Posted by on March 6, 2017

John Cochrane, the libertarian economist from the Hoover Institution at Stanford, has recently commented on a blog posting from Russ Roberts, one of his colleagues.[1]  Roberts’ post argues that economists need to be more humble in their claims of causation, particularly their ability to quantify these claims.  The economy is a very complicated mechanism in which it is impossible to run controlled experiments of the type used in the physical sciences.  This makes economics very prone to the fallacy of “correlation is not causation.”

But Roberts still thinks that the “Tao of Economics”[2] is a very powerful way of looking at the world.  He just thinks economists should be more modest and transparent in their empirical claims.  Economists need to think of their profession as “primarily a way of organizing one’s thinking in considering incentives and costs and the interactions between individuals that we call a market but is really emergent behavior with feedback loops.”

Cochrane agrees that one of the key features of the Tao of Economics is an emphasis on incentives, saying that “in just about every policy question an economist sees an incentive.”  This thought has been a key feature of this blog since the first post:

A central tenet of this blog…is that people, when given the means, motive and opportunity, will game the system.  Not all of them and not all of the time, but a significant and growing portion will. “Growing” because, when people look around and see a lot of other people gaming with impunity, even the most ethical are tempted to ask themselves:  Why am I the only idiot?  And contrary to the political beliefs of both the right and left, it isn’t just the poor welfare cheats (as the Republicans would have us believe) or the rich investment bankers (as the Democrats know to be the case) who do it.  It is everyone.

Every politician in the world should have tattooed to his or her forehead: People – rich or poor; educated or not; black, white or brown – respond to the incentives placed in front on them.  If politicians believed this and acted upon this belief, then an enormous amount of bad policy could be avoided.

Cochrane then riffs on the theme and identifies other areas where the Tao of Economics is strong:

  • “Budget constraints and accounting identities.I think good economists quickly follow the money one more step than most analysts.”   This is Cochrane’s acknowledgement of the importance of opportunity cost (as described more fully by my able co-author), the Tao’s insistence that in a world of constrained resources, everything is a trade-off.  Or, as Milton Friedman put it, in the single most important economic truism ever uttered, “there is no such thing as a free lunch.”
  • “Unintended consequences.Our field is, perhaps, best described as a collection of funny stories about unintended consequences. (I became an economist one day very young, reading a newspaper story about a program to get rid of poisonous snakes. The government had offered a bounty on each dead snake. Guess what happened. Hint: It’s easy to raise snakes.)”
  • “Supply response, (or demand), and competition”
  • “The fallacy of composition ought to be right up there with correlation is not causation. Roosevelt tried to raise inflation by raising prices. Alas, you can only raise relative prices that way.  Individually, it seems we can get ahead by getting a better bargain, but my gain must be your loss and the economy does not gain overall.”

Cochrane sums it all up with words that sang to me:

As you see, I think we’re pretty good at identifying causal channels that most analysts ignore, even if we are not always great at quantifying their relative significance. But “not zero” is usually an eye opener in public policy….In sum, I think economics provides an excellent set of bullshit detectors.

But I don’t think that Cochrane goes far enough.  There are other powerful aspects of a distinctly economic way of looking at the world.  I would add these to the Tao of Economics:

  • Thinking at the margin and the irrelevance of sunk costs. The idea that decisions are rarely “all or nothing” but mostly “more or less,” and that decisions always relate to the future.  In the Tao of Economics, we do not cry over spilt milk.
  • Comparative advantage and the benefits to exchange. The idea that mankind advances in large measure through specialization and the division of labor, combined with exchange, and that both the weak and strong benefit .
  • Thinking probabilistically. The idea that, since all decisions relate to an uncertain future, we must act on the basis of chance.

These are the major elements of the Tao.  But we should not think of them as applying only to economics.  They are rules of rational decision making under conditions of uncertainty and scarcity, which is the human condition.  If they were drilled into the heads of every student, the world would be a much better place.

Or, as I put it more succinctly in a recent tweet that went semi-viral in the geeky cybersphere I inhabit:

Q: Should I study economics?

A: If Spock is your favorite character in Star Trek, yes.

Did Alcohol Cause Agriculture? Did Coffee Cause the Enlightenment?

Here is a short amusing article that argues that the domestication of plants, which allowed fixed human settlements to exist, was “driven by the desire to have greater quantities of alcoholic beverages.”   Usually the rise of agriculture is attributed to the desire for grains as food, with fermentation and alcohol a side effect.  This article claims that the roles should be flipped.

The piece also claims that the Enlightenment was the outgrowth of the spread of coffee in Europe in the 17th century, which replaced the drinking of lightly alcoholic beverages, which were safer than water, throughout the day.  The spread of coffee led to a populace that “began the day alert and stimulated, rather than relaxed and mildly inebriated, and the quality and quantity of their work improved….Western Europe began to emerge from an alcoholic haze that had lasted for centuries.”

I am always highly skeptical of these types of highly materialistic arguments about human progress and history – see one of my earliest blog posts on a classic of this genre, Guns, Germs and Steel by Jared Diamond – but they are always fun and thought provoking.

Roger Barris

Weybridge, United Kingdom


I Wish I Had Said That…

“The United States has spent 100 years and a trillion dollars and killed hundreds of thousands of people, and at the end of all that, you can’t even keep drugs out of your prisons where you have a walled perimeter that you pay people to walk around the whole time” by author Johann Hari, who is probably a bit skeptical about the ability of Trump and Sessions to keep “bad hombres” and their drugs out of America by building The Wall



“It’s an unbelievably complex subject.  Nobody knew that health care could be so complicated” by Donald Trump, who is too ignorant to realize just how ignorant this makes him sound

“Terrible! Just found out that Obama had my ‘wires tapped’ in Trump Tower just before the victory.  This is McCarthyism!” by Donald Trump, the friend of “law and order” who just promoted the idea that presidents order wiretaps and use them for political purposes, both with absolutely no evidence except a Brietbart article[3]


[1] Among other things, Russ Roberts hosts an excellent podcast called EconTalk.  Although the focus is economics, Roberts is nearly as much a polymath as Tyler Cowen and the talks cover a number of related topics, usually from a Hayekian perspective on the tendency of good social structures to emerge spontaneously.

[2] I thought that this was an original title but, sadly, a Google search shows that someone else has beat me to it.

[3] For a good description of what really happened with the surveillance, wrongly characterized by both the Left and the Right, read here.

Read Offline:

Leave a Reply

2 Comments on "The Tao of Economics"

newest oldest most voted
Notify of
Economists and related, derivative 2nd and 3rd order professions (bankers, fund managers, Gillian Tett, etc) need to (be seen to) try hard to develop an ounce of decency again, of intellectual responsibility, and hope it works out for them, before they are allowed to pipe up in public discourse again, before we agree to reinstate them in something close to their late 20th century status, when the undereducated multitudes bestowed respect on them for all the wrong reasons: because they talk about ordinary people’s financial fears, because they project an air of seriousness by couching those fears in high-school level… Read more »