Evidence vs. Faith in Economic Change

James K (now blogging at The League) comments here on the structural change in the U.S. economy that has led to large declines in manufacturing jobs, even as manufacturing output has grown:

Sectoral employment shift can be unpleasant, but that’s no reason to deny that they are necessary. After all, in 1900 over 90% of American were employed in agriculture, and no wits less than 5%. Surely you don’t think it would be better if that change hadn’t happened?

He’s right, of course, but I think the answer in itself is unlikely to satisfy most people who are concerned about the highly visible loss of jobs in the manufacturing sector. From a Bastiatan perspective we can say that they are focusing only on what is seen, and not on what is unseen. The lost jobs are highly visible because they are so densely concentrated, and they make an emotionally compelling story. The new jobs are much less visible, being diffuse, and frequently created some place other than where the old jobs were located. If you’re looking in Flint, Michigan, for the jobs that are replacing auto manufacturing, you’re not going to spot them.

It would be easy to stop with the true, but dangerously smug, statement that people should look for what is not (immediately) seen, but there’s a deeper level at work. Bastiat’s example was quite simple: When a shopkeeper’s window gets broken, people see that the window glazer has more work, but they don’t see that the shoe maker–from whom the shopkeeper was planning to make a purchase–has less work. The example is simple because it’s asking us to consider two things that are happening concurrently, in the here and now. In this case, what is not seen can be seen, just by looking more closely.

But to have confidence that jobs–decent jobs, especially–will replace the lost manufacturing jobs asks us to see something that is in the future, something that largely has yet to occur. And James K’s example, while wholly accurate, doesn’t solve that problem. He shows us something that–now–can be seen easily. But that doesn’t really help us see something that can’t–yet–be seen. He gives us evidence, and then asks for faith.

I say “he” does this, but of course I do this, too.

The essential problem is failure of imagination. And I don’t mean just failure of the imagination of those who are more pessimistic about the future. Those of us who are more optimistic about the future, including James K and myself, don’t have the imagination to see just what is going to replace manufacturing jobs, anymore than anyone in the 1920s could see what would replace agricultural jobs.

This is where the study, even perhaps the somewhat casual study, of economics matters so much. Because for James K, as for myself, faith certainly seems like a word that’s not entirely accurate. He has theory–theory that is supported by both rigorous logic and historical evidence–underlying his confidence. Without the theory, without the rigorous logic, the historical evidence is no more than just-so stories. But the overwhelming proportion of the public, particularly those employed in manufacturing, don’t have that theory. It’s no wonder then that from their perspective our optimism sounds like nothing more than naive faith.l

About J@m3z Aitch

J@m3z Aitch is a two-bit college professor who'd rather be canoeing.
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10 Responses to Evidence vs. Faith in Economic Change

  1. James K says:

    You’re right that my confidence things will work out relies on information not available to the general public. For me the real question is why aren’t the public listening to the experts more? This is an issue on which the profession is most unified, I think the consensus on free trade exceeds 90% among economists. I don’t know anything about medicine, which is why when I have a medical problem I go to the doctor, I don’t conduct an opinion poll of my neighbours.

  2. James K.,

    I don’t think it’s so much that people aren’t listening to experts, or that the experts are wrong. It’s not even that the people “don’t have the theory” that demonstrates things will get better.

    I suggest that it is, at least partially, about who benefits and who doesn’t. Those who are adversely affected by, say, the decline in manufacturing jobs are not necessarily the ones who will benefit when the new jobs and opportunities are created. A 50-something person laid off from a manufacturing job might find it hard to retrain and overcome the bias against hiring people his or her age. Even if something works out for the best, and even if all benefit in the long run, some benefit less than others.

  3. James K says:

    Pierre:
    The problem is that the effects of free trade on the people working in manufacturing is theoretically ambiguous, which means that it might make them worse off, but it might also make them better off.

    Honestly, I think the best way to deal with this would be to liberalise trade in the US more widely. Since people unambiguously gain from liberalised trade in goods they don’t produce, this would make life easier for the people whose jobs are already at risk.

    I would also point out that lower trade barriers produce more exports, as well as imports. Any attempt to arrest the decline in manufacturing emplyoment would cost jobs as surely as it would save them.

  4. James K,

    Fair enough. I guess that what I had written was just a restatement of the point Mr. Hanley made about the difference between the seen versus the unseen.

    I agree that it is a good thing to liberalize trade within the US. But I do think it is pretty much liberalized already. It is possible for states to impose certain economic regulations on those who do business within their borders, but as a general rule, my understanding is that they are not allowed to engage in explicitly protectionist practices. On the other hand, I acknowledge that federal subsidies to certain sectors–e.g., agriculture–might have a “protectionist” and antiliberal effect on some regions in the US.

  5. James Hanley says:

    I think Pierre makes a good point, even if it is in some ways just a variation on the seen and unseen. Most people are economically risk-averse, I think, and the thought of losing a good-paying job at age 50 is both more visible and more psychologically affective than the thought of being able to buy a dvd player at a lower price or maybe getting an export-producing job. Given equal uncertainties, the uncertainty of gain has lower motivational force than the uncertainty of loss.

    I’m not sure what James K means by liberalizing trade in the U.S. Granted we have a plethora of protective business regulations, but trade per se is very nearly unlimited due to the interstate commerce clause, which I like to say made the U.S. the world’s first modern free trade zone.

    Curiously, other than for a handful of buy-local advocates, almost nobody in the U.S. really questions internal free trade, yet most struggle to apply that externally. Here in Michigan, for example, people might want to constrain imports from Ontario, which is immediately adjacent to us, but not from California. Yet if California split from the U.S. and Ontario was incorporated into the U.S. they would surely reverse their positions.

  6. ppnl says:

    Well for evidence how about the end of the inflation recession cycle of the 1970s and 30 years of solid growth since then? As I understand it this was caused by a vast expansion of international trade. Now if only they had used the opportunity to balance the budget.

  7. James K says:

    I mean liberalising trade between the US and other countries. Sorry if that was confusing.

  8. James Hanley says:

    ppnl,

    International trade did not end inflation and create economic growth. The Fed under Paul Volcker ended inflation, and the primary groundwork for economic growth over the past several decades was the deregulation of the transportation and telecom industries. Not that liberalizing trade didn’t play a role in the economy, to be sure, but I think those other factors mattered considerably more. (Although after reading The Box, the relationship between transportation deregulation and growth in international trade is much clearer to me now–deregulation of shipping, railroads, and trucking in the U.S. was intimately related to their ability to adapt to using shipping containers, as well as being partly driven by the way containers were changing the transportation industries, and containerization also revolutionized and lead to a great expansion of international trade.)

  9. ppnl says:

    International trade did not end inflation and create economic growth. The Fed under Paul Volcker ended inflation, and the primary groundwork for economic growth over the past several decades was the deregulation of the transportation and telecom industries.

    At one time I attributed most of the growth to Paul Volcker but I’m no longer so sure. I do think he proved that monetary policy is superior to fiscal policy in reacting to business cycles.

    To understand stagflation I use PIO (Pilot Induced Oscillation) as an analogy. Look here for an example:

    Basically the problem happens when the pilots control inputs are out of phase with the response of the plane. This causes an oscillation of positive and negative over corrections. Apparently the best way to stop PIO is to turn loose of the controls. How is that for an argument for small government?

    The problem with fiscal policy is that it takes a long time to take effect. By the time it takes effect you may need the opposite control input. Paul Volcker’s monetary policy fixed that by responding to the market much quicker. Without a doubt this created a stable environment that allows growth. Paul Volcker was able to nail inflation to the wall once and for all.

    Free trade had a similar effect in that competition with other nations put a top on prices. Probably Volcker’s policies were more important here. But the major effect of free trade was in fueling economic growth elsewhere. This created a huge market for all the things we could still do cheaper. The growth in the last 30 years is global growth not just US growth. Could that have ever happened if the world was as protectionist as it was in 1970? Could we have continued to grow without the rest of the world?

    (Although after reading The Box, the relationship between transportation deregulation and growth in international trade is much clearer to me now–deregulation of shipping, railroads, and trucking in the U.S. was intimately related to their ability to adapt to using shipping containers, as well as being partly driven by the way containers were changing the transportation industries, and containerization also revolutionized and lead to a great expansion of international trade.)

    Well I have not read “The Box” but it is clear to me that the changes in transportation were driven by the needs of an import economy. First you had trailers loaded directly on train flatbed cars. Then you had shipping containers that could be pulled directly by train or truck. Then you had very cheap and very large container ships where most of the structural strength of the ships are provided by the shipping containers themselves.

    But none of this would have been needed without the explosive growth in international trade.

  10. James Hanley says:

    ppnl,

    I am mostly in agreement with your post here, but without intending any real criticism, I think your last two paragraphs would change if you read The Box. The import economy didn’t create shipping containers as much as the containers created an import economy.

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