09 April 2010

Economic Alchemy

One of the leitmotifs of Ben Jonson's great 1610 play The Alchemist is the pervasive economic ignorance of people at the time. They did not understand what profit was or where it came from, and so they tended to think that the entrepreneur and merchant were like the alchemist: engaged in either magical conjuration or fraudulent prestidigitation. The more enlightened members of the play's audience would have suspected, even in the early sixteenth century, that alchemy was a pseudo-science, and there would have already been a general sense that alchemists were untrustworthy, secretive, mysterious people. Jonson exploits these sentiments, and this widespread economic ignorance, brilliantly in his play.

How much better is the general understanding of economics today, 400 years after Jonson's play was first produced? My guess is: not much at all. That is a sobering realization. How can it be that, 234 years since the first publication of Adam Smith's Wealth of Nations, so many people still believe so many false things about economics? And it isn't just the uneducated masses: it is even among our intellectual elite.

Here is a recent illustrative example: House Speaker Nancy Pelosi on Tuesday--that would be April 6, 2010--
gave an interview in which she said this: "It's like the back of the refrigerator. All you need to know is, you open the door. The light goes on. You open this door, you go through a whole different path, in terms of access to quality, affordable healthcare for all Americans."

This is what a friend and former colleague of mine calls the "Milk Comes from the Grocery Store" theory of economics. I sometimes call it the "Money Comes from the Bank" theory. In the present context, we might call it a "Healthcare Comes from a Law" theory.

Perhaps we should not put too much weight on one remark from one person, even if it is a shocking statement and even if it is the Speaker of the House. But my sense is that this is a common, perhaps even pervasive, sentiment: Pass the right laws, with the right series of regulations and policies, with the right experts in charge, and things will--as if by alchemical magic--be better. Alas, it would be nice. If only reality worked that way.

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