Simon Newcomb’s Public Opinion and Economic Insights

Simon Newcomb (1835-1909) is little known today, but he was a very prominent economist in his time. For example, He was actively involved in the dispute that led to the founding of the American Economic Association in 1885.. In July 1893, he published an essay on “The Problem of Economic Education” for prominent (both then and now!) people. Quarterly Journal of Economics. This article argues that there are fundamental insights in economics that were well known in 1893 but are largely unknown or ignored by the general public. What I find thought-provoking is that many of these insights seem equally unknown to the public and many policymakers three decades into the 21st century.

As part of the stage setting, Newcomb wrote:

The disagreement is not between classes of economists or schools of thought, but between established economic conclusions on the one hand and popular opinion on the other. … The first thing I want to show is that we have to deal with an idea that has existed for centuries. An idea that has never made a permanent impression on the minds of professional economists, except perhaps in England. And the everyday application of pure economic theory shows us what our popular opinion, our laws, and even our popular economic terminology would have been like if Smith, Ricardo, and Mill had not lived and the term political economy had not been known. … Great changes in popular sentiment do not occur suddenly, and economists must expect that it will take many years of hard work before the doctrines they oppose are completely rejected.

What kind of argument does Newcomb have in mind? He points out that many people, then and now, believe that trade cannot be beneficial to the economies of two countries, and instead that international trade must necessarily involve one country exploiting another. In my experience, this view is often framed essentially as “exports are good, imports are bad.” Newcomb says:

Before the science of economics was known, the theory of the “balance of trade” arose. The basic tenet of this theory was that trade was either advantageous or disadvantageous to a country depending on whether the value of its exports exceeded or was less than the value of its imports. Thus, in the nomenclature of the time, an unfavorable balance of trade or credit meant that its imports exceeded its exports, and a favorable balance meant the opposite. The immediate inference from this view was that trade between two countries could not be advantageous to both, because the value of each country’s exports to the other could not be greater than the value it received from the other. …

The doctrine which economists have accepted and taught for a century and a half is that there can be no trade between two nations which is not advantageous to both. People do not buy or sell unless what they receive is of greater value than what they exchange for, and what is true of individuals in this respect is also true of nations. But the combined arguments of economists for a century have not been sufficient to change the name of the subject, or to modify the ideas of commercial nations. … The terms “favorable” and “unfavorable,” as applied to the balance of trade, still have the meaning they had before Adam Smith was born. We may tremble at the political fate of a statesman who openly asserts that, whatever policy we adopt, our exports will in the long run be substantially balanced by our imports; and if this equality can be broken, it will be to the advantage of the country which imports the greater value.

What about an alternative view of “job creation”? Newcomb writes:

The difference between economists and the public is by no means confined to foreign trade. We find direct antagonism between them in almost every question, including the employment of labor, and the relation of industry to the welfare of the community. The idea that the usefulness and importance of industry should be measured by the employment it affords to labor is so deeply ingrained in human nature that it is difficult for economists to claim that they have taken the first step toward eradicating it. In the economic view, the value of industry is measured by the usefulness and cheapness of its products. In the popular view, usefulness is almost overlooked, and cheapness is apt to be regarded as an evil on the one hand, and a good on the other. Profit is to be measured by the number of workers and the total amount of wages which can be obtained by pursuing industry.

Or here’s Newcomb’s take on the idea: that producing at low prices is a good thing.

Several years ago, during a debate in Congress over whether to impose a tax on artificial butter, one side argued that if the product were allowed to be produced freely, the price of butter could be as low as 10 cents a pound in a few years. … [I]It was put forward as an argument against permitting manufacture. The most interesting feature of this argument, and the one which I have quoted in connection with this subject, is that no one seems to have been bold enough to join in the question of the conclusion, and to assert that if the whole community had the prospect of soon being able to get butter at ten cents a pound, it would be a good thing for all of us. But there is no proposition more generally agreed among those who study this subject than that modern economic progress consists largely in making processes cheap, and that any evils which may result from cheap production are but temporary, and are many times more compensated by the greater supply of the necessities of life to the public.

What about price controls? As Newcomb writes, in extreme cases, certain regulations can make sense. But attempts to help the poor by controlling prices often result in the poor getting less of the item in question.

The prevalence of usury among us is another instance of the persistence of ideas of an earlier period, long after they have been exposed as erroneous by careful investigation, as well as by general business experience. We need not condemn all attempts to regulate the rate of interest, as we do in exceptional cases to regulate other contracts. What we must attend to is the general belief, throughout society, that the rate of interest can be practically regulated by law. Not unlike this is the widespread belief that laws which make it difficult to collect rents and enforce the payment of debts are for the benefit of the poor. They are undoubtedly for the benefit of those who have no intention of paying. But the fact, so plain to the business economist, that all that is obtained in this way comes out of the pockets of the poor… is something which the legislative public has not yet grasped.

Newcomb argues that economic thinking is often dismissed as “dismal science” not because it is wrong, but because people and politicians do not want to think about how the economy actually works or what trade-offs might arise. He writes:

maybe No phrase Carlyle used has gained more widespread acceptance than the epithet “dismal science.” He applied it to political economy. But if you think about it a little, you will see that political economy is gloomy only in the sense that all its conclusions about what men cannot do can be called gloomy. A stormy voyage across the Atlantic is very gloomy. But no one has ever concluded from that premise that boys should learn nothing about the Atlantic, nor has anyone ever criticized a meteorologist who said that the seas in winter are rough and that landmen get seasick. It is a maxim taught to school boys from their childhood that they cannot have their cake and eat it too. But when an economist applies the same maxim to a state, he is met with opposition and arguments not only from the unthinking masses but also from influential and intelligent men.

As Newcomb points out, some issues are not decided by popular vote. For example, whether a steam engine runs or not is not decided by majority vote, but by the fundamental realities of physical design. Of course, economics is a social science, not a physical science, so the analogy is necessarily imperfect. But it remains true that the outcomes of economic policy are determined not by the stated intentions or popularity of politicians, but by the fundamental realities of how businesses and consumers will react.

Newcomb argues that economists of the time tended to be reluctant to argue with the public. Who wants to be scolded, then or now? He writes, “It must also be admitted that there has been a growing tendency among economists in recent times to abandon the particular field of conflict, which is the implicit or explicit recognition that the wisdom of the crowd and the common sense of the crowd are better guides than the theories of students and philosophers.”

But here in the United States, we live in an age when proposals to impose major restrictions on foreign trade are commonplace. I can’t recall anything like it happening since. Vice President Al Gore defended the North American Free Trade Agreement in 1993 against criticism from Ross Perot. Prominent American politicians have tried to make a case for trade. Current proposals to impose price limits on everything from rent to medicine to groceries are commonplace. Politicians often seem to have difficulty distinguishing between the number of jobs, which is not a major issue in an economy where unemployment has been at 4 percent for the past two years, and the quality of jobs in terms of wages, benefits, education, and opportunities for matching workers with employers in the labor market. No major politician has embraced the idea that “you can’t have your cake and eat it too” and refuses to address well-known issues like the failings of Social Security and Medicare or the need to reduce budget deficits over time.

In these and other economic arguments, there is often a casual and aggressive disregard for the insights that economists offer, much like ignoring the weather forecast when planning a wilderness hike or a day at the beach. As Nikita Khrushchev said, “Economics is a subject that does not respect its own desires very much.”