Stupid, Ignorant or Biased?

President Franklin D. Roosevelt's closest adviser and architect of the New Deal, Harry Hopkins, advised, "Tax and tax, spend and spend, elect and elect, because the people are too damn dumb to know the difference." Professor Bryan Caplan, my colleague at George Mason University, sheds some light on Hopkins' observation in his new book, "The Myth of the Rational Voter: Why Democracies Choose Bad Policies."

Caplan is far more generous than Hopkins. Instead, he says people harbor economic biases, several of which he discusses. There's the anti-market bias, the failure to believe that market forces determine prices. Many believe that prices are a function of a CEO's intentions and conspiracies. If a CEO wakes up feeling greedy, he'll raise prices. They also believe that profits are undeserving gifts. They fail to see that, at least in open markets, profits are incentives for firms to satisfy customers, find least-cost production methods and move resources from low-valued to high-valued uses.

Then there's the make-work bias, where many believe that labor is better to use than conserve. Thus, the destruction of jobs is seen as a danger. Technology, as well as outsourcing, throws some people out of work. Caplan reminds us that in 1800 it took nearly 95 of every 100 Americans, working on farms, to feed the nation. In 1900, it took 40. Today, it takes three. Workers no longer needed to farm became available to produce homes, cars, pharmaceuticals, computers and thousands of other goods. Caplan doesn't make the equation, but outsourcing, just as technological innovation, frees up labor to produce other things as well.

Next is the anti-foreign bias. Caplan explains that there are two methods for Americans to have cars. One is to get a bunch of workers into Detroit factories. Another is to grow a lot of wheat in Iowa. You harvest the wheat, load it on ships sailing westward on the Pacific Ocean, and a few months later the ships reappear loaded down with Toyotas. We have cars as if we produced them. In other words, exchange is an alternative method of production.

Added to the anti-foreign bias is the balance-of-trade fallacy. Caplan says that nobody loses sleep over whether there's a trade balance between California and Nevada, or between him and iTunes. Trade balance fears arise only when another country is involved. The fallacy is not treating all purchases as a cost but only foreign purchases as a cost. There might be another bias as well. Caplan reports that, according to an opinion survey, 28 percent of Americans admitted they dislike Japan but only 8 percent dislike England and a scant 3 percent dislike Canada.

People have a pessimistic bias where they believe economic conditions are not as good as they really are and things are going from bad to worse. This is the message of doomsayers, but the reality is quite different. By any measure of well-being, Americans at the start of this century are far better off than Americans at the beginning of the last century. Perennial doom-and-gloom predictions about resource depletion, overpopulation and environmental quality are exaggerated and often the opposite of the truth. Preaching doom and gloom has been beneficial to the political class. They use it to gain more power and control.

Caplan is one of George Mason University Economics Department's up-and-coming young scholars. In fact, I'm proud to say, he was hired during my department chairmanship. "The Myth of the Rational Voter: Why Democracies Choose Bad Policies" is a highly readable and interesting political-economic discussion of why we choose bad policies. Those policies are harmful to the general public but beneficial to particular interest groups who gain from restrictions on peaceable, voluntary exchange. Maybe that's why our founders loathed a democracy and gave us a republic -- which we've lost.