"Granted that the invisible hand is clumsy, heartless and unfair…”

"Granted that the invisible hand is clumsy, heartless and unfair, it is ever
so much more deft and impartial than a central planning committee."
~ Harry Markowitz

As Henry Hazlitt cogently explained,

The art of economics consists in looking not merely at the immediate but at the longer effects of any act or policy; it consists in tracing the consequences of that policy not merely for one group but for all groups.

This, he argued, is the most important single lesson in all of economics.

This lesson should (but doesn’t) drive every good principles-of-economics course. Here’s what a good principles-of-economics course should teach, says Don Boudreaux:

A good principles-of-economics course drives home to attentive students the profound point that a market economy is far more complex [and requires much longer-range thinking than most popular discussions of the economy suggest.  A good principles-of-economics course teaches, for example, that

• market prices are not arbitrary;
• even in market settings, money prices are not the only form in which costs are incurred;
• “firms,” “governments,” “markets,” and “society” never choose or act; all choosing and acting are done by flesh-and-blood individuals; (the fact that individuals are often, or even typically, influenced in their choices and actions by the opinions of others does nothing to undermine this point);
• people respond to incentives;
• all voluntary trade typical makes all parties to such trades better off;
• high profits earned in markets are evidence that firms that earn them are performing more valuable services for humanity than are firms that earn lower profits;
• competition need not be “perfect” (as “perfect” is bizarrely defined in mainstream economics) in order to be intense and highly effective;
• almost no human being is without the ability to produce and supply something of value in exchange for things produced by other human beings.

How many would-be commissars even understand even one of those points? Or try to?

The basic lesson of the market process is that it signals to producers what consumers most desire, and rewards those producers who either most meet those incredibly diverse desires – or contrive to create new ones (who knew they desired an iPad eight years ago?) As Nobel-prize winning economist points out, you might find the market’s invisible hand to be clumsy, heartless or unfair – but it is ever so much more deft and impartial than any central planning committee that could ever be devised.

Because, as every good public-choice economists understands (and every promoter of would-be commissars never seems to learn):

Individuals do not stop maximising and responding to incentives when they become politicians, cabinet officials, or bureaucrats. We can far better understand politics when we ask who is maximising what, and think about the constraints they face.

So, in marked contrast to what a good principles-of-economics course might teach you about the market process, here’s just a few of the things a good public-choice course might teach you about the political process:

• citizens will only invest effort to become informed if they believe they will receive a net personal gain, hence  incentives lead voters to embrace rational ignorance;
• the incentive of government workers is ultimately to increase its own power and importance rather than to serve the public good;
• the greater the size of government, the more information is necessary to make an informed choice, and the more people become rationally ignorant; thus, rational ignorance destroys real government accountability;
• government officials face the political incentive to stay in office--to stay in office, politician-suppliers must offer what voter-consumers demand: government action; because the political term is much shorter than the economic term, the short-term benefits of policies like price fixing or business bailouts are seen and the long-term benefits are unseen;
• the immediate benefits of government expansion make it politically advantageous to create voter demand;
• since policies favouring special interests “generate substantial personal benefits for a small number of constituents while imposing a small individual cost on a large number of other voters,” democratic systems are biased toward the adoption of policies that favour cronies and special interests;

The basic lesson here: “Ultimately, government desires to live at everyone’s expense because it can.”

A very different process to one that’s driven by the market.

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