Judging from the popular embrace of Marxist figures like Che Guevara and the general praise for political leaders that try to stick it to businesses, it seems that to many, not caring about economics is somehow a virtue. As I casually browse social media or simply recall conversations from my college days, which wasn’t that long ago, it’s pretty clear economics has gotten a nasty reputation. My favorite lines include “Economics is when you learn why poor people deserve to starve,” and “Economists are preventing us from truly accomplishing great things like fighting climate change or eliminating poverty.” Setting aside the ironic fact that markets and innovation are the main forces driving sustainable technology development and reducing poverty, it seems that many people do not understand how dangerous this strain of thinking is. Leading a misguided crusade “to reign in the market” or to smash capitalism for the working class is not only a recipe for failure according to history, it completely fails to understand what economics is all about. Just because you don’t care about economics does not mean that the world suddenly bends to your wishes. As the late economist, Walter Williams used to say: “Politicians exploit economic illiteracy.”
This article does not aim to serve as accounting advice nor does it wish to advance highly theoretical debate. There are many different schools of economics with contrasting views about complicated matters such as whether or not central planning of the money supply to maintain a targeted inflation rate is a good idea or not. That is not important for this article. Instead I simply wish to make the case to the average person about how important the market and market mechanisms are in organizing society. It’s not just about making money, although that is certainly important. As someone with a background in political science, I can say that politics and economics are both related in that they are important in explaining how society functions.
Economics and Politics
Peter Boettke says it best in his book The Four Pillars of Economic Understanding when he explains that economics is simply the realization that the king wears no clothes. When a politician says that he can give everyone free food and solve global warming with his ambitious plan, he’s lying or ignorant or both. Rule number one about economics: scarcity matters. We do not live in a Star Trek utopia where we can just materialize what we need into existence. Someone somewhere has to produce it, someone has to distribute it, someone has to do the hiring, someone has to advertise, and so on. On top of that, we all have limited time, different talents, unequal resources, competing ideas, and so on. We can’t trust the government to run all of this for us via the political process. Just imagine Congress debating how to run a company like Zoom or at the very least making sure we don’t all starve. That’s why we allow people to go about their own business and form private companies to take care of things like providing grocery stores. How do we know how many grocery stores we need? We don’t; that’s why we leave it to free individuals to voluntarily decide how and where they will spend their money.
Do you like discount grocery stores? Go shop at Aldi. Do you like nicer stores with a heftier price tag? Shop at Whole Foods. Every voluntary transaction you make sends a signal about what kinds of products are desired, at what price, in what location and so on. From there, an exponential amount of voluntary decisions are made regarding global supply chains, farming, utilities, labor, and so on, to get the products you need on the shelves. That’s a market system at work and that’s why it is best to leave most societal functions to the market (which is basically just people) and not in the hands of politicians. This also shows how delicate and sophisticated the market process is. It may be about making and spending money, but more importantly, it’s about bringing civilization into existence.
One of the most insightful comments I’ve heard about this dynamic was when I was listening to a podcast about the stock market. The host said that if you’re tired of politics or looking for something different, listening to business news can be a great alternative.
To me that made sense because if you’re civically inclined and concerned about the general advancement of society, the business sector is where it’s happening. New inventions, new organizational concepts, new management techniques, new products and virtually everything that affects our lives come out of the market at breakneck speed. That’s because, in the market, problem-solving and creating value are prerequisites to making money. If you’re tired of listening to talking heads bicker about partisan politics, simply tuning into business news can brighten your day with news of new inventions, new ideas, and increasing productivity. It also makes you realize that the world is actually getting better despite what politicians would like you to believe.
There is a role and place for government such as protecting our rights and freedoms. However, just like Apple sticks to making iPhones, the government does best when it also sticks to a particular job not trying to run everything.
Prices and Profit
Prices and profit are probably two of the most important and most hated market functions. Without exaggeration, without these two mechanisms society might fall apart with devastating shortages and wasteful excess. Ludwig Von Mises wrote about this in his legendary book “Economic Calculation in the Socialist Commonwealth.” He writes that private ownership and price mechanisms are essential to calculated decision-making in society. Prices exist to communicate information first and foremost. High prices mean there’s a shortage which then attracts suppliers to relieve the shortage. Low prices mean that there is likely not much value in selling something due to an excess in supply so those resources would be better used elsewhere, typically somewhere with a higher price.
In a world of imperfect information, these entities associated with greed are in fact the guiding light that keeps society on track. Look at any society where prices and profit are not respected like North Korea or the former Soviet Union. They only feature catastrophic food shortages, wasteful inefficiency, and dreary stagnation. Price mechanisms could certainly be abused as humans are imperfect and self-interested but in the grand scheme of things they ensure that the lights turn on when you flick the switch. All prices do is allow for the allocation of scarce resources and facilitate the voluntary cooperation of individuals towards mutually beneficial goals. Profit is simply a signal that resources are being used in an optimal fashion.
If you’ve followed me this far and understand that market transactions are necessary for everything from being able to buy a sandwich at your local deli to inventing the latest generation of electric cars to reduce air pollution, you need to also understand the power of deregulation. It might be fashionable to see regulations as a necessary instrument to reign in greedy companies and control the market so to speak. You might feel like deregulation is simply an agenda for greedy corporate interests. There might be something romantic about using the arm of the state to reign in the wild energy of the market and direct it in a positive direction as if it was a wild horse. In fact, it’s depicted in the two statues in front and on the side of the US Federal Trade Commission building. So why should you support deregulation?
The problem with all this is that innovation and prosperity are a product of freedom. Oftentimes regulations are either outdated, misguided, or even deliberately imposed to benefit well-connected interests. Although there is certainly a need for some rules and regulations, they must be clear, reasonable, and navigable. Having an abundance of cumbersome regulations is essentially placing chains on society itself. Society does best when the government sets simple rules that allow for the greatest number of voluntary market transactions with the greatest amount of rapidity. Basically leave businesses alone unless they violate people’s rights and allow voluntary association to play out; this is also how you should treat normal people as well.
Legal scholar Richard Epstein even wrote a book about this necessity called Simple Rules for a Complex World. When the government sets rules for society it should understand that the complicated decision-making powers should rest at the lowest level possible. The government should only be around to make sure that people are not violating each other’s rights, narrowly defined. The government should certainly enforce rules regarding fraud, bodily injury, property violations, and so on. However, there is no need to intrude on the voluntary transactions of consenting adults nor should it believe it knows how to run a business better than those running the actual business. In a system of voluntary association and private property, individuals acting in their own self-interest tend to come to mutually beneficial arrangements. This process is often hampered by the arbitrary hand of the state which is often ignorant of the details involved. This is why there has been a powerful correlation between countries with high degrees of economic freedom and prosperity. Onerous and cumbersome regulations are in effect a weight on society’s ability to grow.
When I took AP Government in high school it was also mandatory that the second half of the class be AP Economics. At the time I thought nothing of it besides finding both interesting topics. Years later it became apparent that both are essential in understanding how society functions. Politics and economics are both important forces that run society. Just attempting to wield political power without considering economics is like jumping off a cliff believing you could fly. Economics isn’t just about money; it’s about the management of scarce resources whether it be an international credit system or your personal time. If politics is the sailboat, economics is the wind. It doesn’t care where the boat wants to go. The driver can either accommodate for the wind or face disaster.
Saying “Let the market handle it” may sound like a lazy sentiment from a position of privilege, and maybe it is. However, it also recognizes that doing so allows the most qualified and results-driven people i.e. private individuals, to handle the problem. It recognizes how the world works rather than attempting to impose an impossible vision on reality.
This article was first published by the AIER, and can be found here.
Chart of the Day
In a devastating blow to the already-stalling economic recovery, 140,000 were lost last month, according to the Labor Department. The overall unemployment rate held steady while Black and Latino communities were hardest hit.