The Good Economist vs. The Bad Economist
Frederic Bastiat made a clear distnction between the good economist and the bad economist. For him, the good economist looks beyond what is immediately apparent and instead looks much further into the future. In this world, however, we have many bad economists, and as Bastiat writes in "That Which Is Seen, and That Which Is Not Seen," "It almost always happens that when the immediate consequence is favorable, the ultimate consequences are fatal, and the converse.” As a result, Bastiat warns, “It follows that the bad economist pursues a small present good, which will be followed by a great evil to come."
A refusal to look beyond the immediate and “seen” to the “unseen” also leads to bad economic theory, which, beyond the mere foibles of individual economists, solidifies the practice of ignoring the hidden future effects of economic policies. These bad theoretical frameworks inevitably lead to bad policies and eventually the destruction of wealth via misallocation of resources within the economy.
This phenomenon is certainly common enough in modern economic policies and their underlying theoretical frameworks. For example, we have a large body of economics built on pseudo-facts and unrealistic assumptions. This has been characterized in part by the over-mathematization of economics. As a result, economic analysis relies only on those phenomena that can be quantified, measured, and fit within certain types of models. Other information is ignored.
In other words, policies built on these theoretical frameworks and mathematical models focus heavily on what is seen, such as prices, wages, volume, GDP, and other such metrics. A decline in these factors, it is believed, must immediately be remedied by other measurable activities, such as injection of money and credit into the economy, regulations, subsidies, and so on.
These have an immediate short term and "seen" effect. But, as they are hard to observe, the long term and "unseen" consequences are often ignored, disregarded, or outright denied.
However, the long term and unseen consequences of these may include changes in and the distortion of the market structure, inflation, stifled trade, destruction of capital and wealth, and misallocation of labor, capital, and production capacity. These factors may be very hard to observe, although they have deeper and lasting effects on the growth and sustainability of the economy.
These unmeasurable distortions of the economy often destroy capital and give rise to zombie companies and sectors that end up suffocating the economy by driving out productive companies and sectors.
Bastiat continues, "The true economist pursues a great good to come, at the risk of a small present evil." Good economics looks to the long term and it confers great importance to what is unseen due to the fact that it almost always has longer lasting, more severe, and deeper consequences. For example, excessive borrowing by government and then the handing out of welfare is seen. But the entrepreneur who is crowded out of the credit market, the potential jobs, and the increase in national wealth that he could have contributed are unseen.
So how to practice good economics?
The good economist takes a very different view, recognizing the importance of uncovering hidden effects and relationships. This can be facilitated with less attention to mere quantitative analysis and more attention to sound theory and qualitative analysis. This, however, requires prudence and restraint on the part of the economist. It requires he or she allow natural market structures and mechanisms to follow their natural trajectories so as to organize the market in the most efficient and productive way. How or when this is done cannot always be directly observed, and thus it becomes difficult to tinker endlessly with the machinery of the economy.
The good economist, however, will not be discouraged by this, and will instead pursue a greater understanding of the economy that includes the unseen and well as the seen.