When we think about products that have become cheaper over time—like televisions—we usually believe we know the reason: technology has improved, and production has become more efficient, lowering the cost. But when asked whether the real cost of goods, meaning the amount of work needed to buy them, has generally gone up or down, we often get it wrong. Most of us confidently assume that costs are rising, confusing nominal prices (which increase with inflation) with real costs (which tend to fall as productivity improves).
The wrong targets
New research from Yale calls this mistake “efficiency neglect.” In their study, the researchers found that people tend to focus on the rising demand caused by population growth, but they overlook the productivity gains that often come with it. While this misunderstanding might not harm us much as individuals, it can influence society. People who don’t account for the benefits of population growth may end up supporting policies that limit trade or immigration, based on the false belief that more people lead to fewer resources.
“You don’t need to understand economics to live your daily life,” the researchers say. “But a lack of understanding can push us toward policies that waste money or cause harm because our intuitions aren’t always right.”
The study follows an earlier analysis, published in January, which highlighted how little attention has been paid to ordinary people’s understanding of economics. This neglect, the authors argue, has been a missed opportunity for research into consumer behavior.
Keeping up with demand
The belief that resources can’t keep up with demand, known as depletionism, is not a new idea. Plato once predicted that a city might have to kick people out if its population grew too large. In 1980, biologist Paul Ehrlich famously bet economist Julian Simon that the price of natural resources like copper would go up as more people built homes. Ehrlich lost the bet because new technologies and substitutes for copper emerged.
In the latest study, researchers surveyed Americans about their views on costs over time and how population growth might affect the availability of goods in a thriving nation. They also tested whether prompting people to think about productivity gains would reduce depletionist beliefs.
They found that this prompt helped, but not for everyone. When participants were reminded that a bigger population can lead to more workers, more innovation, and incentives to improve technology, the percentage who thought goods would become more abundant rose from 6% to 27%. While that’s a big jump, most people still didn’t believe in future abundance.
