He contends that economists do not appreciate the harm they do. “Having done the math,” he complains, “the economist can assess policy without giving much thought to those the policy will harm.” Readers of the book will find plenty of criticisms of how economists think as well as many recommendations for how economists “can do much better.”
Salient ignorance / DeMartino begins by introducing the problem of “irreparable ignorance.” By that, he means economists “do not and cannot possibly know all they need to know to design interventions that avoid unanticipated consequences.” There is “what we don’t know now and might someday know, but only after the moment the missing knowledge is needed for decision making.” Perhaps an example is not knowing the benefits and costs when regulating ozone levels in the air. There also is that which we might not know because it cannot be known before acting. Finally, an economist does not know “what lies beyond the domain of economic expertise—not just at the rudimentary state of economic expertise yesterday or today, but at any conceivable level of the science as conducted by the smarter and better-trained economists of the future.” Unfortunately, DeMartino offers no examples of such hubris.
Irreparable ignorance has implications for economic methodology. DeMartino objects to what he calls “time-travel machines—economic models that permit [economists] to see tomorrow, today.” “The problem with economic time-travel machines,” he continues, “is that individuals who populate the economy, just like economists, face irreparable ignorance.” One might think that the more we learn, the less there is that we do not know. But the author points out that technological progress simultaneously increases uncertainty. For instance, social media might be useful for entertainment and business, but an unforeseen consequence might be addiction.
He provides an illustration showing that even though the “island of knowledge” grows larger in the “infinite ocean of ignorance,” the border between the island and the ocean, called “salient ignorance,” necessarily becomes larger too. One might reason that the more we learn, the better off we will be. However, the author asks us to imagine that as we learn more, both good things and bad things happen. Driving an electric car presumably emits less carbon than a conventional car. But does producing and disposing of the battery harm the environment? “Absent adequate knowledge,” DeMartino argues, “the economist at best wields influence without control.”
In such cases, an economist recommends a policy based on a model. Government officials might implement the policy based on the economist’s advice. But the economist cannot orchestrate individual behavior following implementation of the policy; the economist cannot guarantee that the policy will produce more benefits to society than costs.
Counterfactuals / Professing cause and effect is standard economic practice. DeMartino gives a good explanation of causality. He writes:
When economists claim that event X is causally related to outcome Y, they are typically making one of several kinds of claims, such as (a) through (c):
a. that X is necessary for Y
b. that X is sufficient for Y
c. that X is necessary and sufficient for Y
To understand what DeMartino is discussing, suppose X is international trade and Y is a high level of income per person. International trade appears to be necessary to achieve a high level of income because, among the nations that do not trade with the rest of the world, one cannot find one with a high income. But international trade does not appear to be sufficient for a high income because there are open economies with middle or low incomes. That is the sense in which trade causes prosperity, though trade alone does not guarantee prosperity.
Professing a causal connection involves counterfactuals. Put simply, “Counterfactuals are stories economists narrate to probe causal mechanisms and to convince themselves and others that they understand why things did and did not, or do and do not, or will and will not happen.” An economist who claims that international trade causes a high level of income argues that if the United States did not trade with other nations, we would not have our current high level of income. The problem is that no one can know what would have happened had Americans not traded with people around the world. DeMartino puts it this way: “Economists do not get to run the tape n times, alternately treating and not treating identical agents, to establish causal relationships.” Counterfactuals explain why economists disagree. Free traders ask where we would be today without being able to interact with the rest of the world. Protectionists ask where we would be today if the industries that were protected had not been protected. The author believes that counterfactual reasoning is a “virtue”; economists who use counterfactuals make each other’s theories better.
Harm / When a policy makes some people better off and others worse off, a mainstream economist deems the policy a good one if the beneficiaries gain more than the losers lose. The mainstream economist will not lose sleep worrying about whether winners compensate losers. That reasoning is the gist of what DeMartino calls “moral geometry.” He writes about this at length and about what is wrong with it. According to him, welfare economists define “a good life” as getting the goods and services one wants, or “preference satisfaction.” “Harm,” then, is not getting the goods or services one wants. Because there is more to life than obtaining goods and services, and there are more ways to be harmed besides being denied goods and services, DeMartino judges moral geometry to be inadequate.
To further his case, he points out that some harms are not “reparable” and some are not “compensable.” The loss of a loved one, for example, is neither reparable nor compensable. The author posits the following classroom scenario:
A naïve student might ask, “Can we infer then that a father who loses a daughter owing to his inability to afford essential medical care will be just as well-off after her death provided he receives a lump sum payment in the requisite amount? Are the two states ‘with the child but without the money’ and ‘without the child but with the money’ really just two points on the same indifference curve?” The economist qua economist will find little help in standard moral geometry in crafting a compelling reply.
The lost daughter cannot be replaced. Money will not make the father happy. DeMartino’s point that the father would not equally prefer the loss of a daughter to more money is well taken.
The author calls on economists to “act responsibly.” This requires rejecting paternalism and inviting all who have a stake in policy into the policymaking process. Responsible economists recognize that the future is uncertain and that economic models do not enable them to see the future. Given that economists cause harm, they should know more about it.
DeMartino offers the methodology of Decision Making under Deep Uncertainty (DMDU) as an alternative to “reckless” approaches such as cost–benefit analysis. The goal is not to find the best policy, but to find a “robust” policy: one “that performs well enough by stakeholders’ lights under the widest range of possible futures.” DMDU practitioners ask stakeholders how they think the world works and what they think good policy outcomes would be. They strive to imagine a great number of events that may unfold and assess policy outcomes under each event. Among other features of DMDU, policymakers evaluate policy outcomes over time and recommend adjustments.
The author describes the DMDU approach as it applies to the “wicked problem” of allocating the Colorado River’s dwindling water supply among millions of people. Economists will encounter some familiar concepts in his summary, such as supply, demand, and tradeoffs. Also, they will find unfamiliar concepts such as “downscaled general circulation model.” An engineer working on the problem complains of policymakers—economists among them—who seek “one number.” This reader imagines that the one number could be the difference between the benefits and costs of a given solution to the problem of allocating water.
The author’s critique should provoke some healthy introspection among economists. Consider free trade. An economist argues that the winners win more than the losers lose, recognizes the plight of the losers, and endorses free trade even if the winners do not compensate the losers. DeMartino demurs. He sees that “opening economies to trade appears to exacerbate inequality everywhere by increasing wage inequality between skilled and unskilled workers.” He does acknowledge that free trade might be a good policy over the long run. This is the “Paretian promise”: free trade creates more benefits to the beneficiaries than costs to those who are harmed in the short run, but over the long run everybody benefits. The author asks: “Is it really the case that displaced workers who suffer [significant and wide-ranging losses] will be made whole through government checks and the lower prices now available at Walmart for the imported goods that they once produced?” He thinks not. He insinuates that only a fool would endure losses in the present so that his or her grandchildren would be better off. He does not directly address the simple argument for free trade, that no third person has any business interfering in peaceful exchange between two others. Perhaps he indirectly rejects that argument by endorsing positive freedom over negative freedom.
Strange interventions / A reader may encounter several opportunities to pick bones with DeMartino. For example, even though he quotes Adam Smith’s jibe at the “man of system,” he underemphasizes the liberal, laissez-faire tradition. He states, “The economics profession aspires to social engineering.” Yet in some cases—including many that DeMartino laments— economists call for less government intervention in the economy. Apparently, in his mind these would be “interventions.” But is a microeconomist who objects to anti–price gouging legislation on grounds that it will cause shortages a social engineer? Is a macroeconomist who objects to expansionary fiscal policy on grounds that policy lags will produce unintended outcomes a social engineer? Similarly, the author criticizes Alan Greenspan and Ben Bernanke for their faith in financial markets prior to 2008, yet he offers no criticisms of the politicians who attempted to engineer an increase in home ownership.
The student in the classroom discussion above, about the father who lost his daughter, would be better described as among the most perceptive in a career of teaching, not naïve. The economist in the scenario might not be perplexed; he or she could reply that indifference is a concept that is easily applied to goods such as food and clothing, but not so applicable to human life and cash. Furthermore, people buy life insurance because money will help in the event of a loss, not because they expect money to make them indifferent to the loss.
The author convinces this reader that DMDU is both complicated and promising. It may someday be an economist’s tool just as cost–benefit analysis and econometrics are today. But curiously there is no mention of price or property rights in DeMartino’s description of the DMDU approach to allocating water from the Colorado River.
This reader expects that DeMartino would welcome a discussion of these issues. He claims that his book “should be read not as a treatise but as an invitation to contribute to a new conversation.” In that sense his effort is successful.