A comparison of DIY economics – the things everyone knows but aren’t so – with DIY physics.
Samuel Brittan calls it businessmen’s economics. David Henderson, long an international civil servant, prefers DIY economics. Both refer to propositions that people who have practical knowledge but no qualifications in economics hold to be self-evident, but which are false. Countries would do better to export more and import less. New technology destroys jobs, and public spending on my projects not only helps me but also creates jobs. Manufacturing is more important than other forms of economic activity. Business would benefit from lower interest rates.
People who would pause before expressing opinions on quantum mechanics or undertaking brain surgery have no hesitation in pronouncing on the economic consequences of the euro.
DIY is not confined to economics and carpentry. There is DIY medicine and even DIY physics. Common sense tells us that heavier objects fall faster, the sun revolves round the earth and the kitchen will be cooler if you leave the refrigerator door open. But experience is often misleading if we are not trained to interpret it.
It is true that light objects such as feathers fall to the ground slowly, but we mistakenly infer a general rule. And we see the sun rise in the east and set in the west. It is so obvious that the sun circles the earth that people who denied it used to be burnt at the stake. But we observe only part of the solar system. When you study the interactions of moving planets you realise that orbits around the sun are a much more compelling way of understanding the universe. And when you open the fridge door, you can feel the cold air. What you do not see is the chain of consequences. The compressor works continuously to maintain the inside temperature, and the heat it ejects from the back of the fridge offsets the cold at the front.
Scientific research and formal education are needed to understand complex systems. We learn little about the economy by being consumers and producers, just as we do not become expert in aerodynamics as aircraft passengers. The fallacies of DIY economics are mostly the result of generalisation: we mistakenly infer the properties of the whole from our limited experience of a small part.
Because every currency purchase must be matched by a sale, reducing imports affects exchange rates and the output of other producers, just as opening the fridge door alerts the thermostat and triggers the compressor. New technology may displace labour from individual jobs but it enhances prices and profits and so increases demand for both the products of new technology and unrelated goods. Interest rate cuts would be good for business if their only effect were to reduce borrowing costs. But there are many more extensive consequences of interest rate changes, and that is why setting monetary policy is a challenging task.
The complex range of goods and services we need is the product of our interdependent economy. Are the brakes of a car more important than the engine? To ask the question is to display profound ignorance of the automobile as complex system.
Airline passengers can usefully comment on the comfort or discomfort they experience but they do well to leave the design of the aircraft to aeronautical engineers. Businessmen can helpfully describe the effects of interest or exchange rates on their own business, but that defines the limit of what they can knowledgeably say.
Galileo climbed the leaning tower not because he needed to check how quickly a lead weight would fall but because it was the only way to convince the sceptical merchants of Pisa that gravity was not a purely theoretical construct. DIY economics persists, like DIY medicine, because there are rarely clear connections between causes and effects. If you get better after taking snake oil, no one can tell whether it was the snake oil or whether you would have got better anyway. Physicists are able to make decisive experiments; doctors and economists rarely do. But even Galileo could not persuade the inquisitors to look through his telescope because ideology told them what he claimed to see could not be there: a familiar experience in economic matters.