The 4 Boneheaded Biases of Stupid Voters

(And we're all stupid voters.)

Bryan Caplan | October 2007 Print Edition

Almost all the “respectable” economic theories of politics begin by assuming that the
typical citizen understands economics and votes accordingly—at least on average. By a
“miracle of aggregation,” random errors are supposed to balance themselves out. But this
works only if voters’ errors are random, not systematic.

The evidence—most notably, the results of the 1996 Survey of Americans and
Economists on the Economy—shows that the general public’s views on economics not
only are different from those of professional economists but are less accurate, and in
predictable ways. The public really does generally hold, for starters, that prices are not
governed by supply and demand, that protectionism helps the economy, that saving labor
is a bad idea, and that living standards are falling. Economics journals regularly reject
theoretical papers that explicitly recognize these biases. In a well-known piece in the
Journal of Political Economy in 1995, the economists Stephen Coate and Stephen Morris
worry that some of their colleagues are smuggling in the “unreasonable assumptions” that
voters “have biased beliefs about the effects of policies” and “could be persistently
fooled.” That’s the economist’s standard view of systematic voter bias: that it doesn’t
exist.

Or at least, that’s what economists say as researchers. As teachers, curiously, most

economists adopt a different approach. When the latest batch of freshmen shows up for
Econ 1, textbook authors and instructors still try to separate students from their
prejudices. In the words of the famed economist Paul Krugman, they try “to vaccinate the
minds of our undergraduates against the misconceptions that are so predominant in
educated discussion.”

Out of all the complaints that economists lodge against laymen, four families of beliefs
stand out: the anti-market bias, the anti-foreign bias, the make-work bias, and the
pessimistic bias.

Anti-Market Bias
I first learned about farm price supports in the produce section of the grocery store. I was
in kindergarten. My mother explained that price supports seemed to make fruits and
vegetables more expensive but assured me that this conclusion was simplistic. If the
supports went away, so many farms would go out of business that prices would soon be
higher than ever. I accepted what she told me and felt a lingering sense that price
competition is bad for buyer and seller alike.

This was one of my first memorable encounters with anti-market bias, a tendency to
underestimate the economic benefits of the market mechanism. The public has severe
doubts about how much it can count on profit-seeking business to produce socially
beneficial outcomes. People focus on the motives of business and neglect the discipline
imposed by competition. While economists admit that profit maximization plus market
imperfections can yield bad results, noneconomists tend to view successful greed as
socially harmful per se.

Joseph Schumpeter, arguably the greatest historian of economic thought, matter-of-factly

spoke of “the ineradicable prejudice that every action intended to serve the profit interest
must be anti-social by this fact alone.” Anti-market bias, he implied, is not a temporary,
culturally specific aberration. It is a deeply rooted pattern of human thinking that has
frustrated economists for generations.

There are too many variations on anti-market bias to list them all. Probably the most
common error of this sort is to equate market payments with transfers, ignoring their
incentive properties. (A transfer, in economic jargon, is a no-strings-attached movement
of wealth from one person to another.) All that matters, then, is how much you empathize
with the transfer’s recipient compared to the transfer’s provider. People tend, for
example, to see profits as a gift to the rich. So unless you perversely pity the rich more
than the poor, limiting profits seems like common sense.

Yet profits are not a handout but a quid pro quo: If you want to get rich, you have to do
something people will pay for. Profits give incentives to reduce production costs, move
resources from less-valued to more-valued industries, and dream up new products. This is
the central lesson of The Wealth of Nations: The “invisible hand” quietly persuades
selfish businessmen to serve the public good. For modern economists, these are truisms,
yet teachers of economics keep quoting and requoting this passage. Why? Because Adam
Smith’s thesis was counterintuitive to his contemporaries, and it remains counterintuitive
today.

A prejudice similar to the one against profit has dogged interest, from ancient Athens to
modern Islamabad. Like profit, interest is not a gift but a quid pro quo: The lender earns
interest in exchange for delaying his consumption. A government that successfully
stamped out interest payments would be no friend to those in need of credit, since that
policy would crush lending as well.

Anti-market biases lead people to misunderstand and reject even policies they should,
given their preferences for end results, support. For example, the Princeton economist
Alan Blinder blames opposition to tradable pollution permits on anti-market bias. Why
let people “pay to pollute,” when we can force them to cease and desist?

The textbook answer is that tradable permits get you more pollution abatement for the
same cost. The firms able to cut their emissions cheaply do so, selling their excess
pollution quotas to less flexible polluters. End result: more abatement bang for your buck.
But noneconomists, including relatively sophisticated policy insiders, disagree. In his
1987 book Hard Heads, Soft Hearts, Blinder discusses a fascinating survey of 63
environmentalists, congressional staffers, and industry lobbyists. Not one could explain
economists’ standard rationale for tradable permits.

The second most prominent avatar of anti-market bias is monopoly theories of price.
Economists acknowledge that monopolies exist. But the public habitually makes
monopoly a scapegoat for scarcity. The idea that supply and demand usually control
prices is hard to accept. Even in industries with many firms, noneconomists treat prices as
a function of CEO intentions and conspiracies.

Historically, it has been especially common for the public to pick out middlemen as
uniquely vicious “monopolists.” Look at these parasites: They buy products, “mark them
up,” and then resell us the “exact same thing.” Economists have a standard response.
Transportation, storage, and distribution are valuable services—a fact that becomes
obvious whenever you need a cold drink in the middle of nowhere. Like most valuable
services, they are not costless. The most that is reasonable to ask, then, is not that
middlemen work for free, but that they face the daily test of competition.

One specific price, the price for labor, is often thought to be the result of conspiracy:
capitalists joining forces to keep wages at the subsistence level. More literate defenders
of this fallacy point out that Adam Smith himself worried about employer conspiracies,
overlooking the fact that in Smith’s time high transportation and communication costs
left workers with far fewer alternative employers.

In the Third World, of course, the number of employment options is often substantially
lower than in developed countries. But if there really were a vast employer conspiracy to
hold down wages, the Third World would be an especially profitable place to invest.
Query: Does investing your life savings in poor countries seem like a painless way to get
rich quick? If not, you at least tacitly accept economists’ sad-but-true theory of Third
World poverty: Its workers earn low wages because their productivity is low, due partly
to lower skill levels and partly to anti-growth public policies.

Collusion aside, the public’s implicit model of price determination is that businesses are
monopolists of variable altruism. If a CEO feels greedy when he wakes up, he raises his
price—or puts low-quality merchandise on the shelves. Nice guys charge fair prices for
good products; greedy scoundrels gouge with impunity for junk. It is only a short step for
market skeptics to add “…and nice guys finish last.”

Where does the public go wrong? For one thing, asking for more can get you less. Giving
your boss the ultimatum “Double my pay or I quit” usually ends badly. The same holds in
business: Raising prices and cutting quality often lead to lower profits, not higher. Many
strategies that work as a one-shot scam backfire as routine policies. It is hard to make a
profit if no one sets foot in your store twice. Intelligent greed militates against dishonesty
and discourtesy because they damage the seller’s reputation.

An outsider who eavesdrops on economists’ discussions might get the impression that the
benefits of markets remain controversial. But economists who debate certain issues about
the perfection of markets are not debating, say, whether prices give incentives. Almost all
economists recognize the core benefits of the market mechanism; they disagree only at
the margin. Widespread bias against market mechanisms as reasonably efficient means of
meeting human needs affects politicians’ incentives in almost every decision they make.
It is perhaps most relevant today in the debate over whether the American health care
system needs more markets and choice or more central control.

Anti-Foreign Bias
A shrewd businessman I know has long thought that everything wrong in the American
economy could be solved with two expedients: 1) a naval blockade of Japan, and 2) a
Berlin Wall at the Mexican border.

Like most noneconomists, he suffers from anti-foreign bias, a tendency to underestimate

the economic benefits of interaction with foreigners. Popular metaphors equate
international trade with racing and warfare, so you might say that anti-foreign views are
embedded in our language. Perhaps foreigners are sneakier, craftier, or greedier.
Whatever the reason, they supposedly have a special power to exploit us.

There is probably no other popular opinion that economists have found so enduringly
objectionable. In The Wealth of Nations, Adam Smith admonishes his countrymen:
“What is prudence in the conduct of every private family, can scarce be folly in a great
kingdom. If a foreign country can supply us with a commodity cheaper than we ourselves
can make it, better buy it of them with some part of the produce of our own industry.”

As far as his peers were concerned, Smith’s arguments won the day. More than a century
later, Simon Newcomb could securely observe in the Quarterly Journal of Economics
that “one of the most marked points of antagonism between the ideas of the economists
since Adam Smith and those which governed the commercial policy of nations before his
time is found in the case of foreign trade.” There was a little backsliding during the Great
Depression, but economists’ pro-foreign views abide to this day.

Even theorists, such as Paul Krugman, who specialize in exceptions to the optimality of
free trade frequently downplay their findings as abstract curiosities. As Krugman wrote in
his 1996 book Pop Internationalism: “This innovative stuff is not a priority for today’s
undergraduates. In the last decade of the 20th century, the essential things to teach
students are still the insights of Hume and Ricardo. That is, we need to teach them that
trade deficits are self-correcting and that the benefits of trade do not depend on a country
having an absolute advantage over its rivals.”

Economics textbooks teach that total output increases if producers specialize and trade.
On an individual level, who could deny it? Imagine how much time it would take to grow
your own food, while a few hours’ wages spent at the grocery store can feed you for
weeks. Analogies between individual and social behavior are at times misleading, but this
is not one of those times. International trade is, as the economic writer Steven Landsburg
explains in his 1993 book The Armchair Economist, a technology: “There are two
technologies for producing automobiles in America. One is to manufacture them in
Detroit, and the other is to grow them in Iowa. Everybody knows about the first
technology; let me tell you about the second. First you plant seeds, which are the raw
materials from which automobiles are constructed. You wait a few months until wheat
appears. Then you harvest the wheat, load it onto ships, and sail the ships westward into
the Pacific Ocean. After a few months, the ships reappear with Toyotas on them.”

How can anyone overlook trade’s remarkable benefits? Adam Smith, along with many
18th- and 19th-century economists, identifies the root error as misidentification of money
and wealth: “A rich country, in the same manner as a rich man, is supposed to be a
country abounding in money; and to heap up gold and silver in any country is supposed
to be the best way to enrich it.” It follows that trade is zero sum, since the only way for a
country to make its balance more favorable is to make another country’s balance less
favorable.

Even in Smith’s day, however, his story was probably too clever by half. The root error
behind 18th-century mercantilism was an unreasonable distrust of foreigners. Otherwise,
why would people focus on money draining out of “the nation” but not “the region,” “the
city,” “the village,” or “the family”? Anyone who consistently equated money with
wealth would fear all outflows of precious metals. In practice, human beings then and
now commit the balance of trade fallacy only when other countries enter the picture. No
one loses sleep about the trade balance between California and Nevada, or me and
iTunes. The fallacy is not treating all purchases as a cost but treating foreign purchases as
a cost.

Anti-foreign bias is easier to spot nowadays. To take one prominent example,

immigration is far more of an issue now than it was in Smith’s time. Economists are
predictably quick to see the benefits of immigration. Trade in labor is roughly the same as
trade in goods. Specialization and exchange raise output—for instance, by letting skilled
American moms return to work by hiring Mexican nannies.

In terms of the balance of payments, immigration is a nonissue. If an immigrant moves

from Mexico City to New York and spends all his earnings in his new homeland, the
balance of trade does not change. Yet the public still looks on immigration as a bald
misfortune: jobs lost, wages reduced, public services consumed. Many in the general
public see immigration as a distinct danger, independent of, and more frightening than, an
unfavorable balance of trade. People feel all the more vulnerable when they reflect that
these foreigners are not just selling us their products. They live among us.

It is misleading to think of “foreignness” as a simple either/or. From the viewpoint of the

typical American, Canadians are less foreign than the British, who are in turn less foreign
than the Japanese. From 1983 to 1987, 28 percent of Americans in the National Opinion
Research Center’s General Social Survey admitted they disliked Japan, but only 8 percent
disliked England, and a scant 3 percent disliked Canada.

Objective measures like the volume of trade or the trade deficit are often secondary to
physical, linguistic, and cultural similarity. Trade with Canada or Great Britain generates
only mild alarm compared to trade with Mexico or Japan. U.S. imports from and trade
deficits with Canada exceeded those with Mexico every year from 1985 to 2004. During
the anti-Japan hysteria of the 1980s, British foreign direct investment in the U.S. always
exceeded that of the Japanese by at least 50 percent. Foreigners who look like us and
speak English are hardly foreign at all.

Calm reflection on the international economy reveals much to be thankful for and little to
fear. On this point, economists past and present agree. But an important proviso lurks
beneath the surface. Yes, there is little to fear about the international economy itself. But
modern researchers rarely mention that attitudes about the international economy are
another story. Paul Krugman hits the nail on the head: “The conflict among nations that
so many policy intellectuals imagine prevails is an illusion; but it is an illusion that can
destroy the reality of mutual gains from trade.” We can see this today most vividly in the
absurdly overblown political reactions to the immigration issue, from walls to forcing
illegal workers currently in America to leave before they can begin an onerous procedure
to gain paper legality.

Make-Work Bias
I was an undergraduate when the Cold War ended. I still remember talking about military
spending cuts with a conservative student. The whole idea made her nervous; she had no
idea how a market economy would absorb the discharged soldiers. In her mind, to lay off
100,000 government employees was virtually equivalent to disemploying 100,000 people
for life.

If a well-educated individual ideologically opposed to wasteful government spending

thinks like this, it is hardly surprising that she is not alone. The public often literally
believes that labor is better to use than conserve. Saving labor, producing more goods
with fewer man-hours, is widely perceived not as progress but as a danger. I call this the
make-work bias, a tendency to underestimate the economic benefits of conserving labor.
Where noneconomists see the destruction of jobs, economists see the essence of
economic growth: the production of more with less.

Economists have been at war with the make-work bias for centuries. The 19th-century
economist Frederic Bastiat ridiculed the equation of prosperity with jobs as “Sisyphism,”
after the mythological fully employed Greek who was eternally condemned to roll a
boulder up a hill.

In the eyes of the public, he wrote, “effort itself constitutes and measures wealth. To
progress is to increase the ratio of effort to result. Its ideal may be represented by the toil
of Sisyphus, at once barren and eternal.” For the economist, by contrast, wealth
“increases proportionately to the increase in the ratio of result to effort. Absolute
perfection, whose archetype is God, consists [of] a situation in which no effort at all
yields infinite results.”

Nineteenth-century economists believed they had diagnosed enduring economic

confusions, not intellectual fads, and they were right. The crudest form of make-work
bias is the Luddite fear of the machine. Common sense proclaims that machines make life
easier for human beings. The public qualifies this “naive” position by noting that
machines also throw people out of work. It forgets that technology also creates new jobs.
Without the computer, to give one obvious example, there would be no jobs in computer
programming or software development. But the fundamental defense of labor-saving
technology is deeper than that. Employing more workers than you need wastes valuable
labor.

After technology throws people out of work, they have an incentive to find a new use for
their talents. The Dallas Fed economist W. Michael Cox and the journalist Richard Alm
illustrate this process in their 1999 book Myths of Rich and Poor, citing history’s most
striking example, the drastic decline in agricultural employment: “In 1800, it took nearly
95 of every 100 Americans to feed the country. In 1900, it took 40. Today, it takes just
3.…The workers no longer needed on farms have been put to use providing new homes,
furniture, clothing, computers, pharmaceuticals, appliances, medical assistance, movies,
financial advice, video games, gourmet meals, and an almost dizzying array of other
goods and services.”

Many economists advocate government assistance to cushion the displaced workers’

transition to new jobs and to retain public support for a dynamic economy. Other
economists disagree. But almost all economists grant that stopping those transitions has a
grave cost.

Exasperating as the Luddite mentality is, countries rarely accede to public anxieties and
turn back the clock of technology. But you cannot say the same about another
controversy infused with make-work bias: hostility to downsizing.

Inside of a household, everyone understands what Cox and Alm call “the upside of
downsizing.” You do not worry about how to spend the hours you save when you buy a
washing machine. Make-work confusion can arise only in an exchange economy. If you
receive a washing machine as a gift, the benefit is yours; you have more free time and the
same income. If you get downsized, the benefit goes to other people; you have more free
time, but your income temporarily falls. In both cases, though, society conserves valuable
labor.

The danger of the make-work bias is easiest to see in Europe, where labor market
regulation to “save jobs” has produced decades of high unemployment. But we can see it
in the U.S. as well, especially in our massive employment lawsuit industry. The hard
lesson to learn is that giving people “rights to their jobs” is a drain on productivity—and
makes employers think twice about hiring people in the first place.

Pessimistic Bias
I first encountered anti-drug propaganda in second grade. It was called “drug education,”
but it was mostly scary stories. I was told that kids around me were using drugs and that a
pusher would soon offer me some too. Teachers warned that more and more kids would
become addicts, and that by the time I was in junior high I would be surrounded by them.
Authority figures would occasionally speculate about our adulthood, and wonder how a
country could function with such a degenerate work force.

I am still waiting to be offered drugs. The junior high dystopia never materialized. By the
time I reached adulthood, it was apparent that most people were not going to their jobs
high on PCP. Generation X’s entry into the work force accompanied the marvels of the
Internet age, not a stupor-induced decline in productivity and innovation.

My teachers’ predictions about America’s economic future fit nicely into a larger pattern.
As a general rule, the public believes economic conditions are not as good as they really
are. It sees a world going from bad to worse; the economy faces a long list of grim
challenges, leaving little room for hope. We can call this the pessimistic bias, a tendency
to overestimate the severity of economic problems and underestimate the economy’s
performance in the recent past, the present, and the future.

Pessimism about the economy comes in two varieties. You may be pessimistic about
symptoms, overblowing the severity of the effects of everything from the deficit to
affirmative action. But you can also be pessimistic overall, seeing negative trends in
living standards, wages, and inequality. Public opinion is marked by both forms of
pessimism. Economists constantly advise the public not to lose sleep over the latest
economic threat in the news, pointing out massive gains we’ve made during the last 100
years and now take for granted.

David Hume—economist, philosopher, and Adam Smith’s best friend—blamed popular

pessimism on our psychology. “The humour of blaming the present, and admiring the
past, is strongly rooted in human nature,” he wrote, “and has an influence even on
persons endued with the profoundest judgment and most extensive learning.”

But 19th-century economists did little to develop the theme of pessimistic bias.
Nineteenth-century socialists who predicted “immiseration” of the working class met
intellectual resistance from economists. But the root of the socialists’ forecast was
hostility to markets, not pessimism as such. Economists often ridiculed socialists for their
wild optimism about the impending socialist utopia.

Pessimistic bias is widely thought to have grown worse in the modern era. In The Idea of
Decline in Western History (1997), the historian Arthur Herman of the Smithsonian
Institution maintains that it peaked soon after the end of World War I, when “talking
about the end of Western civilization had become as natural as breathing. The only
subject left to debate was not whether the modern West was doomed but why.”

How can high levels of pessimism coexist with constantly rising standards of living?
Although pessimism has abated since World War I, the gap between objective conditions
and subjective perceptions is arguably greater than ever. In The Progress Paradox
(2003), the journalist Gregg Easterbrook ridicules the “abundance denial” of the
developed world: “Our forebears, who worked and sacrificed tirelessly in the hopes their
descendants would someday be free, comfortable, healthy, and educated, might be
dismayed to observe how acidly we deny we now are these things.”

Not all professional economists are utter optimists about tomorrow. There is an ongoing
debate among economists about growth slow-down. This is what relatively pessimistic
economists like Paul Krugman mean when they say that “the U.S. economy is doing
badly.” Other economists counter that standard numbers inadequately adjust for the rising
quality and variety of the consumption basket and the changing composition of the work
force. Either way, the worst-case scenario that GDP statistics permit—a lower speed of
progress—is no disaster.

The intelligent pessimist’s favorite refuge is to argue that standard statistics such as GDP
miss important components of our standard of living. The leading candidate is
environmental quality. Pessimists often add that our failure to deal with environmental
destruction will soon morph into economic disaster as well. If resources are rapidly
vanishing as our numbers multiply, human beings are going to be poor and hungry, not
just out of touch with Mother Earth.

A number of economists have met these challenges. The most wide-ranging is the late
Julian Simon, who argued that popular “doom-and-gloom” views of resource depletion,
overpopulation, and environmental quality are exaggerated and often the opposite of the
truth. Past progress does not guarantee future progress, but as Simon explained in his
1995 book The State of Humanity, it does create a strong presumption: “Throughout the
long sweep of history, forecasts of resource scarcity have always been heard, and—just
as now—the doomsayers have always claimed that the past was no guide to the future
because they stood at a turning point in history.”

Simon has been a lightning rod for controversy, but his main theses—that natural
resources are getting cheaper, population density is not bad for growth, and air quality is
improving—are now almost mainstream in environmental economics. Since the Harvard
economist Michael Kremer’s seminal 1993 paper “Population Growth and Technological
Change: One Million B.C. to 1990,” even Simon’s “extreme” view that population
growth raises living standards has gained wide acceptance.

The UCLA geographer Jared Diamond’s immensely popular 1997 book Guns, Germs,
and Steel links population and innovation in essentially the same way, albeit with little
fanfare. The upshot: GDP may not be the best conceivable measurement of our well-
being, but refining measures of economic welfare does not revive the case for pessimism.
In fact, more inclusive measures cement the case for optimism, because life has also been
getting better on the neglected dimensions.

This pessimistic bias is a general-interest prop to political demagoguery of all kinds. It

creates a presumption that matters, left uncontrolled, are spiraling to destruction, and that
something has to be done, no matter how costly or ultimately counterproductive to wealth
or freedom. This mind-set plays a role in almost every modern political controversy, from
downsizing to immigration to global warming.
Bias Against Bias
Economists have a love-hate relationship with systematic bias. As theorists, they deny its
existence. But when they teach, address the public, or wonder what is wrong with the
world, they dip into their own private stash of the stuff. On some level, economists not
only recognize that systematically biased beliefs exist; they think they have discovered
virulent strains in their own backyard.

You can hardly teach economics without bumping into these biases. Students of
economics are not blank slates for their teachers to write on. They arrive with strong
prejudices. They underestimate the benefits of markets. They underestimate the benefits
of dealing with foreigners. They underestimate the benefits of conserving labor. They
underestimate the performance of the economy. And in doing all that underestimating,
they overestimate both the need for the government to solve these purported problems
and the likely efficacy of its solutions.

Bryan Caplan, a professor of economics at George Mason University, is the author of

The Myth of the Rational Voter: Why Democracies Choose Bad Policies (Princeton
University Press), from which this article is excerpted. © Copyright 2007 by Princeton
University Press.