Keep Breaking Those Windows

As I prepare to speak on a Bastiat panel at the Association of Private Enterprise Educators conference next week, I am recalling the many reasons why Bastiat is one of my favorite economists. I wrote the following tribute to Bastiat earlier this semester:

One of my greatest influences is Frederic Bastiat, because his writing possesses clarity and perceptiveness that have continued to win minds for freedom since he first began writing. Though he contributed little original theory or research to the study of economics, he has been a strong voice for limited government and sound economic policy. He had a remarkable proclivity for illustrating fallacies by telling colorful tales. His wit stripped away the facades that statist positions try to hide behind, and the movement for freedom is stronger for it. Bastiat is a model of dedication to freedom in many ways.

Even though he did not develop new economic theories, he was a great communicator of the importance of property rights, individual liberty, and justice. His work illustrates that an individual does not need to be as brilliant as Alchian or Hayek to make a lasting contribution towards a freer society.

His passion for the work of liberty is a remarkable example for modern liberty-lovers. He encountered hindrance after hindrance in his political work, but by dogged determination and tireless effort, he and his colleagues were able to stop the encroachment of protective tariffs. As Bastiat wrote to an acquaintance,

“For my part, I will join the combat at whatever level I am placed, for apart from the fact that I put our noble cause a thousand times higher than our little individual ideas, I have learned from Mr. Cobden… that individual self-sacrifice is the soul and cement of any voluntary association” (The Man and The Statesman).

Edit 3/25/17: I wrote above that Bastiat did not develop new theories, but that is not true. Embarrassingly, I did not realize until a year after writing this piece that Bastiat’s “unseen” costs are the missed benefits of a choice that was not made because another choice was made instead. Sound familiar? Bastiat may have been the first to write about opportunity costs, now one of the first and most important concepts learned in economics. So I suppose my quest for a liberty hero of ordinary intellect continues.

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James M. Buchanan: One of The Greats

Nobel Laureate James M. Buchanan passed away today at the age of 93. He founded the field of public choice economics, and his writings have had a greater impact on me than any other economist I have read. This summer I heard stories about him from people who knew him, and apparently he didn’t always observe the rules of order in Liberty Fund conference discussions. When you win a Nobel Prize, I’m sure people will give you a little leeway too. I made this poster for Econlib to commemorate the passing of this giant of 20th century economics.

Buchanan Obit

A Political Scientist and a Mathematician on Math in Economics

I found the lovely quote above in Rothbard’s Praxeology: The Methodology of Austrian Economics, and it is a perfect explanation for the Austrian skepticism of empirical methods. Reducing human decision-making into neat numbers misses the dynamic process of markets, and gives a false sense of knowledge. (See Hayek’s Fatal Conceit.) This illusion leads many to believe that we can “maximize” the common good, social utility, or whatever they call it these days. Because all people are exactly the same, correct?

No. And so, there is a place for mathematics in economics, but math is not the epitome of economic thinking.  People are not robots, and we need to embrace human individuality to understand why humans do what they do.

Competition, Monopoly, and “Loving Mises to Pieces”

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In his treatise “Human Action”, Mises devotes a short chapter (5 pages) to explaining what competition is, and what competition is not. He combats the misunderstanding of markets that is at the root of Antitrust legislation and interventions to break up “monopolies.” The fact that monopolies exist is not a  problem as long as new competitors have the opportunity to pitch their ideas to the consumers without legal barriers. The consumer decides how successful an entrepreneur will be based on how well the entrepreneur serves the customers. As Mises puts it, a poet may have a monopoly on his own rhymes, but that doesn’t mean he can command the market for them.

You can read Mises’ excellent chapter on competition here on Liberty Fund’s Online Library of Liberty.

The Journey, Not The Destination: Kirzner and Alchian

“Ends can be conceived as observable states of affairs only after their achievement.” -Israel Kirzner

In his book The Economic Point of View, Israel Kirzner notes that as the study of Economics has developed, economists have tended to miss key parts of economic behavior. One of the errors Kirzner detects is a tendency to forget that purpose is the key to human action. We cannot take “ends” as a given, because every person has her own. Though a person may achieve something that was desired, how the desire was fulfilled is where the economic activity happens. The choices between different possible means to the end involve weighing tradeoffs, using scarce resources, and sacrificing some goals for the sake of others.

So, we can’t just ignore the choices that led to the ends. In the case of business, it would be silly to say that the goal of a business is “profit maximization.” Not because it is untrue, but because it misses a step. The most profitable businesses do survive, but business owners can’t be successful by waking up in the morning and thinking, “I will maximize profits today!” It would be the same as a student declaring that she will get all A’s in her classes, without any plan to make it happen.

The process of profit-maximization is one of constant innovation. Some of these innovations will be amazing, like iPhones, and others will flop, like Kodak’s switch to digital photography. Arman Alchian likens this process to evolution, where some developments are beneficial to an organism, and others are not. Companies that innovate in a way that consumers like are profitable, and companies whose innovations are not embraced will fail.

Successful companies do maximize profits, but that is because they are making good decisions. They cannot make good decisions by trying to maximize profits. This may seem like a tedious point, but it is essential to keep in mind that individual decisions are at the heart of economics. Innovation cannot be taken for granted, because it is always the result of someone’s hard work.

So companies, like people, are trying to make the best decisions given the goals they want to achieve. In economics, as in other parts of life, it is the journey and not the destination that really matters.

The quote at the top of the post is from The Economic Point of View6.36

Kudzu- The Price of Liberty

In a recent book discussion on Robert Higg’s Crisis and Leviathan, one of the participants likened Big Government to Kudzu. She and her family recently returned from a road trip to the east coast, where she saw the destruction that this non-native and highly invasive plant wrecks on the ecosystems it enters.

Kudzu Vines

     Like this invasive plant, no matter how hard we push back against the growth of government the battle never ends. The metaphor is especially striking when we consider the damage that expansive government causes to the parts of the economy that it infiltrates. Not only does government grow at an arresting pace regardless of who is in charge (one of the main points of Crisis), but it also steals resources from productive activities. The Kudzu takes nutrients, sunlight, and water from desirable plants and “crowds out” the growth of other plants in the same way government taxing and spending divert private resources from voluntary exchanges to feeding a bureaucracy. The more resources the government has, the more it demands of the society around it.

But the story for an economy is sadder than the story for the woods, because economic resources are not provided by nature and must be produced by someone’s ingenuity and labor. Kudzu simply takes the rain and nutrients provided, but government takes resources that have been created. Not only is private activity stifled, but it is also discouraged by a system that punishes those who work hard and innovate. And so, we set ourselves to the task of battling this ever-present weed known as Leviathan (Big Government), understanding that it will keep trying to expand its reach. As another participant in the discussion observed, the kudzu metaphor is consistent with the well-known saying “The price of liberty is eternal vigilance.”

The Source of All Reform

Bastiat is a treasure trove of wisdom, and a quote of his that I recently came across in The Man and the Statesman reads:

“Trade is the exchange of the superfluous for the essential.”

In ten words, he distilled the amorphous verb “trade” (which has 11 different definitions in the OED) to its most essential form- it is the means by which we can improve our standards of living.  Each person focuses on the tasks he can do most efficiently compared to others and then trades his excess for the other things he needs to live.  Bastiat’s fervent belief in the power of free trade to make people better off was the driving force of his lifelong battle against protective tariffs and embargoes.  He was convinced that freeing trade, especially with England, would help alleviate poverty in France. The Mercantilist policies of aggressive trade regulation were crippling France’s economy. In his correspondence with British freedom-fighter Richard Cobden, Bastiat explains his frustration with the anti-free trade public sentiment and his enduring devotion to freedom:

“And I want not so much free trade itself as the spirit of free trade for my country.  Free trade means a little more wealth; the spirit of free trade is a reform of the mind itself, that is to say, the source of all reform.”