The U.N. Has Absolutely No Idea How Economic Growth Works by Daniel J. Mitchell

I’ve been at the United Nations this week for both the 14th Session of the Committee of Experts on International Cooperation in Tax Matters as well as the Special Meeting of ECOSOC on International Cooperation in Tax Matters.

As you might suspect, it would be an understatement to say this puts me in the belly of the beast (for the second time!). Sort of a modern-day version of Daniel in the Lion’s Den.

These meetings are comprised of tax collectors from various nations, along with U.N. officials who – like their tax-free counterparts at other international bureaucracies – don’t have to comply with the tax laws of those countries.

In other words, there’s nobody on the side of taxpayers and the private sector (I’m merely an observer representing “civil society”).

I could share with you the details of the discussion, but 99 percent of the discussion was boring and arcane. So instead I’ll touch on two big-picture observations.

What the United Nations gets wrong: The bureaucracy assumes that higher taxes are a recipe for economic growth and development.

I’m not joking. I wrote last year about how many of the international bureaucracies are blindly asserting that higher taxes are pro-growth because government supposedly will productively “invest” any additional revenue. And this reflexive agitation for higher fiscal burdens has been very prevalent this week in New York City. It’s unclear whether participants actually believe their own rhetoric. I’ve shared with some of the folks the empirical data showing the western world became rich in the 1800s when fiscal burdens were very modest. But I’m not expecting any miraculous breakthroughs in economic understanding.

What the United Nations fails to get right: The bureaucracy does not appreciate that low rates are the best way of boosting tax compliance.

Most of the discussions focused on how tax laws, tax treaties, and tax agreements can and should be altered to extract more money from the business community. Participants occasionally groused about tax evasion, but the real focus was on ways to curtail tax avoidance. This is noteworthy because it confirms my point that the anti-tax competition work of international bureaucracies is guided by a desire to collect more revenue rather than to improve enforcement of existing law. But I raise this issue because of a sin of omission. At no point did any of the participants acknowledge that there’s a wealth of empirical evidence showing that low tax rates are the most effective way of encouraging tax compliance.

I realize that these observations are probably not a big shock. So in hopes of saying something worthwhile, I’ll close with a few additional observations

  • I had no idea that people could spend so much time discussing the technicalities of taxes on international shipping. I resisted the temptation to puncture my eardrums with an ice pick.
  • From the moment it was announced, I warned that the OECD’s project on base erosion and profit shifting (BEPS) was designed to extract more money from the business community. The meeting convinced me that my original fears were – if possible – understated.
  • A not-so-subtle undercurrent in the meeting is that governments of rich nations, when there are squabbles over who gets to pillage taxpayers, are perfectly happy to stiff-arm governments from poor nations.
  • The representative from the U.S. government never expressed any pro-taxpayer or pro-growth sentiments, but he did express some opposition to the notion that profits of multinationals could be divvied up based on the level of GDP in various nations. I hope that meant opposition to “formula apportionment.”
  • Much of the discussion revolved around the taxation of multinational companies, but I was still nonetheless surprised that there was no discussion of the U.S. position as a very attractive tax haven.
  • The left’s goal (at least for statists from the developing world) is for the United Nations to have greater power over national tax policies, which does put the UN in conflict with the OECD, which wants to turn a multilateral convention into a pseudo-International Tax Organization.

P.S. The good news is that the folks at the United Nations have not threatened to toss me in jail. That means the bureaucrats in New York City are more tolerant of dissent than the folks at the OECD.

Republished from International Liberty.

Daniel J. Mitchell

Daniel J. Mitchell

Daniel J. Mitchell is a senior fellow at the Cato Institute who specializes in fiscal policy, particularly tax reform, international tax competition, and the economic burden of government spending. He also serves on the editorial board of the Cayman Financial Review.

Ideas, Not ‘Capital,’ Enriched the World by Deirdre N. McCloskey

Why are we so rich? Who are “we”? Have our riches corrupted us?

“The Bourgeois Era,” a series of three l-o-n-g books just completed  — thank God — answers:

  • first, in The Bourgeois Virtues: Ethics for an Age of Commerce (2006), that the commercial bourgeoisie — the middle class of traders, dealers, inventors, and managers — is on the whole, contrary to the conviction of the “clerisy” of artists and intellectuals after 1848, pretty good. Not bad.
  • second, in Bourgeois Dignity: Why Economics Can’t Explain the Modern World (2010), that the modern world was made not by the usual material causes, such as coal or thrift or capital or exports or imperialism or good property rights or even good science, all of which have been widespread in other cultures and at other times. It was caused by very many technical and some few institutional ideas among a uniquely revalued bourgeoisie — on a large scale at first peculiar to northwestern Europe, and indeed peculiar from the sixteenth century to the Low Countries;
  • and third, in Bourgeois Equality: How Ideas, Not Capital or Institutions, Enriched the World (2016), that a novel way of looking at the virtues and at bettering ideas arose in northwestern Europe from a novel liberty and dignity enjoyed by all commoners, among them the bourgeoisie, and from a startling revaluation starting in Holland by the society as a whole of the trading and betterment in which the bourgeoisie specialized.The revaluation, called “liberalism,” in turn derived not from some ancient superiority of the Europeans but from egalitarian accidents in their politics from 1517–1789. That is, what mattered were two levels of ideas — the ideas in the heads of entrepreneurs for the betterments themselves (the electric motor, the airplane, the stock market); and the ideas in the society at large about the businesspeople and their betterments (in a word, that liberalism). What were not causal were the conventional factors of accumulated capital and institutional change. They happened, but they were largely dependent on betterment and liberalism.

The upshot since 1800 has been a gigantic improvement for the poor, yielding equality of real comfort in health and housing, such as for many of your ancestors and mine, and a promise now being fulfilled of the same result worldwide — a Great Enrichment for even the poorest among us.

These are controversial claims. They are, you see, optimistic. Many of the left, such as my friend the economist and former finance minister of Greece, Yanis Varoufakis, or the French economist Thomas Piketty, and some on the right, such as my friend the American economist Tyler Cowen, believe we are doomed.

Yanis thinks that wealth is caused by imperial sums of capital sloshing around the world economy, and thinks in a Marxist and Keynesian way that the economy is like a balloon, puffed up by consumption, and about to leak. I think that the economy is like a machine making sausage, and if Greece or Europe want to get more wealth they need to make the machine work better — honoring enterprise, for example, and letting people work when they want to.

Piketty thinks that the rich get richer, always, and that the rest of us stagnate. I think it’s not true, even in his own statistics, and certainly not in the long run, and that what has mainly happened in the past two centuries is that the sausage machine has got tremendously more productive, benefiting mainly the poor.

Tyler thinks that improvements in the sausage machine are over. I think that if Tyler were so smart (and he is very smart), he would be rich, and anyway there is little evidence of technological stagnation, and anyway for at least the next century, the poor of the non-Western world will be catching up, enriching us all with their own betterments of the sausage machine.

In other words, I do not think we are doomed. I see over the next century a world enrichment both materially and spiritually that will give the wretched of the earth the lives of a present-day, bourgeois Dutch person.

For reasons I do not entirely understand, the clerisy after 1848 turned toward nationalism and socialism, and against liberalism. It came also to delight in an ever expanding list of pessimisms about the way we live now in our approximately liberal societies, from the lack of temperance among the poor to an excess of carbon dioxide in the atmosphere. Anti-liberal utopias believed to offset the pessimisms have been popular among the clerisy. Its pessimistic and utopian books have sold millions.

But the twentieth-century experiments of nationalism and socialism, of syndicalism in factories and central planning for investment, of proliferating regulation for imagined but not factually documented imperfections in the market, did not work. And most of the pessimisms about how we live now have proven to be mistaken.

It is a puzzle. Perhaps you yourself still believe in nationalism or socialism or proliferating regulation. And perhaps you are in the grip of pessimism about growth or consumerism or the environment or inequality. Please, for the good of the wretched of the earth, reconsider. The trilogy chronicles, explains, and defends what made us rich — the system we have had since 1800 or 1848, usually but misleadingly called modern “capitalism.”

The system should rather be called “technological and institutional betterment at a frenetic pace, tested by unforced exchange among all the parties involved.” Or “fantastically successful liberalism, in the old European sense, applied to trade and politics, as it was applied also to science and music and painting and literature.” The simplest version is “trade-tested progress.”

Many humans, in short, are now stunningly better off than their ancestors were in 1800. And the rest of humanity shows every sign of joining the enrichment. A crucial point is that the greatly enriched world cannot be explained in any deep way by the accumulation of capital, as economists from Adam Smith through Karl Marx to Varoufakis, Piketty, and Cowen have on the contrary believed, and as the very word “capitalism” seems to imply.

The word embodies a scientific mistake. Our riches did not come from piling brick on brick, or piling university degree on university degree, or bank balance on bank balance, but from piling idea on idea. The bricks, degrees, and bank balances — the capital accumulations — were of course necessary. But so were a labor force and liquid water and the arrow of time.

Oxygen is necessary for a fire. But it would be at least unhelpful to explain the Chicago Fire of October 8-10, 1871, by the presence of oxygen in the earth’s atmosphere. Better: a long dry spell, the city’s wooden buildings, a strong wind from the southwest, and, if you disdain Irish immigrants, Mrs. O’Leary’s cow.

The modern world cannot be explained, I show in the second volume, Bourgeois Dignity, by routine brick-piling, such as the Indian Ocean trade, English banking, canals, the British savings rate, the Atlantic slave trade, natural resources, the enclosure movement, the exploitation of workers in satanic mills, or the accumulation in European cities of capital, whether physical or human. Such routines are too common in world history and too feeble in quantitative oomph to explain the thirty- or hundredfold enrichment per person unique to the past two centuries.

Hear again that last, crucial, astonishing fact, discovered by economic historians over the past few decades. It is: in the two centuries after 1800 the trade-tested goods and services available to the average person in Sweden or Taiwan rose by a factor of 30 or 100. Not 100 percent, understand — a mere doubling — but in its highest estimate a factor of 100, nearly 10,000 percent, and at least a factor of 30, or 2,900 percent.

The Great Enrichment of the past two centuries has dwarfed any of the previous and temporary enrichments. Explaining it is the central scientific task of economics and economic history, and it matters for any other sort of social science or recent history. What explains it? The causes were not (to pick from the apparently inexhaustible list of materialist factors promoted by this or that economist or economic historian) coal, thrift, transport, high male wages, low female and child wages, surplus value, human capital, geography, railways, institutions, infrastructure, nationalism, the quickening of commerce, the late medieval run-up, Renaissance individualism, the First Divergence, the Black Death, American silver, the original accumulation of capital, piracy, empire, eugenic improvement, the mathematization of celestial mechanics, technical education, or a perfection of property rights.

Such conditions had been routine in a dozen of the leading organized societies of Eurasia, from ancient Egypt and China down to Tokugawa Japan and the Ottoman Empire, and not unknown in Meso-America and the Andes. Routines cannot account for the strangest secular event in human history, which began with bourgeois dignity in Holland after 1600, gathered up its tools for betterment in England after 1700, and burst on northwestern Europe and then the world after 1800.

The modern world was made by a slow-motion revolution in ethical convictions about virtues and vices, in particular by a much higher level than in earlier times of toleration for trade-tested progress — letting people make mutually advantageous deals, and even admiring them for doing so, and especially admiring them when Steve Jobs-like they imagine betterments.

Note: the crux was not psychology — Max Weber had claimed in 1905 that it was — but sociology. Toleration for free trade and honored betterment was advocated first by the bourgeoisie itself, then more consequentially by the clerisy, which for a century before 1848 admired economic liberty and bourgeois dignity, and in aid of the project was willing to pledge its life, fortune, and sacred honor.

After 1848 in places like the United States and Holland and Japan, the bulk of ordinary people came slowly to agree. By then, however much of the avant garde of the clerisy worldwide had turned decisively against the bourgeoisie, on the road to twentieth-century fascism and communism.

Yet in the luckier countries, such as Norway or Australia, the bourgeoisie was for the first time judged by many people to be acceptably honest, and was in fact acceptably honest, under new social and familial pressures. By 1900, and more so by 2000, the Bourgeois Revaluation had made most people in quite a few places, from Syracuse to Singapore, very rich and pretty good.

I have to admit that “my” explanation is embarrassingly, pathetically unoriginal. It is merely the economic and historical realization in actual economies and actual economic histories of eighteenth-century liberal thought. But that, after all, is just what the clerisy after 1848 so sadly mislaid, and what the subsequent history proved to be profoundly correct. Liberty and dignity for ordinary people made us rich, in every meaning of the word.

The change, the Bourgeois Revaluation, was the coming of a business-respecting civilization, an acceptance of the Bourgeois Deal: “Let me make money in the first act, and by the third act I will make you all rich.”

Much of the elite, and then also much of the non-elite of northwestern Europe and its offshoots, came to accept or even admire the values of trade and betterment. Or at the least the polity did not attempt to block such values, as it had done energetically in earlier times. Especially it did not do so in the new United States. Then likewise, the elites and then the common people in more of the world followed, including now, startlingly, China and India. They undertook to respect—or at least not to utterly despise and overtax and stupidly regulate—the bourgeoisie.

Why, then, the Bourgeois Revaluation that after made for trade-tested betterment, the Great Enrichment? The answer is the surprising, black-swan luck of northwestern Europe’s reaction to the turmoil of the early modern — the coincidence in northwestern Europe of successful Reading, Reformation, Revolt, and Revolution: “the Four Rs,” if you please. The dice were rolled by Gutenberg, Luther, Willem van Oranje, and Oliver Cromwell. By a lucky chance for England their payoffs were deposited in that formerly inconsequential nation in a pile late in the seventeenth century.

None of the Four Rs had deep English or European causes. All could have rolled the other way. They were bizarre and unpredictable. In 1400 or even in 1600 a canny observer would have bet on an industrial revolution and a great enrichment — if she could have imagined such freakish events — in technologically advanced China, or in the vigorous Ottoman Empire. Not in backward, quarrelsome Europe.

A result of Reading, Reformation, Revolt, and Revolution was a fifth R, a crucial Revaluation of the bourgeoisie, first in Holland and then in Britain. The Revaluation was part of an R-caused, egalitarian reappraisal of ordinary people. I retail here the evidence that hierarchy — as, for instance, in St. Paul’s and Martin Luther’s conviction that the political authorities that exist have been instituted by God — began slowly and partially to break down.

The cause of the bourgeois betterments, that is, was an economic liberation and a sociological dignifying of, say, a barber and wig-maker of Bolton, son of a tailor, messing about with spinning machines, who died in 1792 as Sir Richard Arkwright, possessed of one of the largest bourgeois fortunes in England. The Industrial Revolution and especially the Great Enrichment came from liberating commoners from compelled service to a hereditary elite, such as the noble lord in the castle, or compelled obedience to a state functionary, such as the economic planner in the city hall. And it came from according honor to the formerly despised of Bolton — or of Ōsaka, or of Lake Wobegon — commoners exercising their liberty to relocate a factory or invent airbrakes.

Not everyone accepted the Bourgeois Deal, even in the United States. There’s the worry: it’s not complete, and can be undermined by hostile attitudes and clumsy regulations. In Chicago you need a $300 business license to start a little repair service for sewing machines, but you can’t do it in your home because of zoning, arranged politically by big retailers. Likewise in Rotterdam, worse.

Antibourgeois attitudes survive even in bourgeois cities like London and New York and Milan, expressed around neo-aristocratic dinner tables and in neo-priestly editorial meetings. A journalist in Sweden noted recently that when the Swedish government recommended two centimeters of toothpaste on one’s brush no journalist complained:

[The] journalists . . . take great professional pride in treating with the utmost skepticism a press release or some new report from any commercial entity. And rightly so. But the big mystery is why similar output is treated differently just because it is from a government organization. It’s not hard to imagine the media’s response if Colgate put out a press release telling the general public to use at least two centimeters of toothpaste twice every day.

The bourgeoisie is far from ethically blameless. The newly tolerated bourgeoisie has regularly tried to set itself up as a new aristocracy to be protected by the state, as Adam Smith and Karl Marx predicted it would. And anyway even in the embourgeoisfying lands on the shores of the North Sea, the old hierarchy based on birth or clerical rank did not simply disappear on January 1, 1700.

Tales of pre- or antibourgeois life strangely dominated the high and low art of the Bourgeois Era. Flaubert’s and Hemingway’s novels, D’Annunzio’s and Eliot’s poetry, Eisenstein’s and Pasolini’s films, not to speak of a rich undergrowth of cowboy movies and spy novels, all celebrate peasant/proletariat or aristocratic values.

A hard coming we bourgeois have had of it. A unique liberalism was what freed the betterment of equals, starting in Holland in 1585, and in England and New England a century later. Betterment came largely out of a change in the ethical rhetoric of the economy, especially about the bourgeoisie and its projects.

You can see that “bourgeois” does not have to mean what conservatives and progressives mean by it, namely, “having a thoroughly corrupted human spirit.” The typical bourgeois was viewed by the Romantic, Scottish conservative Thomas Carlyle in 1843 as an atheist with “a deadened soul, seared with the brute Idolatry of Sense, to whom going to Hell is equivalent to not making money.”

Or from the other side, in 1996 Charles Sellers, the influential leftist historian of the United States, viewed the new respect for the bourgeoisie in America as a plague that would, between 1815 and 1846, “wrench a commodified humanity to relentless competitive effort and poison the more affective and altruistic relations of social reproduction that outweigh material accumulation for most human beings.”

Contrary to Carlyle and Sellers, however, bourgeois life is in fact mainly cooperative and altruistic, and when competitive it is good for the poorest among us. We should have more of it. The Bourgeois Deal does not imply, however, that one needs to be fond of the vice of greed, or needs to think that greed suffices for an economic ethic. Such a Machiavellian theory, “greed is good,” has undermined ethical thinking about the Bourgeois Era. It has especially done so during the past three decades in smart-aleck hangouts such as Wall Street or the Department of Economics.

Prudence is a great virtue among the seven principal virtues. But greed is the sin of prudence only — namely, the admitted virtue of prudence when it is not balanced by the other six, becoming therefore a vice. That is the central point of Deirdre McCloskey, The Bourgeois Virtues, of 2006, or for that matter of Adam Smith, The Theory of Moral Sentiments, of 1759 (so original and up-to-date is McCloskey).

Nor has the Bourgeois Era led in fact to a poisoning of the virtues. In a collection of mini-essays asking “Does the Free Market Corrode Moral Character?” the political theorist Michael Walzer replied “Of course it does.” But then he wisely adds that any social system corrodes one or another virtue. That the Bourgeois Era surely has tempted people into thinking that greed is good, wrote Walzer, “isn’t itself an argument against the free market. Think about the ways democratic politics also corrodes moral character. Competition for political power puts people under great pressure . . . to shout lies at public meeting, to make promises they can’t keep.”

Or think about the ways even a mild socialism puts people under great pressure to commit the sins of envy or state-enforced greed or violence or environmental imprudence. Or think about the ways the alleged affective and altruistic relations of social reproduction in America before the alleged commercial revolution put people under great pressure to obey their husbands in all things and to hang troublesome Quakers and Anabaptists.

That is to say, any social system, if it is not to dissolve into a war of all against all, needs ethics internalized by its participants. It must have some device — preaching, movies, the press, child raising, the state — to slow down the corrosion of moral character, at any rate by the standard the society sets. The Bourgeois Era has set a higher social standard than others, abolishing slavery and giving votes to women and the poor.

For further progress Walzer the communitarian puts his trust in an old conservative argument, an ethical education arising from good-intentioned laws. One might doubt that a state strong enough to enforce such laws would remain uncorrupted for long, at any rate outside of northern Europe. In any case, contrary to a common opinion since 1848 the arrival of a bourgeois, business-respecting civilization did not corrupt the human spirit, despite temptations. Mostly in fact it elevated the human spirit.

Walzer is right to complain that “the arrogance of the economic elite these last few decades has been astonishing.” So it has. But the arrogance comes from the smartaleck theory that greed is good, not from the moralized economy of trade and betterment that Smith and Mill and later economists saw around them, and which continues even now to spread.

The Bourgeois Era did not thrust aside, as Sellers the historian elsewhere claims in rhapsodizing about the world we have lost, lives “of enduring human values of family, trust, cooperation, love, and equality.” Good lives such as these can be and actually are lived on a gigantic scale in the modern, bourgeois town. In Alan Paton’s Cry, the Beloved Country, John Kumalo, from a village in Natal, and now a big man in Johannesburg, says, “I do not say we are free here.” A black man under apartheid in South Africa in 1948 could hardly say so. “But at least I am free of the chief. At least I am free of an old and ignorant man.”

The Revaluation, in short, came out of a rhetoric — what the Dutch economist Arjo Klamer calls the “conversation” — that would, and will, enrich the world. We are not doomed. If we have a sensible and fact-based conversation about economics and economic history and politics we will do pretty well, for Rio and Rotterdam and the rest.

Deirdre N. McCloskeyDeirdre N. McCloskey

Deirdre Nansen McCloskey taught at the University of Illinois at Chicago from 2000 to 2015 in economics, history, English, and communication. A well-known economist and historian and rhetorician, she has written 17 books and around 400 scholarly pieces on topics ranging from technical economics and statistical theory to transgender advocacy and the ethics of the bourgeois virtues. Her latest book, out in January 2016 from the University of Chicago Press—Bourgeois Equality: How Ideas, Not Capital or Institutions, Enriched the World—argues for an “ideational” explanation for the Great Enrichment 1800 to the present.

3 Kinds of Economic Ignorance by Steven Horwitz

Nothing gets me going more than overt economic ignorance.

I know I’m not alone. Consider the justified roasting that Bernie Sanders got on social media for wondering why student loans come with interest rates of 6 or 8 or 10 percent while a mortgage can be taken out for only 3 percent. (The answer, of course, is that a mortgage has collateral in the form of a house, so it is a lower-risk loan to the lender than a student loan, which has no collateral and therefore requires a higher interest rate to cover the higher risk.)

When it comes to economic ignorance, libertarians are quick to repeat Murray Rothbard’s famous observation on the subject:

It is no crime to be ignorant of economics, which is, after all, a specialized discipline and one that most people consider to be a “dismal science.” But it is totally irresponsible to have a loud and vociferous opinion on economic subjects while remaining in this state of ignorance.

Economic ignorance comes in different forms, and some types of economic ignorance are less excusable than others. But the most important implication of Rothbard’s point is that the worst sort of economic ignorance is ignorance about your economic ignorance. There are varying degrees of blameworthiness for not knowing certain things about economics, but what is always unacceptable is not to recognize that you may not know enough to be speaking with authority, nor to understand the limits of economic knowledge.

Let’s explore three different types of economic ignorance before we return to the pervasive problem of not knowing what you don’t know.

1. What Isn’t Debated

Let’s start with the least excusable type of economic ignorance: not knowing agreed-upon theories or results in economics. There may not be a lot of these, but there are more than nonspecialists sometimes believe. Bernie Sanders’s inability to understand why uncollateralized loans have higher interest rates would fall into this category, as this is an agreed-upon claim in financial economics. Donald Trump’s bashing of free trade (and Sanders’s, too) would be another example, as the idea that free trade benefits the trading countries on the whole and over time is another strongly agreed-upon result in economics.

Trump and Sanders, and plenty of others, who make claims about economics, but who remain ignorant of basic teachings such as these, should be seen as highly blameworthy for that ignorance. But the deeper failing of many who make such errors is that they are ignorant of their ignorance. Often, they don’t even know that there are agreed-upon results in economics of which they are unaware.

2. Interpreting the Data

A second type of economic ignorance that is, in my view, less blameworthy is ignorance of economic data. As Rothbard observed, economics is a specialized discipline, and nonspecialists can’t be expected to know all the relevant theories and facts. There are a lot of economic data out there to be searched through, and often those data require careful statistical interpretation to be easily applied to questions of public policy. Economic data sources also requiretheoretical interpretation. Data do not speak for themselves — they must be integrated into a story of cause and effect through the framework of economic theory.

That said, in the world of the Internet, a lot of basic economic data are available and not that hard to find. The problem is that many people believe that certain empirical facts are true and don’t see the need to verify them by actually checking the data. For example, Bernie Sanders recently claimed that Americans are routinely working 50- and 60-hour workweeks. No doubt some Americans are, but the long-term direction of the average workweek is down, with the current average being about 34 hours per week. Longer lives and fewer working years between school and retirement have also meant a reduction in lifetime working hours and an increase in leisure time for the average American. These data are easily available at a variety of websites.

The problem of statistical interpretation can be seen with data on economic inequality, where people wrongly take static snapshots of the shares of national income held by the rich and poor to be evidence of the decline of the poor’s standard of living or their ability to move up and out of poverty.

People who wish to opine on such matters can, again, be forgiven for not knowing all the data in a specialized discipline, but if they choose to engage with the topic, they should be aware of their own limitations, including their ability to interpret the data they are discussing.

3. Different Schools of Thought

The third type of economic ignorance, and the least blameworthy, is ignorance of the multiple perspectives within the discipline of economics. There are multiple schools of thought in economics, and many empirical questions and historical facts have a variety of explanations. So a movie like The Big Short that clearly suggests that the financial crisis and Great Recession were caused by a lack of regulation might be persuasive to people who have never heard an alternative explanation that blames the combination of Federal Reserve policy and misguided government intervention in the housing market for the problems. One can make similar points about the Great Depression and the difference between Hayekian and Keynesian explanations of business cycles more generally.

These issues involving schools of thought are excellent examples of Rothbard’s point about the specialized nature of economics and what the nonspecialist can and cannot be expected to know. It is, in fact, unrealistic to expect nonexperts to know all of the arguments by the various schools of thought.

Combining Ignorance and Arrogance

What is missing from all of these types of economic ignorance — and what is often missing from knowledgeable economists themselves — is what we might call “epistemic humility,” or a willingness to admit how little we know. Noneconomists are often unable to recognize how little they know about economics, and economists are often unable to admit how little they know about the economy.

Real economic “expertise” is not just mastery of theories and facts. It is a deeper understanding of the variety of interpretations of those theories and facts and humility in the face of our limits in applying that knowledge in attempting to manage an economy. The smartest economists are the ones who know the limits of economic expertise.

Commentators with opinions on economic matters, whether presidential candidates or Facebook friends, could, at the very least, indicate that they may have biases or blind spots that lead to uses of data or interpretive frameworks with which experts might disagree.

The worst type of economic ignorance is the type of ignorance that is the worst in all fields: being ignorant of your own ignorance.

Steven HorwitzSteven Horwitz

Steven Horwitz is the Charles A. Dana Professor of Economics at St. Lawrence University and the author of Hayek’s Modern Family: Classical Liberalism and the Evolution of Social Institutions.

He is a member of the FEE Faculty Network.

Ideology, hidden obstacle to reason

I was recently surprised to note that a prominent British libertarian had sent out a bulk email suggesting that leaving the EU would not be much of a boon to the UK since such would not necessarily provide more “liberty” for Brits. Thus, he contends that UK “leaders” have the same totalitarian mindset as the EU “leaders” and the Brexit (exit of the UK from the EU) would not help matters. He mentioned that the UK government has at times exceeded even the legal limitations on power provided by the authoritarian EU and that offended Brits may occasionally benefit from European Court decisions that overturn excesses of UK authorities and judges. Since the European Court is an essential component of the EU, leaving the EU would therefore supposedly remove this supposed benefit.

This email did not contain the words Muslim or Islam. Yet the Islamization of the UK is one of the main concerns of those who support the Brexit.

I had tried to show my UK reader list how simply rolling over and playing dead, ie, not voting in the upcoming referendum or voting YES to stay in the EU was not an option, for one thing because it sends a signal to the EU top rank that the people of Europe have finally given up and are willing to acquiesce to total tyranny.

An article in The Atlantic reveals one very important reason why EU membership is a bad deal for the UK and all other industrial members, to whit:

“EU countries are legally barred from limiting immigration from other member states, a decision that has had a great effect on migration patterns on the continent.”

Now it is certainly true that the usurpers who have seized the internal UK reins of power (essentially Parliament and Downing Street) by deceit are, like the EU bureaucrats, also inclined to flood the UK with still more Muslims, a rapidly growing group that receives an inordinately high percentage of social assistance or welfare (as reported here and here) and which in polls is found to favor sharia law and jihad.

In 2014, Daniel Greenfield, discussing a recent poll in London, wrote:

“There are about 1 million Muslim settlers in London where they make up 12 percent of the population. These figures suggest that the vast majority of them, perhaps as high as 80 percent, support ISIS.”

A NO vote on the referendum would be a signal to the Brussels oligarchs that the people are no longer the lemmings they once were and will not take rampant Islamisation lying down.

It should not surprise anyone that libertarians tend to be more liberal on the issue of immigration. Their ideology teaches essentially that all humans must have the maximum freedom possible and is refractory to considerations of reality. The freedom to cross someone else’s border and gain access to another country’s welfare rolls could be seen as the ultimate in libertarian policy. US libertarians counter the fears of ordinary mortals by contending that welfare would be forbidden in a libertarian society, but their immigration positions ignore the fact that welfare is part of the current US reality, over which libertarians have little or no control, and the current socialist context is the one in which they propose to implement their immigration positions. Like their British counterparts, they therefore generally see even illegal immigration as either a non-threat or a boon. They believe that they could soon operate in a perfect world with no impediments whatsoever to individual freedom.

The trouble with this thinking — in case you are one of the few who need this pointed out to you — is that there really are two kinds of freedom, or liberty (liberté) as the French revolutionaries, ideological second cousins to today’s libertarians, called it.

ONE kind is individual freedom.

The SECOND is more subtle and easier to overlook, and that is, national sovereignty, ie, the freedom of a nation to chart and navigate its own course without interference from other nations or entities.

Today’s libertarians almost never talk about the second kind of liberty because to them, national sovereignty is an obstacle to individual liberty at all costs, which is the non-negotiable centerpiece of their creed. And non-negotiable here means reality be damned.

Ironically, however, this neglect of national sovereignty actually severely curbs individual liberty as well, at least in the real world down here beneath the rarefied stratosphere in which libertarianism thrives.

For example, if 80% of an indigenous population desires freedom of choice in its national lawmaking, then a rigid libertarian policy of legal residency for all and sundry may well lead to veritable inundation of this indigenous population with hordes of people who tolerate and even welcome totalitarianism. After all, to them, totalitarianism is their free choice. Once these hordes reach a critical percentage of the population, the tipping point will be passed and that one-time majority will now be subjected to the will of the newly arrived hordes. And here’s the real kicker: the libertarians who persuaded their unsuspecting countrymen to accept these hordes will now also be enslaved along with the rest. So much for liberté.

Worst of all, the above is not by any means just a hypothetical example. There is a projection that the UK will become a Muslim state by 2050, and while this has been poo-pooed by the Establishment media, The Commentator writes:

“This projection is based on reasonably good data. Between 2004 and 2008, the Muslim population of the UK grew at an annual rate of 6.7 percent, making Muslims 4 percent of the population in 2008. Extrapolating from those figures would mean that the Muslim population in 2020 would be 8 percent, 15 percent in 2030, 28 percent in 2040 and finally, in 2050, the Muslim population of the UK would exceed 50 percent of the total population.”

Thus the rigid and doctrinaire libertarianism with liberty as its Grail, is from the outset on a course of ineluctable self-destruction.

History presents us with a parade of ideologies, all of which have failed one after the other. Yet some flaw in the character of Homo sapiens leads us invariably to put aside our perception of reality, our built-in logic and reason, and even our sense of self-preservation in favor of untested ideologies propped up by high-sounding rhetoric. Somehow, our species never seems to notice that, precisely because ideologies supersede and subtly supplant reason and the perception of reality, all ideologies will eventually fail, always, just as they always have in the past.

The question is: Can we ever come to understand this simple fact and overcome this flaw in our DNA?

Of Battlefields and Boardrooms by Matthew McCaffrey

Are the Art of War and the Art of Enterprise two edges of the same sword?

Sun Tzu’s The Art of War is justly known as one of the great works in strategic thinking. But although the text nominally concerns warfare, through the centuries it’s often been used as a business handbook more than as a military manual. Just like good economic writing, it brilliantly expresses complex ideas simply and concisely, and its dramatic prose makes for compelling lessons about conflict.

However, while analogies between the boardroom and the battlefield might seem appealing, they are erroneous. Economists like Mises have emphasized that market competition and military competition could not be less alike; one is productive and increases human welfare, while the other is destructive of human life and economy.

But The Art of War remains popular in business because it isn’t really about armed conflict. It’s about finding ways to advantageously avoid or resolve confrontation of any kind. It’s this sort of idea that opens the door to insights about enterprise.

One of Sun Tzu’s major attractions for the business world is his emphasis on entrepreneurial thinking. For him, strategic excellence is about creating opportunities and taking risks, the same abilities necessary for success in the market, where uncertainty constantly challenges the good judgment of would-be entrepreneurs.

Good decision-making also means one must be “formless,” so as to instantly take advantage of fleeting opportunities and adapt seamlessly to changing (market) conditions. The classical strategists realized that competitive success depends on one’s ability to control and manipulate the internal and external conditions of conflict. This means knowing one’s own abilities and weaknesses as well as those of the competition, as summed up in The Art of War’s most famous aphorism: “One who knows the enemy and knows himself will not be endangered in a hundred engagements.”

The qualities that these classical strategists recommend in great generals are actually the traits of successful market entrepreneurs. For example, entrepreneurs are decisive and willing to bear the uncertainty of the market—unafraid of committing resources to projects that might fail. And they must be willing to endure hardship on the road to success, while never taking it for granted by becoming complacent or arrogant—traits that consumers often punish severely.

Comparing strategic and economic ideas raises an important question, though: If the analogies to the business world are so obvious, and the ancient texts really do have something in common with economic thinking, why didn’t the classical strategists realize their ideas were applicable to peaceful exchange? A simple response is that the market economy as we know it didn’t exist in ancient China (specifically, during the Spring and Autumn and Warring States periods). A more complete answer is that it couldn’t have existed. That is, ancient China lacked much of the institutional framework necessary for entrepreneurship and commerce to flourish—strong property rights, individualism, and the social acknowledgment of the importance of profit.

As William Baumol argues, a society’s institutions influence the course its entrepreneurial energy takes. Many of the great minds of the Renaissance—for instance, the inventors and innovators perfectly suited to improving welfare through the market—were military entrepreneurs in service to competing city-states. Political institutions offered patronage and the possibility of advancement, while opportunities to commercialize ideas were scarce, if not actively frowned upon. That is to say, the ancient Chinese states, along with countless others throughout history, lacked the “bourgeois virtues” that Deirdre McClosky argues provided the foundation for the industrial revolution.

This then is one explanation for the military turn of The Art of War and the other Chinese strategic classics. Having little explicit acknowledgment of the virtues of commerce, analysis of market competition presumably offered slight appeal. Without the institutional and cultural basis for market entrepreneurship, classical thought turned to analyzing destructive forms of competition that offered better “profit” opportunities—specifically, the chance to wield influence within the State bureaucracy. Spreading ideas usually meant finding a place in court and becoming a trusted advisor to the powerful. This much the classical strategists had in common with Renaissance intellectuals like Machiavelli—who, perhaps not coincidentally, also wrote a book titled The Art of War.

The lesson is that all societies face the problem of developing and keeping the institutions that allow enterprise to thrive—those institutions that direct the best of human creative energy to improving the lives of others, not to the service of the military State. Ideology plays a vital role in this social process and paves the way for peace and commercial prosperity. Instead of a guide to violent competition then, texts like The Art of War can help us develop a strategy for the battle of ideas. Ideas ultimately shape both society and our roles in it, so it falls to us to embrace and spread those that lead us away from the destruction of war making and toward the “creative destruction” of enterprise.


Matthew McCaffrey is assistant professor of enterprise at the University of Manchester and editor of Libertarian Papers.

EDITORS NOTE: The featured image from FEE and Shutterstock