Addendum to “A Short Course in Economics”

The first 19 points appear in “A Short Course in Economics.”

20. The interest-group paradox is a variant of the paradox of thrift. Many Americans (perhaps most of them) favor certain government programs because (they believe) those programs will benefit the class of persons to which they belong, or a class of persons for which they have sympathy. Each such program then becomes a “free lunch,” and you know that there’s no such thing as a free lunch — someone must pay for it, somehow. In the case of government programs, most of us wind up paying for a lot of free lunches because there are thousands of government programs (federal, State, and local), each intended to help a particular class of citizens at the expense of others. And there goes your free lunch.

Wait, it’s worse than that. Picture a row of beer-drinkers at a bar. Each of them is determined to get a bigger free lunch, so each of them eats more. Result? A rise in the price of the beer. Some free lunch.

Even the relatively few persons who might seem to have obtained a free lunch — homeless persons taking advantage of a government-provided shelter — often are victims of the free lunch syndrome. Some homeless persons may be homeless because they have lost their jobs and can’t afford to own or rent housing. But they may have lost their jobs because of pro-union laws, minimum-wage laws, or progressive tax rates (which caused “the rich” to create fewer jobs through business start-ups and expansions).

21. The interest-group paradox is closely related to the fallacy described by Frédéric Bastiat in his essay “What Is Seen and What Is Not Seen“:

In the economic sphere an act, a habit, an institution, a law produces not only one effect, but a series of effects. Of these effects, the first alone is immediate; it appears simultaneously with its cause; it is seen. The other effects emerge only subsequently; they are not seen; we are fortunate if we foresee them.

There is only one difference between a bad economist and a good one: the bad economist confines himself to the visible effect; the good economist takes into account both the effect that can be seen and those effects that must be foreseen.

Yet this difference is tremendous; for it almost always happens that when the immediate consequence is favorable, the later consequences are disastrous, and vice versa….

The pursuer of the free lunch grasps the free lunch but fails to grasp the unintended and costly consequences of his pursuit.

22. Perhaps the gravest of economic fallacies is the belief that regulated economic activity produces better results than unregulated economic activity. This fallacy stems from the fallacy pointed out by Bastiat. Most of us take comfort in plans of one kind or another because we can “see” what the plan intends. What we fail to grasp is that plans — all plans — have unforeseen, unintended, and undesirable consequences. It is those consequences — what is not seen — that undo economic plans and turn hoped-for benefits into actual costs.

By the same token, most of us fail to grasp the fact that unregulated economic activity yields positive results because it involves willing actors engaged in mutually beneficial exchanges of goods and services. Adam Smith was never more correct when he wrote that every individual

[b]y pursuing his own interest he frequently promotes that of the society more effectually than when he really intends to promote it. I have never known much good done by those who affected to trade for the public good.

That which is produced and consumed voluntarily benefits both its producers and consumers. That which is produced through government fiat may benefit those who dictate its production, while harming consumers by (a) failing to produce that meets their needs and/or (b) producing something that partially meets their needs, but at a higher cost than necessary.

23. Moreover, to quote Wilhelm von Humbolt:

“If men were left to their own deeds and devices, deprived of all outside help that did not manage to obtain themselves, they would also frequently run into difficulty and misfortune whether through their own fault or not. But the happiness for which a man is destined is none other than that which he achieves by his own energies. And it is these very situations which sharpen a man’s mind and develop his character.” (The Limits of State Action [1792]).

A sense of self-worth is important to us; it has economic value of its own. Economics isn’t (or shouldn’t be) the “science” of wealth or output maximization; it is (or ought to be) the “science” of happiness-seeking.

The Interest-Group Paradox

The interest-group paradox is a paradox of mass action (my own coinage). In this post, I illustrate the concept of mass-action paradox with two examples, then turn to the interest-group paradox.

The paradox of thrift is probably the best-known paradox of mass action. According to an article at Wikipedia, the paradox (propounded by John Maynard Keynes) states that if, in the face of an economic downturn, large numbers of individuals try to save more money, the attempt to do so will worsen the downturn. That, in turn, will cause reductions in the incomes of large numbers of individuals, who will then be able to save less, not more. (The article continues with an explanation of the mechanism behind the paradox. The criticisms summarized in the article are unconvincing.)

Another familiar paradox of mass action has to do with the behavior of panicked crowds. If someone shouts “fire” in a crowded theater, many members of the audience may rush madly toward the exits instead of walking calmly, in lines. The mad rush likely will cause pileups at the exits, leading to more panic and worse pileups. As a result, many (perhaps most) of the theater-goers will die, if not from fire and smoke inhalation, then from being trampled and suffocated in a pileup. The paradox here is that the (panicked) effort by members of the crowd to save themselves may well result in their deaths. I call this the paradox of panic.

The paradox of thrift and the paradox of panic are paradoxes of mass action because, in both instances, large numbers of individuals come to harm when each of them tries to do something that he believes to be in his best interest.

I now turn to the main subject of this post: the paradox of mass action that I call the interest-group paradox. Pork-barrel legislation exemplifies the interest-group paradox in action, though the paradox encompasses much more than pork-barrel legislation. There are myriad government programs that — like pork-barrel projects — are intended to favor particular classes of individuals. Here is a minute sample:

  • Social Security, Medicare, and Medicaid, for the benefit of the elderly (including the indigent elderly)
  • Tax credits and deductions, for the benefit of low-income families, charitable and other non-profit institutions, and home buyers (with mortgages)
  • Progressive income-tax rates, for the benefit of persons in the mid-to-low income brackets
  • Subsidies for various kinds of “essential” or “distressed” industries, such as agriculture and automobile manufacturing
  • Import quotas, tariffs, and other restrictions on trade, for the benefit of particular industries and/or labor unions
  • Pro-union laws (in many States), for the benefit of unions and unionized workers
  • Non-smoking ordinances, for the benefit of bar and restaurant employees and non-smoking patrons.

What do each of these examples have in common? Answer: Each comes with costs. There are direct costs (e.g., higher taxes for some persons, higher prices for imported goods), which the intended beneficiaries and their proponents hope to impose on non-beneficiaries. Just as importantly, there are indirect costs of various kinds (e.g., disincentives to work and save, disincentives to make investments that spur economic growth). (Exercise for the reader: Describe the indirect costs of each of the examples listed above.)

You may believe that a particular program is worth what it costs — given that you probably have little idea of its direct costs and no idea of its indirect costs. The problem is millions of your fellow Americans believe the same thing about each of their favorite programs. Because there are thousands of government programs (federal, State, and local), each intended to help a particular class of citizens at the expense of others, the net result is that almost no one in this fair land enjoys a “free lunch.” Even the relatively few persons who might seem to have obtained a “free lunch” — homeless persons taking advantage of a government-provided shelter — often are victims of the “free lunch” syndrome. Some homeless persons may be homeless because they have lost their jobs and can’t afford to own or rent housing. But they may have lost their jobs because of pro-union laws, minimum-wage laws, or progressive tax rates (which caused “the rich” to create fewer jobs through business start-ups and expansions).

The paradox that arises from the “free lunch” syndrome is much like the other two paradoxes discussed here. It is like the paradox of thrift, in that large numbers of individuals are trying to do something that makes certain classes of persons better off, but which in the final analysis makes those classes of persons worse off. It is like the paradox of panic, in that there is a  crowd of interest groups rushing toward a goal — a “pot of gold” — and (figuratively) crushing each other in the attempt to snatch the pot of gold before another group is able to grasp it. The gold that any group happens to snatch is a kind of fool’s gold: It passes from one fool to another in a game of beggar-thy-neighbor, and as it passes much of it falls into the maw of bureaucracy.

I call this third, insidious, paradox the interest-group paradox. It is the costliest of the three — by a long shot. It has dominated American politics since the advent of “progressivism” in the late 1800s. Today, most Americans are either “progressives” (whatever they may call themselves) or victims of “progressivism.” All too often they are both.

(Related concepts: tragedy of the commons, ratchet effect. Related post: “Slopes, Ratchets, and the Death Spiral of Liberty.”)