Economists Should Never Abandon Their Principles
In the Spring of 2023 I had the honor of delivering, at the Richmond Fed, the annual Sandridge Lecture to the Virginia Association of Economists. The text of that lecture – the title of which is “The Role of the Economic Scholar in Highly Politicized Society” – is available here. And pasted below are two slices from it.
I learned in ECON 101 – or, ECON 252 as Principles of Microeconomics was numbered at my undergraduate institution, Nicholls State University – that reality is vastly more complex than it appears to our untutored gaze or romantic imagination. I learned also the related fact that unintended consequences are commonplace. I learned that, as Thomas Sowell says, reality isn’t optional; it’s mandatory – and also, again as Thomas Sowell puts it, there are no ‘solutions,’ only trade-offs – that market signals guide us to act as if we have far more information than we really do or can possibly ever hope to possess.
Emphasizing these principles of economics today is especially important because today we do indeed live in a highly politicized society. In such a society, the pursuit of the personal dominates respect for principles. If some flesh-and-blood persons can be seen who would benefit – or even simply thought to benefit – from some course of action, politics demands pursuit of that course of action. No more justification is necessary than that these visible beneficiaries will enjoy anticipated gains.
Indeed, I think that a good definition of “a politicized society” is “a society that elevates attention to that which is seen – to that which grabs our senses and stirs our concerns at the moment – in disregard of principles. Insofar as society is politicized, principles and rules are cast aside if sticking to these is perceived as slowing or otherwise compromising our efforts to deal with the problems and concerns du jour.
Principles and rules protect and nurture that which is unseen; politics embraces only that which is seen. One consequence is that as society becomes more politicized – as society focuses ever-more intently on addressing today’s visible problems (and “problems”) with whatever means it can muster – that society serves its citizens’ long-run interests more poorly. It abandons the wisdom of principles for the wiles and wilds of pragmatism. A politicized society is in dire need of being reminded of the importance of principles.
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Among the most articulate and active champions on the right for industrial policy is Oren Cass, an advisor to Mitt Romney’s 2012 presidential campaign and founder of American Compass. The name of Mr. Cass’s organization is revealing: He believes that the market’s manner of allocating resources for investment purposes is – his term – a “drunk donkey.” It meanders aimlessly if stubbornly. Industrial policy is a means of giving the market proper direction – a means of sobering the donkey up, bridling the beast, and then riding it into the economic promised land under the guidance of a map drawn up by Oren Cass.
But Mr. Cass’s belief – and hubris – is easily exposed as error by a good student of ECON 101. The market does not meander aimlessly or stubbornly. Indeed, it doesn’t meander at all. This lesson is central to ECON 101. The market is steered by market signals – by prices, interest rates, asset values, and profits and loses – signals that reflect information gathered and transmitted from around the globe by individuals spending and investing their own money. This lesson is central to ECON 101.
It follows that, in markets, firms profit when they please consumers at and go bankrupt when they don’t. Amazon and Apple didn’t, in the past few decades, spring up aimlessly; and become successful companies by pure chance. Sears and A&P didn’t, a century ago, become successful companies by chance. Nor is Sears’s and A&P’s recent demise the result of chance. And when, as is inevitable in a market economy, Amazon and Apple eventually close up shop, <that won’t be by chance.
Competitive markets are the only real source of detailed information we have for discovering what consumers want and how best to meet these wants. Conveniently, competitive markets also supply to market participants appropriate incentives to heed market signals.
I needn’t tell you that these signals are never perfect, but everyday experience tells us that they nevertheless work remarkably well, at least by any reasonable criterion.
Charlie Goetz – one of many great Virginia economists – once said that the ultimate economist’s question is: Compared to what? Getting in the habit of asking this question is another lesson learned in a well-taught ECON 101 course.
And so when I hear people, Oren Cass and many others, accuse the market of ‘not working,’ I ask: Compared to what? Compared to what we can imagine being achieved by God? Yes indeed; by this standard the real-world market works miserably; it’s a dumpster fire of failures.
Compared to perfectly competitive general equilibrium of the sort that looks so pretty in advanced textbooks and papers written by masters of ECON 999? Yes indeed; by this standard, too, the real-world market works poorly; it’s chock-full of errors, irrationality, and other imperfections.
But – and here’s another lesson from ECON 101 – unrealistic standards such as these are inappropriate. An appropriate standard of comparison is the real world without capitalist markets. Does any person seriously deny that those of us in capitalist economies today enjoy a material standard of living immeasurably higher than was the material standard of living of our pre-capitalist ancestors, nearly all of whom slept on dirt floors in huts with thatched rooves and no indoor plumbing? Does any person seriously deny that those of us in capitalist economies today enjoy a material standard of living far higher than was that of ordinary people in communist and socialist countries of just a few decades ago?
When I look around, I’m continually astonished at the marvels of our modern world. Supermarket shelves continue to be stocked full with goods from around the world, all affordable. Paris and New York – and Richmond – continue to be fed. Daily. We can talk in real time with people literally on the other side of the globe by pulling out from our pockets our little slabs called ‘smartphones.’ And if we’re struck with the fancy to send to those to whom we are talking pictures of what we’re eating or of our new puppy, we do that, too. It takes a matter of seconds. We drive automobiles, we fly through the air, we have Lasik surgery and antibiotics, and we live in air-conditioned homes with wi-fi and Netflix and Alexa. And all of these marvels are so routine that we don’t even think about them. This regularity is itself a marvel! I say that by any reasonable standard markets work splendidly.
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