 Hey Kevin here, welcome back to Invisible Hands, a series that makes economics easy and helps you see the beauty of trade and cooperation. With puppets! Oh hey Fiona, it's good to see you. So far in this series we've learned that having good rules and institutions that protect people's property and freedom are essential for a prosperous and a happy society. But now we're going to look at the ways economic thinking can be used to better understand political decision making. Oh boy, I guess that means we're going to talk about politics. So exciting. I know, I know, but we're not actually going to be talking about politics or specific policies. Thankfully, instead we're going to talk about how understanding economics helps you understand political behavior. Go on. Okay, economics is the study of human behavior involving choice, right? Yeah. Politics and law are two ways that people try to influence or control the choices people are allowed to make. Ugh, politicians, am I right? Politics and law are usually intended to create rules for shaping how people should behave. But economic insight can tell us how people might really behave when faced with certain conditions. Rules such as legislation and social customs establish the fundamental incentive structure for any economic system. Different rules create different incentives. Yeah, we already talked about the market process. Now, let's take a look at government intervention in markets and the economy. Ah, yes, well, you see, government intervenes in the market to influence economic outcomes frequently. For instance, we have taxes designed to encourage some behaviors like driving electric cars and to discourage others such as smoking. The government subsidizes some economic activities and forces people to buy some goods and services while regulating or prohibiting others entirely. I thought that was a bad thing. It usually is. But what if people make bad choices? And what happens when corporations do bad things? What would you say to people who think the government needs to intervene into the economy so it works for everyone? The question we're concerned about is not should there be economic planning? All humans plan. The real question is, who should do the planning? Politicians, right? Is there an alternative? Robots? Robots? You mean economics professors? Look, economic activity could follow the centralized plans of a few people with power, but economic order can also emerge from the plans of many decentralized individuals operating in the free market. Economics might not give us all the answers, but it can help us ask better questions. OK, I've got a question. Earlier, you also said that economic thinking helps explain how people make political decisions. What did you mean by that? Well, the first thing that you should consider is that in order to make good decisions, government officials need a lot of specific knowledge about all kinds of stuff related to those decisions. They need to know what resources are available, how scarce they are, what people value, where those resources are most needed, when, and on and on and on and on. But all that knowledge is dispersed in tiny, localized bits throughout an economy. This knowledge is constantly changing in response to new circumstances. That's like how we talked about subjective value, how I know when I'm hungry and what I want to eat, but how that changes all the time, and nobody else is ever going to know what I'm looking for at the moment I'm looking. Bingo, everyone has their own unique subjective valuations of resources in a world that is constantly changing. By its very nature, it's actually impossible that this situational knowledge can ever be collected, aggregated, and used by a central authority to effectively plan an ingenious society. The Foundation for Economic Education's founder, Leonard Reid, wrote an essay about this called, I Pencil. In it, he explains that no person or group can possibly have sufficient knowledge to make something as seemingly simple as a pencil, much less plan the actions of millions of people. So that's why a lot of legislation intended to help poor people or improve education doesn't work. Unfortunately, yeah, even when central planners have the best of intentions, it's still impossible for them to have anywhere close to the knowledge necessary to run an entire economy. So what are we supposed to do instead? We rely on markets and prices to communicate all this knowledge and coordinate production and consumption across time and space. Well that sounds like science fiction. But it isn't. Prices communicate the local knowledge of individuals in the market and provide incentives for people to act on that information and coordinate with one another. Prices are incentives wrapped in knowledge that help people coordinate in an economy. Are you saying there's no room for any decisions to be made through political action? Well, no. Markets are great, but they're not going to solve every problem, and they're not going to produce perfect outcomes. And that's where government comes in. Maybe. A lot of people assume that that's the only choice, but you also have to understand that a lot of the time, government solutions aren't always better. Just as advocates of markets... Like you! Yes, like me. Just as we shouldn't believe that markets will create utopia on earth, advocates of government alternatives shouldn't be naive about what could be accomplished through policy in the real world. But all too often, advocates for government solutions compare an in-perfect market reality to an imaginary government ideal. You mean we have to think about how public policy works in the real world? Well, yes, but most people don't do that. We usually end up talking about what we wish government policies would do instead of what they actually will do. So you're saying that just because a politician has good intentions doesn't actually mean their policies are actually helpful? Yeah, or even that they aren't actively harmful. We should always compare the imperfect reality of markets to the imperfect reality of government. Right. And we have to do that before we rush to support restrictions and interventions into the economy. There are some ideas from economics we should always consider in order to see this stuff more clearly. Like what? Well, for one thing, that people are self-interested. All people, including government officials. Yeah, I see what you mean. We usually hope government employees are selfless public servants working for the common good, but that's kind of unrealistic. We're all just people, right? Speak for yourself. But remember, incentives affect the way people behave, and the incentives in politics can be truly outrageous. Politicians can easily become more concerned with winning elections and maintaining or increasing their power than promoting policies in the best interest of their constituents. Plus, whenever government power exists to control economic outcomes, special interest groups have strong incentives to influence politicians for their own benefit. Like corporate lobbyists. Sure. But not just corporations. Unions and non-profit organizations as well. Even government agencies themselves lobby to influence politics. Isn't that a conflict of interest? Lobbying for special favors through government is what economists call rent-seeking. And what the rest of us might call cronyism. Rent-seekers manipulate the political process in an attempt to grab the wealth generated by others. And the more government is used to regulate an economy, the more people try to use politics to gain economic advantage over others. You know, it's really not surprising why this would happen. I suppose not. If government policies create concentrated benefits for special interest groups, it makes sense they'd want to try to manipulate politics to get in on the action. But why doesn't anyone try to stop it? Nobody has any meaningful incentive to stop it. That's right. The benefits are concentrated, sure. But the costs are extremely dispersed. So while some giant company might get millions of dollars in subsidies to build a new factory, the cost to any individual taxpayer could be a few pennies a year. So the people affected don't have good enough reasons to fight the new policies? If they even know they're being affected at all. It's also an issue of what's seen and unseen. Too often people only focus on the highly visible, narrow, and or short-term effects of economic policy, the stuff they can see. I guess when a company gets subsidized, it's easier for people to see new jobs than it is to see what the subsidies really cost and what didn't happen because their money was taken away. Way easier. But the art of economic thinking is learning to consider the short-term specific consequences and the long-term widespread consequences of a policy. Thinking more carefully about not just the ones that are seen, but the ones that are unseen can help us make better decisions in politics and in life. And by the way, this is the central point of Henry Haslett's classic work, Economics in One Lesson. I guess we should stop getting so romantic about politics, huh? Yeah, let's keep the romance to moonlit walks on the beach. We should be more realistic with politics. And that's where we're going to have to leave this complex and difficult topic. What were some unintended consequences of an important decision that you've made? If you have any questions and want to dig deeper into these ideas, leave a comment on this video and check out Economics in One Day at Courses.Fee.org. And we'll see you next time.