Watch your metaphors – Econlib

• It is quite clear that an economist, like a poet, uses metaphors. They are called ‘models’. According to the economist, the apartment market in New York is ‘like’ a curve on a blackboard. No one has yet seen a literal demand curve floating in the air above Manhattan.

• —Deirdre McCloskey, If you’re that smart: the story of economic expertise1990.

IIn 1966, Martin Bronfenbrenner pointed out that the critical question about economic models is whether or not they are apply in the real world. A model is only useful if it can be shown that the mathematical symbols fit reality.

The problem of ensuring that metaphors apply does not only matter to economists. Steven Pinker, op The stuff of thinkingsays that metaphors permeate human communication, and in fact, thought itself.

In many areas of human knowledge, ranging from politics to physics, arguments are difficult to settle. The problem is not that one person believes a metaphor to be true and another person believes it to be false. The problem is that one person believes the metaphor applies and the other believes it does not apply.

For example, in physics you could describe light using the metaphor of a wave. Alternatively, you could use the metaphor of a particle. For some purposes it is useful to describe electrons as they orbit a nucleus. For other purposes, that metaphor does not apply.

Here I want to evaluate some of the metaphors used to describe aspects of economics. I couldn’t possibly discuss all these kinds of metaphors, because every economic proposal I can think of is a metaphor. Instead, I’ll choose a few metaphors to evaluate in terms of how useful I think they are.

Metaphors that I find useful

I believe the metaphor of supply and demand is useful. It leads a student to think that prices reflect overall systemic forces, rather than treating prices as dictated by all-powerful corporations.

It is also important to understand that supply and demand curves intersect. I wish we didn’t call the intersection “equilibrium” because that suggests stability. The metaphor I would use instead is the “market clearing price,” by which I mean the price at which there is no shortage or surplus. The student should understand why we expect shortages and surpluses to be only temporary unless the government imposes price controls.

I like the metaphor of “roundabout production.” It can describe a production process in which you arrive at the final output by first building tools to produce that output, the way Austrian economics thinks about capital goods. But it can also describe the process of generating revenue through trade, as in David Friedman’s classic description of Americans “growing cars” by raising wheat, loading the wheat onto ships for Japan, and returning the ships with cars.

Metaphors from non-economists

Non-economists wallow in some metaphors that I think are misleading. Metaphors that ignore the complexities of specialization and trade are particularly problematic.

For example, the metaphor of the economy as a camping trip, where we take turns completing tasks and sharing the results, is one of many metaphors that lead people to overestimate the feasibility of socialism or communism. Recently I sat on a plane next to a woman reading a book about replacing capitalism with the principle of ‘solidarity’. I asked her to estimate how many people were involved in building the plane. She quickly noticed that when you take into account the subcontractors who supply parts, the steel manufacturers, the material miners, and so on, that’s a lot of people. I then pointed out that the coordination process involved was therefore very complex. You can’t just get a small group together, have a discussion and then start building an airplane. She got the point, but unfortunately I don’t think she has abandoned her socialist beliefs.

Another metaphor that bothers me is what I call the GDP factory. You think the entire economy produces a single good. When “aggregate demand” falls, the factory/economy lays off workers. Spending creates jobs, and jobs creates expenditure. Newspaper stories about the economy constantly describe it in such terms. Worse, and sad to say, this metaphor is hardly limited to non-economists. Much of mainstream macroeconomics uses this metaphor.

I prefer to think of job creation as companies discovering new patterns of sustainable specialization and trade. They are sustainable because everyone involved makes a profit. When something happens that makes a company no longer profitable, the pattern is broken and employees are fired.

Misleading metaphors from economists

In fact, non-economists are not the only ones stuck in misleading metaphors. In my opinion, there are many metaphors used by economists that lead to more confusion than insight.

One such metaphor is the metaphor of perfect markets. A perfect market requires a simple good, with many sellers competing on a level playing field. There is a ‘fundamental welfare theorem’ that says that perfect markets promote efficiency according to a criterion known as Pareto Optimality.

But in practice, the metaphor of perfect markets almost never applies. Almost every real market “fails” because it violates at least one condition necessary for perfection.

Because ‘market failure’ occurs everywhere, many economists argue for government intervention in various markets. I consider this an intellectual scam. The fact that the market will not produce the perfect outcome does not mean that government intervention will.

Interventionists accuse free market economists of believing that markets are perfect. But in fact, free-market advocates view markets and government intervention as something different processes. We see the market process because they are better able to achieve continuous improvement than government intervention process. But that is a topic beyond the scope of this essay.

The key point to take away is that every attempt at economic analysis uses a metaphor. Whether the metaphor is applicable, and how it should be applied, is debatable. We should expect disagreement. We have to live with uncertainty.