Mind Your Metaphors – Econlib

• It is pretty clear that an economist, like a poet, uses metaphors. They are called ‘models.’ The market for apartments in New York, says the economist, is ‘just like’ a curve on a blackboard. No one has so far seen a literal demand curve floating in the sky above Manhattan.

• —Deirdre McCloskey, If You’re So Smart: The Narrative of Economic Expertise, 1990.

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

The problem of making sure that metaphors apply matter so more than just to economists. Steven Pinker, in The Stuff of Thought, says that metaphors pervade human communication, and in fact pervade thought itself.

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

In physics, for example, one might describe light by using the metaphor of a wave. Alternatively, one might use the metaphor of a particle. For some purposes, describing electrons as orbiting around a nucleus is useful. For other purposes, that metaphor does not apply.

Here I want to evaluate some of the metaphors used to describe aspects of the economy. I could not possibly discuss all such metaphors, because every economic proposition that I can think of is a metaphor. Instead, I will choose a few metaphors to evaluate in terms of how useful I believe they are.

Metaphors I Believe Useful

I believe that the supply-and-demand metaphor is useful. It guides a student toward thinking of prices as reflecting overall systemic forces, rather than treating prices as dictated by all-powerful businesses.

It also is important to understand that supply and demand curves intersect. I wish that we did not call the intersection point “equilibrium,” because that suggests stability. The metaphor I would use instead is “market-clearing price,” meaning the price at which there is neither a shortage nor a 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 final output by first building tools to produce that output, which is how Austrian economics thinks of capital equipment. But it can also describe the process of obtaining output through trade, as in David Friedman’s classic description of Americans “growing automobiles” by growing wheat, loading the wheat onto ships for Japan, and having the ships come back carrying automobiles.

Non-economists’ Metaphors

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

For example, the metaphor of the economy as a camping trip, where we take turns doing tasks and share the results, is one of many metaphors that lead people to over-estimate the feasibility of socialism or communism. Recently, I was on an airplane, seated next to a woman who was reading a book about replacing capitalism with the principle of “solidarity.” I asked her to estimate how many people were involved in building the airplane. She quickly picked up on the fact that if one takes into account the subcontractors providing components, the steel manufacturers, the miners of materials, and so on, it would add up to very many people. I then pointed out that the coordination process involved was therefore very complex. You could not just get a small group together, discuss, and then go about building an airplane. She understood the point, but unfortunately, I do not think that she let go of her socialist persuasion.

Another metaphor that disturbs me is what I call the GDP factory. You think of the entire economy as producing a single good. When “aggregate demand” falls off, the factory/economy lays off workers. Spending creates jobs, and jobs create spending. Newspaper stories about the economy are forever describing 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 businesses discovering new patterns of sustainable specialization and trade. They are sustainable because everyone involved earns a profit. When something happens that makes a business unprofitable, the pattern gets broken and workers get laid off.

Economists’ Misleading Metaphors

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 that insight.

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

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

Because “market failure” is everywhere, many economists argue for government intervention in a variety of markets. This I regard as an intellectual swindle. Just because the market will not produce the perfect outcome does not mean that government intervention will do so.

Interventionists accuse free-market economists of believing that markets are perfect. But in fact, free-market advocates look at markets and government intervention as processes. We see the market process as doing a better job of providing continuous improvement than the government intervention process. But that is a topic that is 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 applies, and how to apply it, is contestable. We should expect disagreement. We should live with uncertainty.