Just as the consensus on homeopathic medicinal techniques has found them to be little more than quackery, so too should the brand of economics that is regularly practiced that I shall call Homeopathic Economics. Homeopathic medicinal techniques generally take substances that are known to cause diseases in healthy people, and repeatedly diluting them to create remedies to heal sick people. In many cases, the solution is so diluted that virtually no molecules of the “active ingredient” remains.
The first obvious application of homeopathic economics is the implementation of multiplier analysis to justify public expenditure. You see, all you need is a little bit of “active” ingredient, and magically all kinds of new economic activity is created. The analogy is apt I think – particularly given the fashionable criticism that private individuals “spend too much” (i.e. the substance that causes disease in healthy people) so wise economic policy ought to take it from them and shower it upon government bureaucracies to spend.
The more general applications of economic homeopathy are the myriad cases where folks claim terms from economics, or use partial insights from economics, without any real understanding them, to jump to their conclusion that their preferred policy works. Take the tired canard that “markets lead to monopoly.” Since it was economists who first demonstrated the problems with monopoly and laid out the conditions for when single sellers can impose costs on society (when long-term demand elasticities are low in the particular market), lay audiences dilute the heck out of that insight to argue that any and all private businesses ultimately have consumers over the barrel and therefore anti-trust rules and strong governmental regulations are in order. Ask anyone to lay out what conditions make it likely for monopolistic behavior to occur, or what the actual record shows through history, and you’ll get our favorite familiar sound.
In general, a little economics knowledge could be useful if for example that knowledge recognized the importance of the price system. But I have never seen a case where someone has a little economic knowledge actually has a command over principles, but rather they seem to have a command over some particular result. Thus, you are likely to see more people cling to the finding that in some cases raising the minimum wage will not destroy employment, than you would ever find who are able to articulate the problems with distorting prices. And it is not just lay people who commit it, I suspect all of us professionals are guilty of practicing homeopathic economics as well. We will explore some illustrations in future posts.