What you don’t know hurts more in politics than markets

There is an old expression that “what you don’t know won’t hurt you.” Unfortunately, it is not true. Further, when it comes to economic misunderstanding, it is far more likely to harm Americans in their political choices than their market choices.

thomas-sowellThomas Sowell, in Knowledge and Decisions, laid out why. In market competition:

Economic knowledge need not be articulated to the consumer, but is conveyed — summarized — in the prices and qualities of goods. The consumer may have no idea at all — or even a wrong idea — as to why one product cost less and serves his purpose better; all he needs is that end result itself. Someone must of course have the specific knowledge of how to achieve that result. What is crucial to economic competition is that better and more accurate knowledge on the part of the producer is a decisive competitive advantage, regardless of whether the consumer shares any part of the knowledge.

In political competition, however:

Political knowledge is conveyed by articulation, and its accurate transmission through political competition depends upon the preexisting stock of knowledge and understanding of the receiving citizen. … In political competition, accurate knowledge has no such decisive competitive advantage.

In other words, as long as consumers can choose which suppliers’ goods better satisfy their preferences and situations, misunderstanding the processes involved does not keep them from being well-served by market competition. In contrast, voters must understand how things will actually work to evaluate politicians’ promises.

In markets, “prices convey effective knowledge of inherent constraints.” In contrast, “ballots do not … there are no constraints on my voting for … options simultaneously desired [but] unrealizable from the outset.” To make it worse, “no small part of the political art consists in misstating options and in trying to give them the appearance of simultaneously satisfying competing claims when they cannot be satisfied in reality.” Consequently, “The competition among political groups does not therefore bring to bear more accurate knowledge, as in economic competition, but promotes exaggerated hopes and fears.”

Today, for those who believe freer trade harms people rather than creating mutual gains, promises of “cracking down” or imposing higher tariffs on foreign products appears attractive. For those who believe that they earn less because “the 1 percent” earn too much, rather than that market incomes reflect added value provided to others, punitive taxation appears attractive. For those who think various workplace amenities, such as paid leave, come out of employers’ pockets, rather than from workers’ compensation packages (once there has been time to adjust), mandating those benefits appears attractive. For those who think higher minimum wages will benefit “the poor” with few other effects, rather than helping some and hurting others, including those who lose their jobs, hours worked, on-the-job training, etc., as well as all consumers in higher prices, they appear attractive. But in each of these cases, and many others, appearances are deceiving the ill-informed.

Thomas Sowell recognized that “Perhaps the greatest achievement of market economies is in economizing on the amount of knowledge needed to produce a given economic result.” However, he also recognized “That is also their greatest political vulnerability,” which we are seeing acted out before our eyes. The public, benefitting from vast and varying market arrangements without understanding them, can be lured by siren songs of something for nothing, because they don’t see how it undermines those irreplaceable voluntary arrangements which do reliably serve them.

Gary M. Galles is a professor of economics at Pepperdine University, an adjunct scholar at the Ludwig von Mises Institute, a research associate of the Independent Institute, and a member of the FEE faculty network. His books include Apostle of Peace (2013), Faulty Premises, Faulty Policies (2014) and Lines of Liberty (2016).