What is the Economist's Code?

Today I released a video about how I broke the Economist’s Code. I’ll confess, it’s a bit of clickbait. There is no Economist’s Code.

But it did get me thinking about what should be in the code for someone who wants to be an economist. Here are a few ideas that came to mind.

Always ask, “How is this better than cash?”

This ends up being the idea behind my video. I apply it to the (almost silly) example of giving gifts. But it has a broader lesson.

There’s a famous experiment done by economists in the 90s. They saw that schools in Kenya did not have enough resources for their students. For example, many classrooms did not have enough textbooks. So the economists decided to see if giving textbooks to these schools would help students learn.

It didn’t.

The textbooks did not provide any meaningful impact on the average student. Why not? Because even though the school was in English and the textbooks were in English, most of the students did not speak English! In fact, for most of the students English wasn’t even their second language, it was their third!

There are so many poverty-alleviation efforts that try to guess what’s best for the recipients and just give it to them. But individual needs vary so much, there’s no way we’ll find a one-size-fits-all solution. Except….we could. With cash!

Instead of giving the schools textbooks, we could have given them cash. Then they could have spent the money on the things the school really needed, instead of textbooks that had no use.

Many people object to a cash-first solution because they fear the cash will be embezzled or wasted. Giving schools textbooks ensures the money was spent on learning. Except, when kids can’t read the textbooks, it’s just as wasteful!

If you want more discussion on this, check out Chris Blattman’s discussion on EconTalk about whether we should give poor families chickens.

Always ask, “Why aren’t people already doing this?”

Economists are famous for saying, “There’s no such thing as a free lunch.” Usually we interpret that as, “There’s always a cost.” But there’s another way to interpret this.

Some people like to point out, “If businesses would just pay their employees a living wage, they would see less turnover and happier, more productive employees, and profits would rise.” But if that were the case, why aren’t businesses already doing that? If we believe businesses are greedy and want to maximize profits, and paying people higher wages would lead to higher profits, then they’ll do it. Your only rationale for businesses not doing this is that they are willing to sacrifice profits to hurt their workers.

When we say there’s no such thing as a free lunch, we mean that people and businesses already scoop up all of the gainful opportunities out there. If we think we see there’s a free lunch, something where the benefits immediately justify the costs, then we might not understand the benefits or costs.

Here’s an example. Economists have calculated that someone in Haiti with less than a high school education could make ten times as much if they moved to the US. That’s accounting for differences in the cost of living. Looks like Haitians could grab a free lunch by just moving a couple of hundred miles. Why don’t they? Immigration restrictions in the US, of course. But why doesn’t the US ease restrictions? Unfortunately, there are lots of political barriers and entrenched interests that keep them up. Removing those barriers would be a costly political bargain. So even though it looks like a free lunch, there are lots of costs maintaining the status quo.

Words are cheap, action is expensive

Just this morning, we had to work with this one. My 7 year-old was throwing a fit. Yesterday his older brother and his mom made some lemon poppy seed muffins, but instead of using vanilla extract they used almond extract. Scandal! He went on a tirade on how almond extract ruins the muffins. So I took the muffin away from him and told him to eat something else. This caused a bigger fit. He wanted the lemon poppy seed muffin!

It’s easy to say you like something or you support a cause. But when you have to do something or pay something, that’s when we see what you truly support. This is called revealed preference.

I’ve seen this in the world of YouTube. YouTubers with big followings gain a lot of detractors. These negative personalities will come to dominate the comments. The YouTubers sometimes respond by starting a paid community, where fans can come and talk without worrying about the haters. Because it’s easy to hate watch something, but nobody want to hate pay for something.

Oh yeah…

When I came up with the idea to make an Economist’s Code, I thought I was cleverly doing something that hadn’t been done before. But then I remembered the second rule of the code, “Why aren’t people already creating a code?” And I realized someone already had!

Dani Rodrick wrote a book called Economics Rules. He lists ten commandments for economists. If you’re at the intermediate/advanced economics level, I recommend checking it out to make sure you understand what the tools of economics actually give us.

He also lists ten commandments for noneconomists. My favorite is, “If you think economists are mean to noneconomists, attend an economics seminar.”

Do you think there are other things to include in the Economist’s Code. Let me know in the comments.