Monthly Archives: August 2015

Smith, Free Markets & Human Life

During the hunting societies of the Old Stone Age, 200 sq mi of land was needed to support each person, so there were no more than 500 people on the whole island of the paleolithic United Kingdom.  If more than that would be born, more would starve – as Adam Smith’s famous equilibrium kicks in. Agricultural was a big step but it was the division of labor, specialization, rule of law and trade that enabled Britain to ultimately support 11,000 times that in 1696 when 5.5 million occupied the same island. Despite PC pronouncements to the contrary, it is this ability to allow millions to live that makes free markets and civilization superior to other types of societies.

Smith’s argument about population is like his ideas about country’s inventory of gold – it will seek a supply & demand equilibrium, that needn’t, and shouldn’t, have government’s attention. Specifically, he’s saying when the supply of workers is low (relative to demand), wages rise and people will feel more confident bringing children into the world. This is why, in the British colonies (back then), that were “much more thriving” than England, “those who live to old age…see…50 to 100 descendants from their own body” (p81). Without growth, or where wages are declining, the population at the very bottom suffer the most, and labor supply is reduced (through starvation).

Malthus, on the contrary, unpersuaded by claims that the population had declined over 30%, since the Restoration (1660), was alarmed the population would rise so quickly that his 1798 treatise says the geometric population growth could not keep pace with the arithmetic growth of cultivable land (p89) and that “premature death must…visit the human race”.   This static view fails to account for market adjustments. Growing populations => lower wages & higher food prices => innovations in food production => higher real wages / lower food prices…(cycle continues).

Smith’s purpose seems to be to show, if left alone, markets will adjust to meet consumer needs. Malthus’ purpose seems to foster panic to spur government intervention, or to reveal his ignorance about market dynamics, or both.  Neither, according to Robert Heilbroner, anticipated the role of affluence and urbanization on limiting the number of additional offspring born by the lower classes.  But the real lesson is how dynamic free markets allocate resources to enable human life to flourish.  What other system can do that?

Works Cited

  • Heilbroner, Robert L. The Worldly Philosophers: The Lives, Times, and Ideas of the Great Economic Thinkers. Rev. 7th ed. New York: Simon & Schuster, 1999. Print
  • Smith, Adam, and Edwin Cannan. An Inquiry into the Nature and Causes of the Wealth of Nations. New York: Modern Library, 1994.

 

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Any Profit in the History of Economic Thought?

The study of history is a powerful antidote to contemporary arrogance. It is humbling to discover how many of our glib assumptions, which seem to us novel and plausible, have been tested before, not once but many times and in innumerable guises; and discovered to be, at great human cost, wholly false.

UK historian Paul Johnson

At first glance, the question of whether the history of economic thought has profit – a positive “net” of benefits versus costs – seems odd. Of course it does. Besides, as Ludwig von Mises once said about the question of who’s right – “logical economists” or “mathematical economists” – Mises suggested we let the market for ideas decide. However, after reading academic papers by George Stigler, Ken Boulding, Pete Boettke et al., the question has been transformed by the changes in my perspective.   In this paper, I will explain why my perspective changed, why I believe the history of economic thought is critical to future knowledge and I’ll provide one contemporary example that speaks to this issue.

Most of us are taught that history has much to teach us, but we’re also taught that all of us, even the great ones, stand on the shoulders of previous giants. Ken Boulding says Robert Merton gave this idea an acronym (OTSOG). Yes, Einstein was amazing, but even he stood on shoulders of Newton, Descartes, et al.  A major theme of The Prince is how much new princes should learn from great princes like Romulus, Cyrus, Theseus, and others. Machiavelli believed a great prince might surpass the ancients, but “man must always follow in the footsteps of great men and imitate those who have been outstanding” (19). Lord Keynes believed the “world is ruled by little else” than the ideas of economists and political philosophers and that these ideas are more powerful than the “power of vested interests”.   Yet, as Stigler and Boulding make clear, modern economics seems dominated by the “anti-historical school” that are not “interested in the wrong opinions of dead men”.   Boettke tells us “the mainstream of economic analysis has become occupied with excessively …unrealistic models…rather than a deeper historical and institutional knowledge”.  Stigler ends his article with a challenge, which Boettke echoed 45 years later, to inspire those who properly value the role of the history of economic thought to make a strong case, change minds and, in Boettke’s bold words, “reverse the degenerative path of the discipline”.

One of the implications of Whig arguments is that there’s something inherently superior – built in – about modern economics. Let me provide one counterfactual. My textbook for Intermediate Macroeconomics, written by Charles Jones (Stanford Graduate School of Business), was an older version (2006). On page 308, in a section called, “Case Study: Oil Prices and Inflation Shocks”, that included a graph of oil prices from 1978 – 2006, Jones said: “Most economists don’t believe the high inflation of the late 1970s and the large recession that followed are likely to occur.” As we know, no high inflation but the 2008 financial crisis, one of the worst recessions in U.S. history, followed shortly thereafter. This is not Jones fault – he’s simply passing along the consensus of modern “mainstream” economists in 2006. But they had it wrong – very wrong.

The point is that for 30 years, after rejecting Bolding’s argument that we have much to learn from past thinkers, mainstream economists ignored the great thinkers and got the 2008 recession wrong. Moreover, given Lord Keynes’ claim that the economic ideas of “academic scribblers” are hugely influential, is it possible that 2008 was caused by flawed “Whig” or mainstream thinking and research? I contend it’s not just possible, it’s probable. At the very least, it’s worthy of honest, objective research – research informed by the principles of great thinkers and pioneers like Adam Smith who showed us how to break through hundreds of years of mercantilism and establish a new paradigm, what Boettke called “the theory of markets” that laid the foundation for a system of “the 3 p’s of property, prices and profit/loss” (122) that has helped transformed the world and raised millions out of poverty. If Adam Smith was right about that, perhaps he’s right about a few other things?

Works Cited

  • Boettke, Coyne, and Leeson (2010), “Earw(h)ig: I Can’t Hear You Because Your Ideas are Old.
  • Boettke, Peter J. “What Should Classical Liberal Political Economists Do?” SSRN Journal SSRN Electronic Journal 25.1 (2014): 111-22. Constitutional Political Economy. Springer Science Business Media. Web. 17 May 2015.
  • Boulding, Kenneth E. (1971), “After Samuelson, Who Needs Adam Smith?”  History of Political Economy 3(2): 225-237.
  • Jones, Charles. Macroeconomics: Economic Crisis Update. 2E ed. New York: W. W. Norton, 2010. Print.
  • Mises, Ludwig. Human Action: The Scholar’s Edition. Hillsdale, MI: Hillsdale College, 2000. Print
  • Stigler George J. (1969), “Does Economics Have a Useful Past?” History of Political Economy 1(2): 217-230

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