Does Economics have a conservative or liberal bias?

Chris House argues that Economics has a conservative bias:

"In economics it seems like the facts and the analysis have much more of a conservative slant than a liberal one.  It really is true that taxing labor income reduces labor supply (a little).  It really is true that extending unemployment benefits encourages people to delay looking for a job (a little).  It really is true that taxation can reduce employment demand; that excessive business regulation seems to be correlated with reduced levels of business formation; that union concentration has a detrimental effect on industries and on and on. "

Matt Yglesias lists points that he believes imply that basic Economics has a liberal bias:

• Governments (typically through central banks) need to manage the demand level of national economies to prevent catastrophic recessions and mass unemployment.
• Absent carbon pricing, a market economy will massively overproduce greenhouse gases.
• Many industries, such as broadband Internet, are "natural monopolies" where an unregulated market will lead to higher prices and less investment than is socially optimal.
• Due to asymmetrical information, consumers in a market economy will be unable to bargain effectively with doctors and other providers of health care services.
• Due to adverse selection, consumers in a market economy will be unable to effectively insure themselves against health risks.
• Due to the declining marginal utility of money, taking $100 from a rich person and giving it to a poor one will increase human welfare.
• Increasing the number of immigrants, raising taxes on the rich, and making Social Security benefits more generous will make almost everyone better off.

I basically agree with both authors on every one of these observations (with caveats on a few*).   Econ 101-type analysis does make almost every single one of these points.

But notice that House’s observations basically come from the trunk of Economics, which I take to be spinning out of the observation that voluntary transactions are mutually beneficial thereby creating the invisible hand that leads people to make the world a better place while trying to do nothing more than make themselves better off. 

Yglesias’ points, for the most part, reflect conditions under which transactions mutually beneficial to the participants do not, for one reason or another, make the world better off (i.e., "market failures”).  The points are all fine, if in some cases overwrought, but unless Matt wants to argue that they completely overwhelm the trunk of Economics, then Economics has a "conservative" bias.

I’m reminded of an interview with an urban planner of some sort who described letting all of the inhabitants of a city trade with each other however the want, put stores wherever they want, and so on, as “the worst possible thing to do.”  Not something that can in some cases lead to some negative consequences that might be able to be addressed by some government policy, but, rather, “the worst possible thing to do.” 

I can think of something worse.  Giving a collection of urban planners carte blanche to dictate how and where individuals interact with each other without allowing for learning and adjustments on a micro level would be worse.  


*  A few observations about Yglesias' points:

1. The basic Economics that I took did not teach that Governments need to manage demand.  It did teach about theoretical Keynesian countercyclical policies that Governments could attempt to employ to reduce the scope of the business cycle.  It did not necessarily give much hope that real flesh and blood governments would be able to implement these policies in a way that does more good than harm.  
2. Technically, Econ 101 assumes that interpersonal utility comparisons are impossible, so it cannot teach that a policy which reduces a rich person’s wealth by $100 while simultaneously increasing a poor person’s wealth by $100 necessarily increases human welfare.  But it certainly suggests such a thing.  
3. For similar reasons, in no way does Econ 101 teach that raising taxes on the rich or making Social Security benefits more generous will make almost everyone better off.  I honestly have no clue where Yglesias gets that idea, unless it is generalized from the $100 from rich to poor argument.  In that case, at worst Econ 102 is going to get into disincentive effects of taxation and the fact that Social Security is fundamentally a transfer from the middle class to the middle class.
4. Finally, we Austrian-types tend to view the world as a sea of ignorance surrounding little blobs of knowledge, and the Economic Problem as how to manage to bring these little blobs of knowledge to bear on decisions.  In some sense, asymmetrical information is a characteristic of every transaction.  Asymmetrical Information is interesting and worthy of study (more so that a lot of other things that get studied).  But it’s hard to get as worked up about it as the left does. 

Thinking, Fast and Slow

Anyone listening to the intellectually oriented radio and podcast world over the last several years will recognize this theme: recent scientific research has identified types of decisions in which human beings tend to make somewhat counter-intuitive decisions. From memory: 

1) People faced with a promotional display of 24 different varieties of jam will not buy as much jam as people presented with the same promotional display of a mere 6 flavors. 

2) Hotel customers will be more likely to respond to a card noting that 75% percent of other customers choose to save water by not requiring the hotel to wash their towels every night than will respond to a card making the intellectual case against profligate water consumption. 

3) People will choose to save more if their employment contracts default to contributing to a 401k program rather than waiting for the employee to take the positive step of enrolling in the program. 

4) An Israeli day care center’s institution of a sliding “lateness penalty” in an attempt to reduce tardiness among parents picking up their kids backfires as parents interpret the charge as giving them license to be late, when previously they had considered arriving late as an act of rudeness towards the center.

As an Economics grad student in the mid 1980’s I was introduced to Daniel Kahneman through his research that found that even math experts (not to mention everyone else) were very bad at incorporating general information about we know about the world when dealing with specific types of questions. E.g. (and I’m making the details up entirely), when presented with a description of a person that includes the characteristics “bookish” and “likes poetry,” survey respondents will probably be more likely to choose “philosophy professor” over “computer programmer” when asked to speculate about his profession, even though there are many many many more computer programmers in the world than philosophy professors. In fact, there are almost assuredly more bookish computer programmers who like poetry than similar philosophy professors simply because there are so many more computer programmers in general. 
Frequently this research is presented as a frontal assault on the assumption of rationality employed by standard economic analysis, especially of the “Econ 101” variety. And it is, to some extent. But just to some extent. 

Kahneman is disappointingly full of himself when lambasting expected utility theory, a mainstay of economic theory which Kahneman appears to think is entirely overthrown by his research. The work on which he bases this assessment investigates the difficulties humans have dealing with very small probabilities, difficulties which have some unusual effects at the margin (such as most people “irrationally” overweighting a .0001% chance of something happening), and making inconsistent decisions depending on the framing of options (e.g., starting with $300 with the ability to possibly make an additional $200 vs starting with $500 with the ability to possibly avoid the loss of $200). 

This is valuable research, and well worthy of the Nobel Prize bestowed upon him. But how many real world decisions fall into these categories? How does this research weigh on the Econ 101 discussion of, say, the effect of a carbon tax on oil at the wellhead on the price and consumption of gasoline? The effect of the minimum wage on the unemployment rate of unskilled teenage labor? The effect of rent control on the housing market? Not a lot. Some, perhaps. But not a lot. 

Attacking the “rationality assumption” in economics has become something of a shibboleth among the less educated critics of Economics. But, in fact, the sort of super-human feats of hyper-rationality that are mocked by these critics really aren’t necessary for what economists want out of the “rationality assumption.” When you find yourself in a supermarket (never mind how you got there), and you’re hungry, do you usually find yourself walking out with a roll of toilet paper, a bar of soap, and two quarts of oil, or are you more likely to toss a pound of ground beef and some buns in your car for the trip home? For the basic, regular lessons, that’s really all that Economics needs from the rationality assumption.