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Facts, Figures, and the Limits of Economic Knowledge

(Warning: This is not a data-driven article)

Experts say that the top 10 percent of United States income earners have only grown richer over the last several decades. This has led many to criticize wealthier Americans for “taking” from poorer Americans. They show you charts like these in the New York Times that presumably prove the point, where the line representing “the rich” moves up and to the right.

The reality is that flesh-and-blood people move in and out of those categories every day: More than half the U.S. population will be in the top 10 percent of income earners at some point in their lives, according to another article in the Times. When someone sells a house or receives a bonus or inheritance, that can push him or her into a higher income bracket for one year, which is often left out of discussions about “the rich.”

What these charts don’t capture is how individual people move through income brackets. That’s because charts show statistical categories, not actual people. They’re inherently blunt; charts simplify data so the data can be visualized. The challenge to you and me is to be sharper than the chart, to ask questions of it and to push beyond its face value.

Full Charts and Half-Truths

By asking simple questions, we can deconstruct the two-dimensional graph to better understand the complexity of three-dimensional life. If a chart shows changes over time, for instance, ask what else has changed over time. With charts on income inequality, in keeping with our example, how have demographics changed over that same period? Has the economy dramatically changed since the 1970s? What about interest rates or tax rates? What about the median age of the population? Any one of these factors tend to set up expected financial growth among the already-wealthy. 

You don’t have to be an economist or statistician to see how these charts and accompanying proclamations can obscure real life. You can simply apply common sense to the common topics of our day. Analyzing stories behind the stats helps us make better decisions to better care for others. 

As Christians, we’re supposed to be people of truth, which requires critical thinking skills — and even a dash of skepticism. We need to think clearly about the limits of knowledge, about “data-driven” decisions, and about how we can love those whose daily lives comprise our economy.

But Whose Knowledge?

One of the goals of economics is to allocate resources in a limited world. Thinkers — academics, politicians, commentators — use data to understand more about the economy and where to put what. The trouble, however, is that often we simply don’t have the data to make those kinds of decisions. We have to ask what is even understandable in the first place.

In a famous essay, “The Use of Knowledge in Society,” Nobel-laureate economist Friedrich Hayek argued that it’s impossible for a person or group to know enough information to effectively make those allocation decisions. Soviet economists, for example, had to keep track of more than 24 million prices. Hayek suggests that a better strategy would be to harness widely dispersed knowledge. 

Put in terms of a church, the idea is basically that the collective knowledge of a congregation more accurately reflects reality than the knowledge confined within only your elders. Unlike God, we are not omniscient. A lack of omniscience isn’t all bad. It’s exactly this information asymmetry that fosters cooperation among individuals in society and leads to the power of the common person to make decisions for his or her own life.

And Who's Driving the Data?

Multifaceted knowledge also has a downside: It fractures our perceptions of reality. A buzzword in business circles is that leaders ought to be “data-driven.” That is, they should use data to shape their decisions for marketing, HR, finance, etc. This is because, they say, what gets measured gets managed. Yet, using another aphorism, “not everything that can be counted counts.”

Historian Jerry Muller argues against this “metric fixation” in The Tyranny of Metrics. The thrust of his book is that by focusing only on what can be counted, we not only misconstrue reality, but, when our incentives are tied to such metrics, we also make poorer decisions.

Returning to our church example, think about churches that prominently display the number of baptisms performed in a year or attendance growth. These are easy to understand and easy to quantify, so you can see why ministers could be graded by this figure rather than by, say, the hidden, incremental spiritual transformation within a person’s soul. But which data point more accurately reflects reality? 

Muller points to many areas of society where metric fixation has gone awry, such as colleges, policing, and health care. For instance, the World Health Organization has ranked the U.S. health care system as 37th in the world. “But actual health outcomes,” Muller writes, “accounted for only 25 percent of the ranking scale. Half the points awarded are for egalitarianism,” which are factors influenced outside the medical system. “When it comes to diagnosing and treating disease,” however, “American medicine is among the best in the world.”

Data points and charts can oversimplify the complexity of life, and that’s when the data is clear. As Muller notes, however, sometimes the methodologies used to create the data itself are unclear. We need to scrutinize not only the visualization of data but often data itself.

Facts that Figure in Wisdom

As I write this, I have friends and family in the hospital, some overworked, some sick. My point here is not that data and their use can’t be trusted. It’s important to note that, just as there are stories from data that can mislead, other data illustrate important insights. A wise person can parse the difference.

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