When I first started teaching, David Henderson gave me some advice: to be open about who I am regarding my economic philosophy.  At the beginning of class (and several other times throughout), I mention that I am a classical liberal—a free-market economist who argues that individuals rather than governments are best suited to deal with complex social relationships and problems.  I don’t rule out government intervention completely, but I make a strong presumption of liberty that must be overcome before government intervention is justified.  Law exists to enhance liberty, not restrict it. That is some of the best teaching advice I have gotten. For many students, especially those who might disagree philosophically with me, it prompts conversations outside of class about economics and liberalism.  On campus, we have beautiful live oaks.  On nice days I hold office hours outside, so I have had many great conversations with students in their shade.  Some of the students have liberal leanings.  Others do not but are interested in the philosophy (or wish to pose counterarguments).  But all leave the conversation enriched.  Or, at least, I do. Recently, one student asked why I am a liberal.1  It is a good question, and the answer has evolved.  Certainly, I am a liberal for empirical reasons.  Liberalism has led to unprecedented human flourishing, virtually eliminating true poverty in liberal countries.  Liberal countries tend to be more tolerant, peaceful, wealthy, healthy, creative, and happy.  There are countless books that document this, but for those who want a more dramatic read, I recommend The Rise of the Cajun Mariners: The Race for Big Oil by Woody Falgoux.  Woody tells the story of the Cajun boaters who started with nothing, gambled it all, and became “oil boat barons.”  It is a tale that could only come about in a liberal market economy.  As Thomas Sowell once said, “I do not have faith in the market.  I have evidence about the market.” If you asked me, “Why liberalism?” 20 years ago, when I first started learning economics as a high school student, I would have stopped with the empirical evidence.  But I have since engaged with many liberal thinkers, both past (Adam Smith, Frederic Bastiat, John Miller, A.V. Dicey, F.A. Hayek, James M. Buchanan, etc.) and present (Don Boudreaux, David Henderson, Pierre Lemieux, Russ Roberts, Dan Klein, etc.)2. Over that time, I have come to appreciate a deeper understanding of “liberalism” and “human flourishing.”  In fact, I’d say my view now is much less geared toward the empirical; even if liberalism did not result in better material outcomes, I would still be a liberal.  I think James Buchanan put it best in his essay “Natural and Artifactual Man” (reprinted in Volume 1 of The Collected Works of James M. Buchanan): Man wants liberty to become the man he wants to become.  He does so precisely because he does not know what man he will want to become in time.  Let us remove once and for all the instrumental defense of liberty, the only one that can possibly be derived directly from orthodox economic analysis.  Man does not want liberty in order to maximize his utility, or that of society of which he is a part.  He wants liberty to become the man he wants to become. (pg 259, emphasis in original.) Liberalism lets people both discover and become the best versions of themselves, whatever that version may be.  Will some people mess up?  Of course.  And that is ok.  Will some use their freedom to abuse others?  Of course.  And that is where a liberal government in a liberal society has a role: to punish those who commit injustice.  To me, that freedom to find and live your best life, whatever it may entail, so long as you are not harming others, is beautiful. Liberalism is truly a social philosophy.  It encourages social behavior because it encourages peace.  Because of this, liberalism encourages societal cohesion in a way that collectivist ideologies that do not prioritize individuals cannot.  It encourages human flourishing in a myriad of ways.  And for that, I am a classical liberal. Live oaks in the quad at Nicholls State, photo by the author. [1] I use “liberal” and “classical liberal” interchangeably in this post.  They mean the same thing.  “Liberal” here does not refer to the American left or Democratic Party. [2] These lists are not exhaustive.  I have been blessed to engage with many great thinkers.  The exclusion from these lists does not imply a lack of influence or is not meant as a snub to anyone.   As an Amazon Associate, Econlib earns from qualifying purchases.   (0 COMMENTS)

A Book Review of Solving Social Dilemmas: Ethics, Politics, and Prosperity, by Richard D Congleton.1 Economists like blackboards. Using chalk (or markers), they construct logically consistent abstractions of the world. They call them “models”. This invites derision from both academics and the general public. However, the abstractions are often tested against the real world to assess their relevance of the models. The bad ones (i.e., those that are irrelevant) are thrown out. In Solving Social Dilemmas, Roger Congleton flips this perspective by asking how real-world individuals, through trial, error, and adaptation, generate rules and norms that sustain cooperation—and how these emergent solutions are later captured by economists in abstract form. To illustrate this flip, consider a small collectivity at the beginning of a long-time scale. Because some members of the collectivity can always act opportunistically, cooperation is hard to sustain (and one can think cooperation is analogous to exchange and trade) so rules must be developed to govern behavior. Sometimes, the discipline of continuous dealings (i.e., losing the stream of benefits from future cooperation because of immediate opportunism) is sufficient. Sometimes, the development of norms and reputations acts as a complement to that discipline. These norms and mores become internalized and reinforced as they generate benefits from sustained cooperation. Then, they are transmitted via socialization. “Norms,” “mores,” “rules,” and other terms more familiar to anthropologists fall broadly into what economists loosely call “institutions” or “governance.” (This category also includes government legislation.) In everyday language, people tend to describe the behavior generated by adherence to these institutions simply as “ethical behavior.” If the relevant collectivity grows to the size of a village, the dilemma of cooperation remains, but it changes in form. More people means that the effectiveness of past solutions may decline. Therefore, the norms must be adapted. Tinkering with the existing rules is one way. Introducing new rules may be necessary. This means a long process of trial and error. If the collectivity grows from a village to a city, the problems change again. The tinkering continues and the innovation must continue as well. This is unavoidable, since each round of growth of the collectivity is made possible by having successfully dealt with the problems of sustaining cooperation in the prior round. Each round generates new problems for sustaining cooperation that must be answered for growth to continue. “In other words, ethics build markets, markets reinforce the very ethos that sustains them, and together they generate the prosperity that allows both to flourish.” This is why Congleton can write “communities with an ethos that tends to support market transactions, team production, specialization, innovation and public policies that do not impede economic development benefit from more extensive and productive commercial networks” (p. 23). In other words, ethics build markets, markets reinforce the very ethos that sustains them, and together they generate the prosperity that allows both to flourish. This is the simplest summary that can be made of Congleton’s Solving Social Dilemmas. And it is a powerful way of expressing more formally the nature of economic development and the process that individuals follow (and understand intuitively) to produce “governance” in their daily lives. Economists can gain from reading this book because it offers ways to conceptualize questions about the evolution of institutions. Economic historians can gain from it a possible way to resolve certain questions regarding divergence between nations. Development economists can use it to understand how “big plans” imposed from above may destroy existing intricate systems of governance in ways that even the most rationally devised plan enacted by the most angelic planner could still make things worse. Even this high praise fails to do justice to the book. For example, the entirety of chapters 4 and 5 can form the basis of advanced undergraduate classes in economic history, economic development, economic philosophy, the history of economic thought and political economy. If expanded, in ways that some of the appendices provided by Congleton allow, they could form entire sections of core courses for graduate students in economics. They could also be easily adapted as a way to bridge conversations with historians and sociologists. Chapter 6 of the book provides a simple exposition, accessible to all, about customary law as “market-based law”. Liberty Fund followers are aware of these arguments, but their full exposition often comes in long treatises such as Theodore Plucknett’s Concise History of The Common Law2 (a misleading title—the book spans 828 pages) or Arthur Hogue’s Origins of the Common Law,3 and (more modern) John Hasnas’s Common Law Liberalism.4 But this chapter in Congleton boils down the entire literature in a digestible way. More importantly, Congleton expresses these ideas in terms that would attract people to the argument. Most notably, it is accessible to economists, who sometimes struggle to connect legal concepts to economic concepts. The understanding that emerges is that customary law has flexibility, offers more room for a smoother tinkering process with new rules as societies change (notably as in my example of changing size), and is cheaper to enforce because of the “customary” part. Finally, Part III of the book could easily form the core of a course in a Politics, Philosophy, and Economics (PPE) curriculum. It connects the economics discussed above with history and philosophy, providing insight into why the successful tinkering and innovation process in the “governance” of social dilemmas has been effective in sustaining cooperation. For more on these topics, see “The Rebirth of Classical Political Economy,” by Pedro Schwartz. Library of Economics and Liberty, July 4, 2016. Michael Munger on Choosing in Groups. EconTalk. “Ethics and Economics,” by Stephen R. C. Hicks. Concise Encyclopedia of Economics. Some may be tempted to dismiss Congleton’s book based on the perception that he is claiming prosperous societies are simply more ethical, while poorer societies are composed of less ethical people. That would be a mistake, since this isn’t what he argues. Instead, Congleton argues that certain ethical systems—discovered through trial and error, innovation, and repeated experimentation—are simply better suited to solving cooperation problems and sustaining markets. He summarizes this best himself: “some ethical systems ameliorate or solve a broader array of dilemmas than others” and “some internalized systems of ethical and normative rules provide more support for commerce than others” (p. 430). In this, Congleton echoes Adam Smith’s belief that prosperity is not the product of men’s personal virtue, but of the rules that govern their behavior.5 That is, in short, the single sentence on which Congleton builds one of the finest works I have read in years. Footnotes [1] Richard D. Congleton, Solving Social Dilemmas: Ethics, Politics, and Prosperity. Oxford University Press, 2022. [2] Theodore F. T. Plucknett, A Concise History of the Common Law. Liberty Fund, 2010. [3] Arthur R. Hogue, Origins of the Common Law. Liberty Fund, 1986. [4] John Hasnas, Common Law Liberalism: A New Theory of the Libertarian Society. Oxford University Press, 2024. [5] William Easterly, 2021. Progress by consent: Adam Smith as development economist. Rev Austrian Econ 34, 179–201. https://doi.org/10.1007/s11138-019-00478-5 *Vincent Geloso is an Assistant Professor of Economics at George Mason University. He holds a PhD in economic history from the London School of Economics and Political Science and a master’s degree in economic history from the same institution. For more articles by Vincent Geloso, see the Archive. As an Amazon Associate, Econlib earns from qualifying purchases. (0 COMMENTS)

What do Shakespeare, Hollywood storytelling, and military special operations have in common? They all excel at inventing new plans, or improvising when we’re facing radical uncertainty. Listen as professor of story science Angus Fletcher tells EconTalk’s Russ Roberts how we’ve misdefined intelligence, equating it with data–driven reasoning in place of what he calls “primal intelligence”–the […] The post Primal Intelligence (with Angus Fletcher) appeared first on Econlib.

“Expert failure” is clearly having a moment. Pollsters, Wall Street analysts, tech futurists… all are facing demands to reckon with getting it wrong. Economics, though, seems to be getting special attention. Lately, this has metastasized into Orweillian skepticism of government data itself. It’s one thing to argue that economists have misread numbers. It’s quite another to claim that the numbers themselves are lies. Believe me, I understand the reflex. If it’s true that the government fails at so many things it sets out to do, why trust its statistics? But this cynicism commits a category error: confusing the government’s inability to solve economic problems with its capacity to solve technical problems. Understanding this distinction explains why we can simultaneously distrust economic planning efforts while also trusting, e.g., the Bureau of Labor Statistics to provide employment figures. Briefly, economic problems involve mutually exclusive ends and trade-offs. Should we use titanium to build railroad tracks or golf clubs? Should corn become ethanol or be used to feed cattle? Markets solve these through prices, profits, and losses. Governments, as F.A. Hayek demonstrated, are fundamentally incapable of evaluating the trade-offs involved. Technical problems, by contrast, have a singular goal in mind. Build the railroad tracks, feed the cattle, and count the total number of jobs in the US. No trade-offs are involved in these problems, it’s just a matter of execution. Market participants can obviously solve technical problems, but so too can governments. The Soviet Union, for example, beat America to space but couldn’t stock the shelves at the grocery store. This wasn’t a coincidence. Technical problems have clear and specific endpoints. Economic problems require the evaluation of infinite trade-offs that market prices make understandable.  Note that there is nothing here about the cost-effectiveness of the government’s solutions, nor does it suggest that solving the problem was even worthwhile to begin with. Getting to space was an impressive feat in 1961. A more impressive feat, though, is feeding your people. As it turns out, the Soviet Union did the former, but did not accomplish the latter. The result: collapse. What does this have to do with government statistics? In a word: everything. Collecting and analyzing data is a technical problem with a clear, singular objective: accurate measurement. There are no trade-offs for e.g., the BLS to evaluate, no resource allocation problem to solve, and no need for price signals. Consider the BLS’s track record, specifically. Unlike, to take another example, China’s National Bureau of Statistics, which answers directly to the State Council and is more accurately described as a “propaganda arm,” the BLS operates with statutory independence. The much-maligned 911,000 downward revision in total non-farm jobs growth means that the Bureau was still well over 99% accurate—there are over 150 million non-farm employees in the US right now. The 2020 Census was estimated to be off by as many as 782,000 people. With over 330 million people in the US, the Census Bureau was accurate to within 0.25%.. Does this mean that the data collected perfectly matches reality? Of course not. There are serious and legitimate debates about what should count toward GDP, how to adjust the CPI for aspects of things like changes in quality, what the threshold should be before someone is considered “unemployed,” and plenty of other measures. These debates are all about what to measure, not whether the measurements themselves are accurate or technically competent. This distinction matters for classical liberals. We rightly distrust the government’s ability to pick winners, allocate resources, and plan economies. But dismissing government statistics as inaccurate writ large conflates technical competence with economic planning. Could the private sector collect this same data in a more efficient way? Maybe, but keep in mind that Bloomberg Terminals, which cost upwards of $24,000 per user per year, use government data. Should we trust governments to plan economies? Absolutely not. But should we trust government statistics, at least those in the US? The evidence suggests that we should. We should trust them not because governments are virtuous, but because measurement is fundamentally different from deciding what to do with those measurements. (0 COMMENTS)

I’ve had a difficult time watching superhero movies the past few years. Not because they lack quality (though perhaps true), but because they rely on bad economics. To justify this claim, I propose an answer to the eponymous question: why wouldn’t there be superheroes?  The Gotham Problem Imagine you live in Gotham City, where there is rampant crime. This ceaseless villainy is not only normatively bad, but also drives real estate prices down. Then Batman shows up, reducing said crime. Do the people of Gotham celebrate? Probably! After all, Batman made the city safer (and raised the value of their homes).  We may infer that the Gotham police tried their best, but the marginal police officer’s salary can’t increase property values enough to warrant their hiring.  The introduction of the Caped Crusader has changed the “optimal” level of crime from “mafia boss running every street” to “avoid committing premeditated crimes at night.” If Batman can achieve these higher real estate prices at a cost lower than the benefit he’s bequeathed upon the city, then we’re left to conclude that Batman is GCPD’s most desired hire, but that he simply refuses the salary. Though Batman’s actions have created value, citizens don’t proportionately respond to the effort Batman put into crime-fighting. That is, property values are discounted by the uncertainty everybody faces with Batman staying anonymous and with unclear incentives.  In a sense, there is a market failure: the people of Gotham would gladly pay Batman to perform his services, but because he rejects their payment, he is artificially reducing the value of the services provided, even if he would perform the same services upon payment rendered. Benjamin Klein and Keith Leffler’s wonderful paper “The Role of Market Forces in Assuring Contractual Performance” implicitly claims that any introduction of transaction costs requires an investment in hostage capital by the producer and the payment of a price premium by the consumer (assuming neither supply nor demand is perfectly elastic/inelastic). For example, Gucci sells a “high-quality” shirt, and you want it. But for the prices they charge, you want to know you’re getting something of truly high quality. An element of mistrust might act as a transaction cost that prevents the sale. To solve this problem, Gucci invests in capital (their brand name), which only holds value if their shirts are up to snuff. The expense of establishing the brand only pays off if the product actually is what it’s claimed to be. We call this “hostage capital” because Gucci is giving you a hostage: their brand name.  But producers and consumers bear costs (here’s a refresher, treating tax as a cost). Consumers “absorb” the cost of mistrusting the transaction by raising the price they pay to incentivize the producer towards providing the correct service. If consumers can’t rely on providers’ goodwill (hostage capital), paying higher prices is necessary to maximize gains from trade.  With Great Power, Comes Great… Fiduciary Responsibility?  Back to superheroes: that Spider-Man isn’t paid should result in an extremely sub-par outcome where home values in New York don’t consequently rise in value because nobody can really trust that Spider-Man will fight crime in perpetuity, and to the same level. We often envision heroes as not taking payment—perhaps a good person wouldn’t “do it for the money.” But payment is nonetheless required for people to maximize the value of Spider-Man’s crime-fighting. The only way consumers could maximize the value of Spider-Man’s gift is if Spider-Man loved crime-fighting so much that he covered the entire transaction cost by investment in hostage capital (in other words, he has a perfectly inelastic supply curve).  This is why we shouldn’t assume superheroes would exist, even if super-powered people did: because neither bystanders nor superheroes are maximizing on superpowers by donning a mask and fighting crime for free.  Uncle Ben’s famous words of wisdom to Spider-Man, that “with great power comes great responsibility,” may be normatively true. Still, innocent bystanders (you and I) should want Spider-Man to have a fiduciary responsibility, not only a moral one. There is no physical cost felt by Spider-Man when he neglects his duties, but his neglecting them inflicts a high cost on his constituents! Unless bystanders can be utterly convinced that Spider-Man will never neglect his duties (which he does on several occasions), we should always want Spider-Man to make money.  But my answer here is a bit facetious. I said superheroes don’t exist because the value of their labor isn’t maximized by fighting for free. Though many superpowers plainly don’t exist (thus rendering the likes of Spider-Man impossible by default), there are people with extraordinary mental and pecuniary capabilities. But in a world that doesn’t pay superheroes, why would we expect them? To be blunt, I would only let a radioactive spider bite me if (and only if) a clear financial gain were in order.  Superpowers aside, why doesn’t Elon Musk become Batman? Put simply, in the real world, that’s not his “superpower.” The value he can provide the world is maximized not by crime-fighting, even if he can afford a Batcave. Rather, he provides value from other industrial pursuits. What this should suggest is that the marginal benefit of reducing crime is not actually very high, and that if Bruce Wayne existed in real life, he might consider running Amazon as his contribution to the world. Maybe Elon Musk doesn’t care about making money, but we nonetheless pay him to impose a fiduciary responsibility to properly maximize the value of his contributions.  In conclusion, perhaps my eponymous question was a trick. “Superheroes” do exist, but they’re (1) paid and (2) not reducing crime, because the market signals to them that the marginal benefit in doing so is extremely low.  Not only do powerless superheroes already exist, but powered superheroes as comics present them necessarily create a state of the world where nobody has any incentive to even have superpowers (or at least, use them for “good”). Thus, every superhero movie implicitly assumes that markets don’t clear. If superheroes actually made no money, it would more likely suggest they aren’t performing any service worth paying for! (0 COMMENTS)

Shortly after the “Liberation Day” tariffs were announced back in April, Janet Bufton wrote an excellent post about whether or not Adam Smith would approve of those so-called “reciprocal” tariffs. I also riffed off her post here. In both cases, we argued these tariffs were not compliant with Smith’s argument and thus he would not have approved of them. Six months later, we have four pieces of good evidence that U.S. tariffs would not have met with Smith’s approval. First, as I have discussed before, these tariff rates are unrelated to any restrictions foreign nations have placed on U.S. exports. Rather, they are based on trade deficits and the opaque motivations of the executive branch. Second, the handful of “deals” motivated by these tariffs have resulted in higher tariffs, not lower ones. Smith’s discussion on reciprocal tariffs is in Book 4, Chapter 2 of The Wealth of Nations (WN, pages 467–468 of the Liberty Fund/Glasgow Edition). Smith writes: There may be good policy in retaliations of this kind, when there is a probability that they will procure the repeal of the high duties or prohibitions complained of. The recovery of a great foreign market will generally more than compensate the transitory inconveniency of paying dearer during a short time for some sorts of goods. Note the two conditions for tariffs required for Smith to qualify them as good policy: The tariffs result in the repeal of foreign nations’ tariffs, The domestic tariffs are temporary and short-lived, and are repealed once the foreign nation’s reductions take effect. In some cases, the new trade deals have led to lower tariffs on U.S. exports. So, the first condition is met. But all of these result in higher tariffs on foreign goods being made permanent. The second condition is not met. The third piece of evidence is that the Trump Administration has often and repeatedly cited mercantilist justifications for the tariffs (e.g., their arguments before the U.S. International Trade Court, Federal Court of Appeals, and likely the Supreme Court that trade deficits constitute a national emergency). Reciprocity or negotiation is frequently omitted or given short shrift. Smith rather explicitly calls these types of arguments “absurd” (WN 488). Finally, the Trump administration is counting on decades of tariff revenue. That certainly means these are not temporary negotiation tools. It doesn’t make sense to speak of permanent tax revenue from a temporary tariff. Adam Smith certainly would not approve of these tariffs. Rather, he would have rejected them. Smith dismisses the mercantilist grounds on which they’re based as “absurd.” On revenue grounds, they violate his maxims (WN 825–827), including the maxim that taxes shouldn’t be arbitrary (WN 825). Given how often these tariffs are adjusted or imposed without warning, they also violate the non-arbitrary maxim. There is a habit of inventing post hoc justifications for tariffs on Smithian grounds. Rather, I think we should just take Donald Trump and his administration at their word. They are mercantilists, through and through. And Adam Smith did not approve of mercantilism. (0 COMMENTS)

What if math isn’t about grinding through equations, but about training your intuition and changing how your brain works? Mathematician and author David Bessis tells EconTalk’s Russ Roberts that the secret of mathematics isn’t logic–it’s the way we learn to see. He explains why math books aren’t meant to be read like novels, how great […] The post A Mind-Blowing Way of Looking at Math (with David Bessis) appeared first on Econlib.

This is the latest in our series of posts in our series on price theory problems with Professor Bryan Cutsinger. You can see all of Cutsinger’s problems and solutions by subscribing to his EconLog RSS feed. Share your proposed solutions in the comments. Professor Cutsinger will be present in the comments for the next couple of weeks, and we’ll post his proposed solution shortly thereafter. May the graphs be ever in your favor, and long live price theory!   Question: The Texas Minimum Construction Standards require that all plumbing fixtures be WaterSense certified. Examples of requirements under these standards include low-flow faucets, shower heads, and toilets.  Suppose, for the sake of argument, that before the requirement for low-flow toilets went into effect, installing a normal-flow toilet cost $250. Suppose also that installing a low-flow toilet costs plumbers an additional $100 under the regulations, and that their customers value the savings from low-flow toilets at $25 per toilet.  Illustrate how the demand and supply curves for toilets shift as a result of the law. What happens to the price of a new toilet (providing a range of new prices is sufficient)? Who gains from the law: plumbers, their customers, both, or neither? Justify your answer. (0 COMMENTS)

In times of crisis, we consider what can be done to return to a path of prosperity and wealth. However, there is a tendency to mistake the previous manifestations of economic success—the sectors and products that an economy has, in the past, successfully produced—for the more fundamental source of success. When, in 1947, Ludwig Erhard lifted price regulations and decisively shifted the German economic system away from heavy interventionism towards a free market economy, the stage was set for what is commonly—though perhaps misleadingly—referred to as the “German Economic Miracle.” The rest is history.  Today, there is a fundamental misunderstanding of the origins of wealth that endangers the already struggling German economy’s future. This misunderstanding is also observable in other societies. The mistake is taking the really-existing businesses and sectors that have emerged under a successful economic system to be the decisive element in an economy’s growth. For example, Germany’s economic system has produced an economy focused on, put very roughly (and, strictly speaking, of course, falsely), cars. So, one may conclude that all that is necessary for protecting and reinvigorating the German economy is to protect and support the German carmakers’ ability to produce cars. Precisely this is what many commentators on the German economic situation, as well as politicians, seem to believe. According to this view, the focus must be on ensuring favorable conditions for the auto sector, a proven powerhouse of the economy in the past. This is not necessarily false—but if it is correct, it is correct contingently, not necessarily. Consider that a system of free enterprise will lead to the production of certain goods and services, and those may well lead to a focus on cars. But it could also lead to specialization in another industry, or to more diverse economic activity.  The goods and services that entrepreneurs focus on are not given or predetermined. Rather, in a free market, entrepreneurs who can produce profitably will succeed, regardless of the industry they operate in. It may well be that carmakers are exceptionally profitable. But the success of carmakers, or any other industry for that matter, is only worth celebrating when it is a manifestation of the healthy market economy.  So, what’s the lesson? It is that not industrial production, nor cars, nor any other sector was the decisive element for Germany’s economic success. These are just specific manifestations of that economy in this specific time and place. What the economy needs is a system that ensures market-tested success, not the prospering of any particular industry. Instead, the decisive factor is the economic system, where entrepreneurs must be free to flourish while also being responsible for their actions. In other words, the free market is crucial—and, historically, it was the reason for the tremendous economic growth Germany experienced. In any economy’s past, this economic success will have manifested in certain sectors being central to the economy; tomorrow, it may be precisely these sectors again, but it could also involve completely different ones.  To retain—and in Germany’s case, regain—its economic clout, a society’s focus must be on its economic system, not on the sectors that have historically emerged as the strongest under that system. Put simply, what is required is a return to the free market, not the bolstering of one specific sector that has recently achieved success.  Now, let me be clear that there are certainly measures that would not only promote the specific sector that has historically brought success, such as the automotive sector in Germany, but also represent a return to free market principles. Consider deregulation and lowering corporate income taxes. However, the focus must always be on the market if the objective is to rekindle the economy, rather than on any specific sector that seems promising to politicians, such as subsidizing energy prices for industry. This misunderstanding of what constitutes economic success permeates not only German policy recommendations but also those of many other countries. To some extent, it is understandable as the success of an economy manifests, or at least is primarily visible, in specific industries. However, this is precisely to misunderstand the true origins of a society’s economic miracle. You do not enrich your citizens by protecting an industry that has been successful in the past. Rather, at the basis of economic growth we find a solid market economy—just what Ludwig Erhard had restored in 1947 when he eliminated a host of government interventions to free the citizens from the constraints that had prevented them from enriching themselves and others. (0 COMMENTS)

In his 1980 book, Knowledge and Decisions, Thomas Sowell highlights the importance of social authentication and verification processes. Does this work? Is that a good idea? If it works, it survives. If not, it doesn’t. Over time, we accumulate rules, norms, and practices that make it easier for us to get things done. Some of it might be analogous to non-functional or “junk” DNA, which is “a DNA sequence that has no known biological function.” As I’ve heard it put, however, any social institution has endured because, at some point, it solved a problem. Markets are notable institutions because they make the signals and the solutions especially clear. Profits and losses take people’s ideas out of the world of speculation and into the world of verification. A hunch becomes more than a hunch: either it is authenticated as a good idea or rejected as a bad idea. Suppose a particular type of new toaster is profitable. In that case, it means that after we tally up all the “votes” people cast by spending or saving dollars, there are more votes for making the toaster than for using the necessary resources for something else. In a free market, the question, “Who decides?” has a simple answer. We each do, and in so doing, we all do.  In the 1930s, the economist W.H. Hutt popularized the term “consumers’ sovereignty” to describe the market process. Consumers are sovereign, Hutt argued, when they do not delegate to a centralized, coercive authority the power they exercise by buying or abstaining. He put it this way in his classic book Economists and the Public: A Study of Competition and Opinion: “The consumer is sovereign when, in his role of citizen, he has not delegated to political institutions for authoritarian use the power which he can exercise solely through his power to demand (or to refrain from demanding).” Hutt sometimes uses the singular, but the plural possessive “consumers’ sovereignty” is important. As he explains, the market is a genuinely social process. What emerges—a structure of prices—is something no one designed or intended, but that takes account of everyone’s voice. That’s cold comfort to people worried about inequality because some individual voices speak louder than others. Someone with ten times my income can “speak” ten times as loudly in a free market. However, there are far, far more people of relatively modest means than there are people of very high incomes. In aggregate, they command more purchasing power and speak as a louder chorus.  One of the great ironies of elite humanitarianism is the way people dismiss the “voice of the people” when it cries out loudly for things the elites don’t like, like Walmart Supercenters, action movies, and professional wrestling. What the people demand loudly, as measured by letting their money talk, however, is what the market will supply dutifully. When elites claim that the market doesn’t give the people what they want, their complaint is really that the market is all too happy to oblige unwashed masses who want the wrong things. Hutt argued that this illustrates the importance of tolerating bad taste. He equated it with religious tolerance. We might disagree with people and think them vulgar and base. But they have voices to which we should listen carefully, precisely because they are human and because those voices have important things to say about how the world operates—or should operate. In a society of free and equal people, consumers’ sovereignty means that people with refined tastes have to accept a lot of what they might consider chaff along with their cultural and commercial wheat. Money talks in all walks of life, or more accurately, people “talk” with their money. Money and prices translate people’s inchoate ideas and preferences into a meaningful “social will,” or at least something akin to it.  In the stage production of Les Misérables, we’re asked, “Do You Hear the People Sing?” Profit-seeking entrepreneurs can answer “yes.” When we rely on prices, profits, and losses to help us figure out what to produce and how, “the people’s”—i.e., the sovereign consumers’— messages come through loud and clear.   As an Amazon Associate, Econlib earns from qualifying purchases. (1 COMMENTS)