Tag Archive for: economics

3 Kinds of Economic Ignorance by Steven Horwitz

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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

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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

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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.

ABOUT MATTHEW MCCAFFREY

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