruction is the unseen, the ignoring of which constitutes the “Broken Window Fallacy”.

Keynesian economists in particular seem hooked to this fallacy. A major Keynesian argument is that, in a depression, the government should ‘stimulate the economy’ by spending money on public works projects, thus providing employment for the unemployed labourers. Keynes suggested that even spending money on digging useless holes or building useless pyramids would be better than doing nothing. What the Keynesians don’t seem to grasp is that the government does not just create resources out of thin air. It must either tax the citizenry to fund the project or (the method recommended by Keynesians), it must use its monopoly of money production to expand the money supply, thus giving itself more money and thus claims to resources, at the expense of other money holders’ purchasing power (and causing harmful economic distortions to boot). In either case, the government takes resources from the citizenry in order to fund their public works projects. While the employment provided by the public works projects is what is seen, the potential employment and consumer satisfaction that could have been provided had the money or claims over resources stayed in the hands of the citizenry is what is not seen. The government breaks the window with the tax, and ‘repairs’ it by providing employment to people with the public works project. If the tax had not been levied though, the resources would have been allocated in the way that the consumers wanted them to be allocated, not in the useless way in which the government allocated them.

An equally egregious Keynesian claim is that wars can help “stimulate the economy”. But wars only destroy, and though preparing for them and rebuilding afterwards provides a lot of ‘employment’, those resources could have been used in peaceful ways to improve the well-being of the world’s consumers. Thus, always remember to use your imagination and powers of abstraction and never forget about the unseen.