Ideas and Implications

Thomas Sowell frequently emphasizes the importance of thinking beyond the immediate and obvious impact of some economic policy and thinking through the larger implications. He actually wrote an entire book dedicated to this idea – Applied Economics: Thinking Beyond Stage One. A similar and useful exercise to evaluate an idea is to really try to work out not what will unfold next, but what that idea, if true, should imply for the present situation. Here are two common examples where this would come in handy.

First, some people believe that all the value a business generates for consumers and stockholders is generated by the workers. Meanwhile, the owners of the business don’t create or contribute value – they merely siphon off the value created by the workers, while paying the workers less than the value they generate. If this was true, this has a pretty clear implication – business owners should be incentivized to hire as many workers as possible! After all, by this understanding, workers generate more value than they are paid, which means maximizing the size of your workforce is a surefire way to maximize the money you can make. The very last thing a greedy business owner would want to do is fire his workers – because if workers generate more value than they paid, cutting jobs means the business owner will necessarily lose more than he gains. Yet, we’re often told that cutting jobs is itself motivated by greedy business owners trying to increase their profits – which would be mathematically impossible in a world where all value is created by workers. The idea that greedy business owners pay workers less than the value they generate and the idea that greedy business owners cut jobs to increase their profits contradict each other – yet both ideas seem to fit comfortably into many heads at the same time. 

Another common belief is that some particular groups of people are discriminated against when trying to get auto loans or mortgages. Sometimes this is buttressed with references to studies that say, in effect, “We used our data and controlled for these seventeen different confounding variables, and found that all else equal, freckled people with identical financial credentials were less likely to get approved for a mortgage than non-freckled people.” Does this mean that freckled people are being discriminated against? Maybe. Or maybe there are other relevant confounding variables the study fails to take into account. But if you hold the belief that freckled people are being discriminated against, there’s a clear implication for the present situation. We should expect to find that freckled people have unusually low rates of payment delinquency or default. After all, the claim is that freckled people need to be disproportionately financially secure compared to non-freckled people to be approved for equivalent loans, which necessarily means the loans granted to freckled people should be at a disproportionately low risk of delinquency. Meanwhile, if there’s a group that reliably has a disproportionately high risk of delinquency or default, that would imply getting approved for a loan is actually disproportionately easy for that group, all else equal. The idea that there are groups of people who must be disproportionately well-qualified to get a loan but are also at disproportionately high risk of default are also contradictory to each other. Yet these ideas, too, are often held in tandem by people. 

What are some other examples you can think of?