Economics Explained — Part II: Economic Principles in Perspective

This is the second installment of a long post. I may revise it as I post later parts. The whole will be published as a page, for ease of reference. If you haven’t read “Part I: What Is Economics About?“, you may benefit from doing so before you embark on this part.

What Drives Us

Humans are driven by the survival instinct and a host of psychological urges, which vary from person to person. Those urges include but are far from limited to the self-aggrandizement (ego), the need for love and friendship, and the need to be in control (which includes the needs to possess things and to control others, both in widely varying degrees). Economic activity, as I have said, excludes matters of love and friendship (though not calculated relationships that may seem like friendship), but aside from those things — which influence personal economic activity (e.g., the need to provide for loved ones) — there are more motivations for economic activity than can be dreamt of by economists. Those motivations are shaped genes and culture, which are so varied and malleable (in the case of culture) that specific knowledge about them is useful only to the purveyors of particular goods.

Therefore, economists long ago (and wisely) eschewed models of economic behavior that impute particular motivations to economic activity. Instead they said that individuals seek to maximize utility (something like happiness or satisfaction), whatever that might be for particular individuals. Similarly, they said that firms seek to maximize profits, which is easier to quantify because profit is measured in monetary units (dollars in America).

Irrational Rationality

Further, economists used to say that individuals act rationally when they strive to maximize utility. Behavioral economists (e.g., Richard Thaler) have challenged the rationality hypothesis by showing that personal choices are often irrational (in the judgment of the behavioral economist). The case of “saving too little” for retirement is often invoked in support of interventions (including interventions by the state) to “nudge” individuals toward making the “right” choices (in the judgment of the behavioral economist). The behavioral economist would thus impose his own definition of rational behavior (e.g., wealth-maximization) on individuals. This is arrogance in the extreme. All that the early economists meant by rationality was that individuals strive to make choices that advance their particular preferences.

Wealth-maximization is one such preference, but far from the only one. A young worker, for example, may prefer buying a car (that enables him to get to work faster than he could by riding a bus) to saving for his retirement. There are many other objections to the imposition of behavioral economists’ views. The links at the end of “No Tears for Cass Sunstein” (Thaler’s co-conspirator) will lead you to some of them. That post and the posts linked to at the end of it also provide insights into the authoritarian motivations of Thaler, Sunstein, and their ilk.

The Rise of Corporate Irresponsibility

Turning to firms — the providers of goods that satisfy wants — I have to say that the profit-maximization motive has been eroded by the rise of huge firms that are led and managed by bureaucrats rather than inventors, innovators, and entrepreneurs. The ownership of large firms is, in most cases, widely distributed and indirect (i.e., huge blocks of stock are held in diversified mutual-fund portfolios). This makes it possible for top managers (enabled by compliant boards of directors) to adopt policies that harm shareholders’ financial interests for the sake of presenting a “socially responsible” (“woke”) image of the firm to … whom?

The firm’s existing customers aren’t the general public, they are specific segments of the general public, and some of those segments don’t take kindly to public-relations ploys that flout the values that they (the specific segments) hold dearly. (Gillette and Dick’s Sporting Goods are recent cases in point.) The “whom” might therefore consist of segments of the public that the firms’ managers hope will buy the firm’s products because of the firm’s pandering. and — more likely — influential figures in business, politics, the arts, the media, etc., whom the managers are eager to impress.

“Social responsibility” fiascos are only part of the picture. Huge, bureaucratic firms are no more efficient in their use of resources to satisfy consumers’ wants than are huge, bureaucratic governments that (at best) provide essential services (defense and justice) but in fact provide services that politicians and bureaucrats are “needed” in order to buy votes and make work for themselves.

The bottom line here is that the satisfaction of consumers’ wants has been compromised badly. And the combination of government interventions and corporate misfeasance has made the economy far less productive than it could be.

The Flip Side of Economics: Failure to Produce

Economics, therefore, is about the satisfaction of human wants through the production and exchange of goods, given available resources. It is also about the failure to maximize the satisfaction of wants, given available resources, because of government interventions and corporate misfeasance.

The gross underperformance of America’s economy illustrates an important but usually neglected principle of economics: Every decision has an opportunity cost. When you choose to buy a car, for example, you forgo the opportunity to buy something else for the same amount of money. That something else, presumably, would afford you less satisfaction (utility) than the car. Or so the theory goes. But whether it would or wouldn’t isn’t for a behavioral economist to say.

Individuals (and firms) often make choices that they later regret. It’s called learning from experience. But “nudging”, government interventions, and corporate sluggishness reduce the opportunity to learn from experience. (Government interventions and corporate sluggishness also prevent, as I have said, behaviors that are essential to economic vitality: invention, innovation, and entrepreneurship.)

Government interventions also incentivize economically and personally destructive behavior. There are many estimates of the costs of government interventions (e.g., this one and those documented quarterly in Regulation magazine) and a multitude of examples of the personally destructive behavior engendered by government interventions. It is impossible to say which intervention has been the most harmful to the citizenry, but if pressed I would choose the thing broadly called “welfare”, which disincentivizes work and is an important cause of the dissolution of black (welfare-dependent) families, with attendant (and dire) results (educational, occupational, criminal) that bleeding hearts prefer to attribute to “racism”. If not in second place, but high up on my list, is the counterproductive response (by government at the prodding of bleeding hearts) to homelessness.

Thus we have yet another principle: the “law” of unintended consequences. Unintended consequences are the things that aren’t meant to happen — but which do happen — when an actor (be it governmental, corporate, or individual) doesn’t think about (or chooses to minimize or ignore) when it or he focuses on a particular problem or desire to the exclusion of other problems or desires. Individuals can learn from unintended consequences; governments and, increasingly, corporations are too rule-bound and infested by special interests to do so.

None of what I have said about corporations should be taken as an endorsement of governmental interventions to make them somehow more efficient and responsible. (The law of unintended consequences applies in spades when it comes to government.) The only justification for state action with respect to firms is to keep them from doing things that are inimical to liberty and can’t be rectified by private action. In an extreme case, a business that specializes in murder for hire is (or should be) a target for closure and prosecution. A business that sells a potentially harmful product (e.g., guns, cigarettes) isn’t a valid target of state action because the harmful use of the product is the responsibility of the buyer, product-liability law to the contrary notwithstanding.

What about a business that collaborates (perhaps tacitly) with other businesses or special interests to prevent the expression of views that are otherwise protected by the First Amendment but which are opposed by the managers of the business and their political allies? There are good arguments for a hand-off approach, in that markets — if they are allowed to operate freely — will provide alternatives that allow the expression (and wide circulation) of “objectionable” views. If anti-trust actions against purveyors of oil and steel (two take two examples from the past) are inadvisable (as I have argued), aren’t anti-trust actions against purveyors of information and ideas equally inadvisable? There is a qualitative difference between economic rapacity and what amounts to a war that is being waged by one segment of the nation against other segments of the nation. (See for example, “The Subtle Authoritarianism of the ‘Liberal Order’“.) Government action to defend the besieged segments is therefore fitting and proper. (See “Preemptive (Cold) Civil War“.)

Economics and Liberty

This brings me to the gravest economic threat to liberty, which is state socialism and its variants: communism, fascism, and social democracy. All of them vest control of the economy in the state, when not through outright state ownership of the means of production, then through laws and regulations that dictate allowable types of economic output, the means and methods of its production, and its beneficiaries. The United States has long been burdened with what has been called a “mixed” economic system, which is in fact a social democracy — an economy that has many of the trappings of free-market capitalism but is in fact heavily managed by governments (federal, State, and local) in the service of “social justice” and various trendy causes.

The most recent of these is the puritanical, often hypocritical, and anti-scientific effort to rescue the planet from “climate change”. The opportunity cost of this futile undertaking, were it conducted according to the dictates of its most strident supporters, would be a vast share of the economic output of the the Western world (inasmuch as Russia, China, India, and even Japan are disinclined to participate), thus demoting America and Western Europe to Third-World status and rendering them vulnerable to economic and military blackmail by Russia and China. (Old grudges die hard.) You can be sure, however, that even in their vastly diminished state, the Western “democracies” would find the resources with which to cosset the ruling class of politicians and their favorites.

Proponents of state action often defend it by adverting to the paradox of collective action, which is that individuals and firms, acting in what they perceive to be their own interests, can bring about a disaster that engulfs them. “Climate change” is the latest such so-called disaster. What the proponents of state action always omit to consider (or mention) is that state action itself can bring about a disaster that engulfs all of us. The attempt to control “climate change” is just such an action, and it is of the more dangerous kind because government programs, once started, are harder to turn around than the relatively modest and inexpensive projects of individuals and firms.

You may think that I have strayed a long way from the principles of economics. But I haven’t, if you’ve been following closely. What I have done — or tried to do — is put economic activity in perspective. Which is to say that I’ve tried to show that economic activity may be important and even crucial to our lives, but it is not the only important and crucial thing in our lives. Economic activity is shaped by government and culture. If the battle to contain government is successful, and if the battle to preserve a culture of personal responsibility and respect for traditional norms is successful, economic activity will thrive and be worth the striving.

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