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Thursday, September 22, 2005


Economic Literacy & Externality

William Polley:
"In a way, this brings us back to the question of the value of economic literacy. If the only reason for becoming economically literate was to become a more intelligent voter, then ignorance would be individually rational. However, the economic world would keep right on spinning. Markets would keep right on working -- except to the extent that policy makers, not subject to the constraints of an economically literate population, get in the way. However, there is a larger social issue at stake. Economic literacy has positive externalities. For me the most compelling argument for economic literacy is not to make sure everyone can shift a demand curve, but simply to teach people how to avoid being taken in by fallacies of composition and other logical fallacies.

[. . . .]

. . . . There's a great deal of social value in a citizenry able to recognize free lunch claims and refute them."
What? Positive externalities? This couldn't be another example of externality abuse could it? Probably not. After all, the implication of there being positive externalities would be to subsidize economists.

Economics teaches us that voter apathy, or rational ignorance, is the choice that we make when weighing out the cost of becoming informed and the benefit of obtaining a favorable election outcome. This is evident from the lack of collective action that we see, which would benefit a far greater proportion of the US population, versus the parochial interests that usually win legislation, imposing additional costs on the rest of the people. I have to ask about Polley's assertion that policy makers are "not subject to the constraints of an economically literate population," on the grounds of Cost/Benefit analysis. If economics engenders understanding of the costs/benefits of becoming politically informed and illuminates the problem of rational ignorance, then people would probably choose to be more informed than before. This would have the effect of altering the way people would vote for elected officials, imposing "constraints" on activities that may have been relatively unrestricted. So I think that a more economically educated public would influence policy makers NOT to "get in the way" of markets as Polley suggests.

Further, I think that economists do generate positive externalities through choosing to be more informed. Because economics and politics (Political Economy) are inextricably connected, becoming educated in economics leads to an augmented understanding of politics as well. This would effectively reduce the cost of becoming politically informed and would lead to greater visibility of issues through conversations with other people. Even people who are not informed stand to gain from economists who act on behalf of their own self-interest to elect better officials. It seems economists do create positive externalities, which means they should be subsidized to correct the inefficiency. I prefer cash. How about you?
Of course I prefer cash -- I get to a higher indifference curve than with any other form of in kind subsidy.
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