Common Sense: As True As It Seems

Scott once again scoffs in the face of common sense economics:

Common sense is almost useless in the field of economics. Never dismiss an economic theory because the assumptions about human behavior don’t sound plausible.

Notice, though, how Scott tries to persuade you of this conclusion: By methodically making an economic theory’s assumptions about human behavior sound plausible!  And he does a nice job, too:

[People] don’t find it plausible that people would save more if the budget deficit increased, and indeed they are even skeptical that the public would be aware of the fact that the deficit increased.

If I ask my students whether they find RE to be plausible, they almost all answer “no.”

But suppose I ask them a different set of questions:

1. Do you expect to get back all the Social Security that you have been promised?

Almost all say they expect less than what has been promised.

2. Then I ask whether that perception affects their willingness to save money for retirement, outside of Social Security.

Almost all say they are more likely to save for their retirement because of the perception that Social Security is on the road to bankruptcy.

But if you put these two answers together then you have Ricardian Equivalence!

If Scott really put no weight on plausibility, he would scorn his own Socratic efforts.  What’s the point of reconciling economic theory with common sense if common sense is “almost useless in the field of economics”?  All you’ve shown is that economic theory is consistent with something of no particular importance. 

My point: We should heed Scott the educator, not Scott the methodologist.  Common sense is the foundation of all reasoning.  If you want to reject a common-sense claim, you’d better do it in the name of an even stronger common-sense claim. 

Quantum mechanics, for example, ultimately rests on the core common-sense belief that repeated careful observation reveals the world as it really is.  So does every other scientific claim; none build on the slogan, “Who are you going to believe – me or your own eyes?”  If an economic theory seems to contradict common sense, decrying common sense just makes you sound dogmatic and senseless.  The sensible response is to show that the alleged contradiction is illusory.  Don’t tell me you can’t show this.  It’s easy if you try!

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