Tariffs continue to be in the news. Not only are they being used as leverage to create new trade relationships, they are also being used as an instrument of foreign policy. How they are being used has never been addressed in this space. Our focus has only been that they are just bad economics.
While standing in line at Southern Soul, a fellow barbeque lover and reader of From the Murphy Center raised a philosophical question with me — how do we know if a policy is based on bad economics? We had a good lengthy discussion — the line was long and moved slowly — that needed to become public. So here it goes.
The most fundamental model in economics is supply and demand. Close your eyes for a moment and imagine a graphing space with price per unit on the vertical axis and quantity demanded and supplied on the horizontal axis. In that space, demand is a line that is downward sloping to the right, while supply is a line that is upward sloping to the right. Where the lines cross is called equilibrium.
Supply and demand contain the fundamentals of all human behavior. Buyers, in all that they do, willingly substitute. This is probably the contribution of economics to mankind; just the simple idea that consumers willingly move between alternative goods as they make choices. Sellers, on the other hand, face the engineering technological constraint that the marginal cost of making additional units of a product rise as more are made. This is a certain as gravity.
These two forces cannot be avoided. They are certain. They are indisputable. They cannot be ignored. It is what it is.
The supply and demand graph is only a simple way to depict human behavior. Trying to control the market does not alter the behavior that is contained in it. The forces do not go away. Again, it is what it is. Just accept it and move on. Attempts to ignore or rationalize away these fundamentals make everyone worse off.
This is how I judge various economic policies. Can I find supply and demand in them and what does the policy maker do with it? Does he/she accept and embrace the forces or do they ignore them or, worse, think they can control them? Anything that does the latter is bad (wrong) economics. This is what is so troubling about the rise of socialism among younger people. The tenants of socialism are built round behaviors that people simply don’t exhibit. They just don’t. Therefore socialist policies are bad (wrong) economics. Just Google Venezuela and read about their economy — if they still have one by now.
What I really worry about is that we economists, who love supply and demand, are not doing our job by showing others our love for this model and our acceptance and respect for simple and basic human behavior that is contained in it. At times it seems like we embrace the mathematics and statistics and the art of empirical estimation. Dr. Jonathan Gruber, the MIT economist who was a lead designer of the Affordable Care Act, had a nice mathematical model and pretty flow charts. The problem was that the behavior contained in supply and demand was ignored. It is emotional love, respect and commitment to the principles that we must show our students. Failing to do this will take us down the road for more bad economics and away from what is right and good.
Reg Murphy Center