Americans admire the rugged individualist who goes his own way, who stands alone. The problem is that standing alone at social gatherings is…lonely. And, frankly, pathetic. But that’s what usually happens to me, off in a corner, trying to pretend to study the wallpaper for clues. The problem is that I am, both by training and by temperament, an economist, and therefore dismal company.
The “dismal science” appellation came originally to our profession for a different reason, though, as has been shown by David Levy in his terrific and surprising account. The tl;dr version is that the cool kids of the 18th and 19th centuries — and their intellectual heirs and assigns, the Progressives of the 20th and 20st centuries — were dismayed by the idea that common folk, servants, and even slaves, were fully formed moral beings and were better off being autonomous than they were being ordered around by the cool kids. Thomas Carlyle, one of the coolest kids, proposed (satirically, to be fair) in his appalling “Occasional Discourse on the Negro Question”, that chattel slavery of Africans be expanded to create lives of ease for the more civilized white race.
Since the demand is so pressing, and the supply [of food, clothing, and other needs] so inadequate (equal, in fact, to nothing in some places, as appears), increase the supply; bring more blacks into the labor market, then will the rate fall, says science. Not the least surprising part of our West Indian policy, is this recipe of “immigration;” of keeping down the labor-market in those islands, by importing new Africans to labor and live there. If the Africans that are already there could be made to lay down their pumpkins and labor for a living, there are already Africans enough. If the new Africans, after laboring a little, take to pumpkins like the others, what remedy is there? To bring in new and ever new Africans, say you, till pumpkins themselves grow dear — till the country is crowded with Africans, and black men there, like white men here, are forced, by hunger, to labor for their living? That will be a consummation. To have “emancipated” the West Indies into a black Ireland — ” free,”‘ indeed, but an Ireland, and black! The world may yet see prodigies, and reality be stranger than a nightmare dream…
Truly, my philanthropic friends, Exeter Hall [a London forum for abolitionists] philanthropy is wonderful; and the social science — not a “gay science,” but a rueful — which finds the secret of this universe in “supply and demand,” and reduces the duty of human governors to that of letting men alone, is also wonderful. Not a “gay science,” I should say, like some we have heard of; no, a dreary, desolate and, indeed, quite abject and distressing one; what we might call, by way of eminence, the dismal science. These two, Exeter Hall philanthropy and the Dismal Science, led by any sacred cause of black emancipation, or the like, to fall in love and make a wedding of it — will give birth to progenies and prodigies: dark extensive moon-calves, unnameable abortions, wide-coiled monstrosities, such as the world has not seen hitherto! (emphasis added)
Economics, then, is the “dismal” science precisely because it makes a consequentialist, but also a moral argument, that it is the duty of human governors to leave people — even slaves! — alone. For Carlyle, this notion that slavery was not only immoral, but economically inefficient and unsustainable, flew in the face of his notions of class and the “right sort” of companions at parties. Even then, economists were reduced to studying the wallpaper.
Of course, today the social isolation of the economically minded has different proximate causes, but the underlying reason economic reasoning stands alone is that it stands athwart the desire of many people, perhaps most people, to rearrange the actual world into a world that they can imagine. Economics’ “curious task” is more often to explain why the newest utopia is unreachable, and in fact harmful, than it is to suggest what a quickly achievable utopia might look like. More simply, we spend most of our time saying “that won’t work” than we spend saying “here is the solution!”
The reasons we are in this position is that there are many problems in economics that are hard to understand, and some border on impossible. We don’t actually understand the correspondence between policy actions and economic outcomes, when it comes to making things better. Bastiat’s “seen and unseen,” or Friedman’s “long and variable lags,” or Sowell’s “and then what?” are all versions of the same basic problem: we don’t know.
But that’s not the reason we stand alone. The reason we stand alone is that economists specialize in taking away people’s illusions, preventing them from persisting in truths that “just ain’t so.” That’s uncomfortable; people don’t want to talk to us. Not because we’re wrong. But because we’re right.
My own most recent example of this is a discussion of whether to buy a beach house on the North Carolina coast. The premise was that the family would save money, because then “we could stay at the beach for free.” It is not generally wise to react strongly to this sort of mistaken claim, but on this point I could not resist. So, now I’m sleeping on the couch for a while, until things calm down. Being alone, I thought I’d give the illustration of why buying a beach house not only doesn’t save any money, but costs exactly as much as renting the house would have cost in the first place.
Suppose the following things are true:
It costs $X thousand per week to rent the beach house you are looking at. It is possible, given market conditions, to rent out the house for the whole summer, with all the weeks taken at that price. X is highest ($5,500) from June 1 through August 20, and slightly less ($4,000) in the fall and spring. In winter, the rent is only $2,500, but it’s cold then. In any case, it is possible to charge a price that will result in the house being rented.
Your financial situation enables you to arrange for a down payment, and mortgage, to buy the beach house.
The expected rate of return from owning the house, considering the down payment, and monthly mortgage payments, and ultimate capital gains when you sell the house in the future, are exactly equal to the opportunity cost rate of return available to you, including taxes.
In other words, as an investment the beach house is no worse than the other investments that you might pick, but it’s no better, either. Assumption #3 allows us to focus solely on the buy vs. rent decision. If buying the house were a good investment, then someone else would bid on the house, raising the price until condition #3 is true, or close to true. More important, for my purposes, assumption #3 allows us to focus on the main claim: if you own a house, it’s cheaper to stay in the house than if you are renting, just because you own it.
Now, that all seems like a lot of argle-bargle, but it is necessary to set up my point: suppose we buy the house, and decide we want to stay at the house for five weeks, June 15 through July 25. What will that cost? It seems to cost us nothing, because we own the house. Except…
Except we could have rented out the house, those prime weeks. The price to us as owners is the value of the rent we do not receive: $5,500 per week, every week we stay in the house. It is no coincidence that this price is exactly what it would cost for us to stay in the house if we were renting, because rent reflects the use value of the property. This logic is very close to that of the so-called “Coase theorem,” which says that the economic value of an asset is determined by price negotiations, not by the ownership of the asset, provided that the transaction costs of negotiations are not prohibitive.
The brutal truth — and the reason I’m going to be a rugged individualist alone on the couch for a while — is that economics makes it hard to persist in the pleasant-but-untenable beliefs we enjoy. On the other hand, I can say with certainty that Carlyle was wrong: the world is better when the government’s duty is limited to allowing each of us to govern themselves.
