Why economic thinking needs evidence too, not just logic

Not surprisingly, humans have a strong tendency to move away from punishment and towards rewards. When something is disincentivized, we tend to get less of it; when something is incentivized, we tend to get more of it. So, for example, an increased tax on cigarettes will tend to reduce consumption of cigarettes. The same goes for labor. The higher that minimum wage is increased, the less labor you can expect that an employer will be willing to pay for. Once per year, the American restaurant chain Applebee’s offers free meals to military veterans on Veterans Day. Not surprisingly, each year the restaurant has long lines of veterans waiting for a seat.

The Mises-Rothbard, praxeological (‘logic of human action’) approach is an important one for thinking about economics. We don’t have to assume that individual actors are perfectly rational in that they always make choices for best long-term outcomes, that they recall all available options when making a decision, or that they are even capable of engaging in complicated quantitative analysis. We also most certainly don’t (and shouldn’t) assume that human actors only seek to maximize economic outcomes.

What we do assume is that most humans prefer pleasure to pain, comfort to discomfort. They tend to move away from worse situations to better situations (as judged by themselves). Quoting Mises’ book Human Action:

Acting man is eager to substitute a more satisfactory state of affairs for a less satisfactory. His mind imagines conditions which suit him better, and his action aims at bringing about this desired state. The incentive that impels a man to act is always some uneasiness.

When an actor acts (in making a trade or anything else), they believe at the time of the action that they will be better off – ex-ante – somehow by doing it – otherwise the action would not occur. The “as judged by themselves” is important here because, to use just one example, some people find utility in spicy foods, while others find disutility in it. To sum it up: value is subjective, and human preferences are diverse.

A real world example

In the video interview below, Ann Coulter and John Stossel debate whether the illegality of drugs leads to a decrease or an increase in consumption. Coulter cites the importance of incentives and disincentives on behavior in economics. Sadly, Stossel ignores cultural differences as a variable between the United States and the Netherlands (where marijuana is legally tolerated) that may affect consumption levels; Coulter embraces the cultural variable. But culture aside, here is the debate regarding incentives and disincentives:

Stossel: “[In the Netherlands] despite legalization, it’s [marijuana is] less popular.”

Coulter: “You can’t be saying that if you legalize something, fewer people will do it.”

Stossel: “That’s what happened in Holland. They took the sexiness out of [it]…”

Coulter interrupts at this point, but Stossel’s point is clear: that consumption went down as a result of the legality of drugs since in the Netherlands, suggesting that illegality offers a social appeal of just being “underground.” Coulter then makes an argument consistent with a praxeological approach: “[When] you make something illegal, you get less of it. You subsidize it, you get more of it.”

Note: More accurately, marijuana use is legally tolerated in the Netherlands, but we will refer to it as “legal” for simplicity.

If value is subjective (and it is), then it is at least plausible that the “illegality” of something will, in fact increase its utility for some that are attracted to an underground lifestyle, so its consumption could actually increase despite (or because of), the illegality, even though making it illegal is intended by lawmakers to be a disincentive. Legalize it, and it loses some of the “cool” appeal. This is Stossel’s argument, and it reminds one of something that a former Dutch minister of health once said: “We have succeeded in making pot boring [by legalizing it].”

Clearly serving jail time and holding a criminal record is a disincentive for using marijuana, while socially benefiting from participation in an “underground” culture is perhaps, for some people, an incentive to use it. In the latter case, the very illegality of consumption, sale, purchase and production are what give marijuana the “underground” appeal – to the extent that it has one.

So is Coulter correct that – on the whole – consumption is lower than it would be if marijuana was legal (in all states) due to the disutility of risking jail time? Or is Stossel correct that consumption is higher than it would be otherwise due to the “sexy” appeal of illegality? Libertarians and left-leaning “progressives” alike – generally agreeing that America’s Drug War is a net bad – often repeat Stossel’s argument without offering any data. Maybe Stossel is right. Maybe Coulter is right. Maybe it depends on the culture of a particular geographical area. Praxeology, the logic of human action, can help us think about it rationally, but it wouldn’t be wise to reach a firm conclusion a priori – especially since we have states within the USA with similar cultures and demographics where marijuana is now legal for recreational use bordering other states where it is illegal. The data are there to be collected. Empirical evidence is our friend.

Concluding notes:

  1. To readers that are non-Austrians (the Austrian school of economics) who don’t know why I would write such an article: Search the web for “Austrian economics and praxeology.”

  2. I am not making the contradictory claim that a priori truths do not exist. I am making the claim that in cases such as this one, we don’t have to play a guessing game. “Pure logic” can only get us so far.

  3. It seems a bit silly that I’d have to write an article on this topic at all, but sadly, far too many Austrians, usually following the Rothbard-Hoppe tradition, are closed off to evidence entirely. As the saying goes, “Without data, you’re just another person with an opinion.” I think that in this context this statement may be overstated because a great deal can be deduced by logic (more so, I think, than mainstream economists give it credit for). But it isn’t always sufficient.