Economists give conflicting Advice

If all economists were laid end to end, they would not reach a conclusion. This quip from George Bernard Shaw is revealing. Economists as a group are often criticized for giving conflicting advice to policy makers. President Ronald Reagan once joked that of the game Trivial Pursuit were designed for economists, it would have 100 questions and 3,000 answers.

Why do economists so often appear to give conflicting advice to policy makers? There are two basic reasons:

* Economists may disagree about the validity of alternative positive theories about how the world works.
* Economists may have different values and therefore different normative views about what policy should try to accomplish. Let’s discuss each of these reasons.

Several centuries ago, astronomers debated whether the earth or the sun was at the center of the solar system. More recently, meteorologist have debated whether the earth is experience global warming and, if so, why. Science is a search for understanding about the world around us. It is not surprising that as the search continues, scientists can disagree about the direction in which truth lies.

Economists often disagree for the same reason. Economics is a young science, and there is still much to be learned. Economists sometimes disagree because they have different hunches about the validity of alternative theories or about the size of important parameters that measure how economic variables are related.

For example, economists disagree about whether the government should tax a household’s income or its consumption (spending). Advocates of a switch from the current income tax to a consumption tax believe that the change would encourage households to save more because income that is saved would not be Taxed. Higher saving in turn would lead to more rapid growth in productivity and living standards. Advocates of the current income tax system believe that household saving would not respond much to a change in the tax laws. These two groups of economists hold different normative views about the tax system because they have different positive views about the responsiveness of saving to tax incentives.

Differences in Values

Suppose that P and Q both take the same amount of water from the town well. To pay for maintaining the well, the town taxes its residents. P has income of $50,000 and is taxed $5,000 or 10 percent of his income. Q has income of $10,000 and is taxed $2,000 or 20 percent of her income.

Is this policy fair? If not, who pays too much and who plays too little? Does it matter whether Q’s low income is due to a medical disability or to her decision to pursue a career in acting? Does it matter whether P’s high income is due to large inheritance or to work long hours at a dreary job?

These are difficult questions on which people are likely to disagree. If the town hired two experts to study how the town should tax its residents to pay for the well, we would not be surprised if they offered conflicting advice.

This simple example shows why economists sometimes disagree about public policy. As we learned earlier in our discussion of normative and positive analysis, policies cannot be judged on scientific grounds alone. Economists give conflicting advice sometimes because they have different values. Perfecting the science of economies will not tell whether P or Q pays too much.