The economic biases that we talked (or will talk) about in class are from an article by Bryan Caplan that you can read in full here. Feel free to use this article as the source of one of your short article summaries. (If you do so, go ahead and just focus on one of the 4 biases, you don't have to summarize the entire thing.)
To remind you what the biases were (are), here's a quick summary:
1. Anti-market bias - the feeling that any act that results in a profit for one person must be anti-social by definition. (If you think GM is ripping you off, then take the bus. Otherwise, be quiet).
2. Anti-foreign bias - the feeling that economic exchanges are "different" if they occur with foreign countries as opposed to with locals. (You run a trade deficit with GM when you buy a car. Should we put tariffs up between you and GM?)
3. Make-work bias - the feeling that there are a fixed number of jobs, in specific categories, to be filled. (In 1900, 40% of the people in the U.S. worked on farms. Now, its 3%. Are 37% of American's now unemployed?)
4. Pessimistic bias - the feeling that things are getting worse in general. (Since 1950 we've had 9 recessions. Since 1950 there have been exactly 6 years out of 57 in which GDP actually shrank. GDP per capita in the U.S. is 3.4 times higher today than in 1950.)
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The 4 bonehead Biases of Stupid Voters article the 4 main biases that economists deal with. These 4 include
Anti-market Bias,which is as stated by Caplan, the tendency to underestimate the economic benefits of the market mechanism.
Anti-Foreign Bias,which is according to Caplan the tendency to underestimate economic benefits of interaction with foreigners.
Make Work Bias, which is according to Caplan the tendency to underestimate the economic benefits of conserving labor.
Pessimistic Bias, which is according to Caplan, the tendency to overestimate the severity of economic problems and underestimate the economy's performance in the past present and future.
In my opinion, the one of these four that makes the least sense to me is the pessimistic bias, because being pessimistic is a feeling it cant make you alter a decision one way or another, i dont beleive it should.Being pessimistic i think comes naturally according to how the economy is actually going. Like Caplan points out talking about things like the war just brings on a pessimistic atmosphere i beleive it shouldnt alter your economic views and economic performance.
Bryan Caplan’s article, “The 4 Boneheaded Biases of Stupid Voters” emphasizes the anti-foreign bias as mired from the xenophobic non-economist. For whatever reason, foreigners are seen as something that takes away rather than having any benefit. However, the similarities from physical appearance to language in Canada and Great Britain override any fears as they are seen as less foreign when compared to Mexico and Japan. The anti-foreign bias is the belief that there is a difference between local and foreign trade.
Sometime around the Great Depression and the 1980’s, economists did take a step back, but presently, most agree that trade is benefited from foreign interaction. Adam Smith’s “The Wealth of Nations” wisely stated that if country A could produce a good cheaper than country B, country B should purchase that good from the other country rather than producing the good. Absolute advantage is not reliant to having the edge over another country in terms of trade benefits. If a country specializes and trades, their total output would increase. Immigration has no bearing on the balance payments and yet people fear jobs, wages and public services lost. The trade in labor and the trade in goods are about the same. Rather than thinking of countries specializing, you can think of people. The American mother would evaluate her opportunity cost in working or hiring a Mexican nanny.
If the real exchange rate is high, then foreign goods are cheap and our goods are expensive. People can afford to buy more foreign goods. The reverse is true as well; if the real exchange rate is low, then foreign goods are expensive and our goods are cheap. This simply works into the idea that if a country can specialize and is able to produce goods at a cheaper cost, then people are able to lower their cost of living.
The main problem is rooted in the idea that foreign purchases are a separate cost rather than an aggregate. People would be quick to cry out when the balance of trade flows outward to other countries, but not when the trade occurs outside their family, city or region. What generates such attitudes is the policy created in the conflicts occurring between countries. Many countries that have restricted foreign trade have hurt their economies so much that they are behind the world in terms of development and in turn, have hurt their people more. If only the policymakers of those countries could see the disadvantage they had burdened their own people by depriving foreign exchanges, would they realize what their anti-foreign bias has not reaped.
This article studies the voters’ general knowledge about economics and the common mistakes they do while making economic decisions. The author studies a survey from 1996 and he concludes that general public not only thinks economics in a different way than the professional economist, often their ideas on different economic concepts are incorrect or less accurate. The author have divided these differences in two four broad categories, namely- the anti-market bias, the anti-foreign bias, the make work bias and the pessimistic bias.
According to Caplan, the anti-market bias is the skeptics that the general public has about the motives of market and business. The author mentioned that people tend to ignore or forget that discipline in market is imposed by competition. People tend to relate business profits with gifts to the rich. Caplan mentions that profits and interests are not gifts but “qui pro quo”. To earn a profit, the producer has to do something that people will pay for the product/service. Moreover profits give incentives to reduce cost, resource mobilization from “less-valued to more-valued industries”. Another important anti-market bias is monopoly theories of price. Public blames monopoly for scarcity of product and do not seem to agree that demand and supply of a good control its prices. Similarly, general public thinks interest rate is a medium of exploitation on the borrower but they tend to realize that interest is earned in exchange of delayed consumption by the lender. Therefore these kinds of biases towards market lead people misunderstand economic policies.
The second bias is the anti foreign bias. When good and services are exchanged between the two countries people tend to get alarmed, even though the same goods and services are also traded with different states in the same country border. The notion of foreign trade raises concern among people be it the issue of labor trade (immigration) or goods trade. Author mentioned provided historical evidences how American trade with other countries worldwide has been sensitive to cultural and linguistic differences.
Caplan defines make-work bias as the tendency to underestimate economic benefits of conserving labor. People consider that producing goods with less man hours is a danger to the society. While people consider labor savings as damage to the society (through destruction of job) but economist consider as an efficient production. Moreover people equate use of machine as a cause of job loss. People tend to forget the machines might replace some labor, it also create more jobs. Economists think that employing more workers that required would eventually lead to the waste of valuable labor. Caplan mentions that protecting rights to job is a “drain of productivity” as it makes hiring more difficult.
Final bias discussed in this article is termed as pessimistic bias. Caplan says that people tend to feel that society is not so much in a good shape as it seems. People complain about standard to living, show concern about the occasional pitfalls of economy. The general attitude is economic or societal issues left unmonitored tend to go uncontrolled and eventually cause damage to the society unless something is done to it. This attitude is reflected in broad categories of issues such as immigration and environmental quality.
Interestingly, one comes across these kind of biases in everyday life and Caplan does a good job in explain these economic attitudes with nice examples. This article could make one wonder if these biases are actually baseless. In situations such as anti market bias, price gouging do happen when sellers tend to hoard stock. Although in long run things comeback to normality due to market forces, the misery caused by artificial price gouging actually affects families. In monopoly, market forces are not capable of any corrective action unless government takes any action such as “Antitrust act” or others. Therefore some of the biases develop due to malfunction in parts of the economic system but it would be incorrect to comment that these biases are true in all situations.
Bryan Caplan breaks down most voters into four categories. The first one is an anti-market bias. He begins by portraying a mother enlightening her child at a grocery store. She explains that competition will in the end make people poorer. Caplan explains that most people believe business that are out for their own interest can in no way help the overall economy. He goes on to explain that people believe that business should not be able to make profits. Further, he explains that profits are needed. These profits give people incentives to offer something. He goes on to quote the “invisible hand.” Which basically means, that everyone is looking for their own interests, and in doing so we are helping the entire economy. He explains that many times people will reject permits for complete stoppage of population. Caplan explains that having them pay is more cost effective way, and those that can't afford it, will go out of business. Then Caplan explains that people blame monopolies for the increased price of goods. Rather the increase is usually because of of the middleman. The middleman like transportation gets added into the cost.
The second bias is the anti-foreign bias. Caplan begins this bias by depicting a business man who believes if we created a Berlin wall with Mexico and blocked Japan all our economic worries would come to an end. He quotes Adam Smith again where he believes we should buy from outside if the product is cheaper. It is cheaper for everyone to specialize in something than for each person to produce their own goods. He quotes an economists that says there are two ways to make automobiles: The first one is to have it manufactured in Detroit. The second way is cultivate wheat in Iowa. Soon that wheat will be shipped and on another ship will come foreign cars.
The third bias is the make-work bias. Caplan starts off by rehashing a conversation he had with a someone in his college days. His college could not understand how bring back 100,000 people back from Korea could help the economy. He goes on to explain that most people that machines lay off people. But the forget to mention that a technology like the computer has generated uncountable jobs. Once the technology initially hits, people might be hurt. Consequently, the learn new skills so they can be more productive and attractive.
The last and final bias is the pessimistic bias. He explains that when he was in the school system that he was bombarded against drugs. Further, they said that he would be offered drugs soon enough. He explicates this bias by explaining that people believe we are getting worse off rather than more well off. He goes on to show that many academics have been in the state of doom and gloom, and believing that the past was great.
I feel that the most propagated of these biases is the anti-foreign bias. There too many people that are against globalization. Golobalization has lifted many people out of poverty. It has helped share the wealth the the rich countries have. With globalizaiton we have the entire world connected. Every country has its money in another country. Since there is everyones money in every country the likelihood of war is far less. Overall people are brought to a more balance relative to others; and sustainable peace is possible.
The article begins by stating that Ben Bernanke has said that the Federal Reserve can cut rates if need be. This consequently lead the stocks to rise. Bernanke assured the Federal Reserve will do all that it can to keep the economy ticking. Bernanke stated that the economy most likely grew a medial rate during the end of 2007. He further explained, the data is indicating that the economy doesn't seem to be in great condition going into 2008. Bernanke gave a slew of reasons for the slowdown: first the housing market's woes, “higher oil prices, lower equity prices and softening home values.” He explained that growth could reduce further because inverters are unsure of the real damage that has occurred. Bernanke further explained that banks have begun to be more selective in their lending ways which will be a main point for the barrier in growth. He said if further information is disclosed it has the potential of slowing the economy down even more. The labor market has also begun to show some weariness, where it was more robust beforehand. He explained that worsening of the labor market could reduce spending. Towards the end of the article there is mention of oil prices increasing the prices of other goods.
There are three question that are posed. The first one: How can the Fed support growth? The main way the Fed increases growth is by slashing the interest rates. The Fed lowers the interest rate at which banks lend money to one other. By doing so the Fed generates more money. A lower interest rate increases the incentive to borrow and spend. The spending increases the economy.
The Second question is: To what extent can the Fed affect the attitude of the financial market? The Fed can greatly effect financial markets. By lowering the interest rates people have a greater affinity towards spending. But the effect is limited. If massive problems arrive the Fed only able to somewhat stop the situation from worsening to a greater extent. And in the case of what is happening currently, so many factors have combined to send the economy, possibly into a recession.
The third question is: Why is the Fed worried about inflation? And what do they have to do with it? Inflation will raise the price of goods for people. The article explains that it seems that the higher price of oil is leading the prices of other commodities to go up also. Historically speaking, the Nominal interest rate has always been side by said either inflation rate. The higher the nominal interest rate, the higher the inflation rate. The lower the nominal interest rate, lower the inflation. So in theory if the Fed can keep the Nominal interest rate low, the inflation should also be low.
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