There are always headwinds that resist the forces of progress, and tailwinds that push progress forward. Furthermore, outlines Peter Boettke in this Guest Post, the economic history of humanity is made up of the story of this battle between headwinds and tailwinds. Just imagine it as a three-horse race between two great economists and a nag ...

Imagine a Horse Race Between Smith, Schumpeter, and Stupidity

by Peter Boettke

We economists have been the object of ridicule for centuries. [Deservedly so, for the most part. - Ed.] We supposedly know the price of everything and the value of nothing. The stress on scarcity and choice within constraints is seen as raining on the hope and aspirations for a better world.

In my book The Four Pillars of Economic Understanding, I try to counter these criticisms by pointing out that,  by capturing the beauty of the complex coordination of commercial society, the message of basic economics not only provides truth and light to uninitiated would-be students of society. It also conveys the hope that entrepreneurship offers for the discovery of new and fascinating products, and the implementation of new rules of social interaction which enable productive specialisation and peaceful social cooperation.

It does so with a sense of deep compassion for the least advantaged, who most benefit from the unleashing of economic forces to alleviate extreme poverty, and raises the material standards of living of people. Economic freedom brings with it progress and peace.

Unfortunately, economics is often taught as an abstract discipline with abstract examples to illustrate. Don’t get me wrong, abstraction is a necessary intellectual tool. Our theories must be logically sound, and as such must be empirically relevant. That requires discipline of thought and expression. Economics is not poetry, and neither is moral philosophy and political economy. We must practice these distinct but related disciplines with the utmost of intellectual care.

Why must we do that, you ask? Wouldn’t it be so much more inspiring to spin fanciful tales of better worlds to inspire the youth?

I want to say NO. James Buchanan, my teacher, argued that what we needed was to articulate a vision in political economy of a “workable utopia.” Hayek earlier had argued that we need a vision of a “liberal utopia,” and that we had to excite the imaginations of the best and the brightest to explore the workings of a free society — a true radical liberalism. But in both Hayek and Buchanan, the idea was to have these “utopias” firmly grounded in the teachings of basic economic reasoning.

As Hayek argued in his 1945 essay “Individualism: True and False,” the idea was to find a social system that relied not on individuals becoming better versions of themselves for its operation, but which made use of individuals as they are — sometimes smart, more often stupid; sometimes good, but capable of being bad. In fact, the idea was to have a system not where the best and the brightest could rule over others, but where bad men if they were to find themselves in charge could do least harm. In this way, freedom could be granted to all, and not restricted to only a few.

This is why Adam Smith’s critical idea of the invisible hand is so vital to our understanding of commercial life: It is not from the benevolence of the butcher, the baker and the brewer that we can expect our dinner, he explained, but from appealing to their self-interest. We cannot rely on friendship and fellow feelings to secure for us the material progress required to lift us from the Malthusian trap of subsistence. We escape that Malthusian trap through expansions of the trade and technological innovations spurred by the gains realized from turning scientific knowledge into commercially useful knowledge as the great economic historian Joel Mokyr has so convincingly argued throughout his career. To put it another way, borrowing from Mokyr, there are always headwinds that resist the forces of progress, and tailwinds that push progress forward, and the economic history of humanity is made up of the story of this battle between headwinds and tailwinds.

That metaphor is a useful one to keep in mind when thinking about our current situation, and where the primary winds are coming from — public sector, private sector, independent sector, or some combination. What are the headwinds that seem to block the timely and honest communication of knowledge about public health issues to us, for example; what are the headwinds that delay testing and medical innovations; what are the headwinds that keep the allocation of scarce yet critical medical resources from being allocated to their most urgent use?

On the other hand, where are the tailwinds coming from that will cut against those headwinds and push us forward to make progress against the reality of the current situation? When the history of our recent times comes to be written, obviously a serious accounting of the headwinds and tailwinds will need to take place.

After 2008, in my effort to try to communicate basic economic reasoning to make sense of the reality we were collectively experiencing, I started to utilise my own metaphors and analogies. One was to look at Michael Phelps, the great Olympic swimmer, and to ask my readers to imagine what would happen to his ability to swim across a pool if we first just tied his hands together.

Well it turns out that Phelps gets across the pool in a slower time using the breaststroke than he does freestyle, but still at amazing speed. How about if we tied his feet together as well? Well, again, Phelps is one of the best butterfly swimmers that the world has ever seen, so that dolphin kick would not be impeded by tying his feet together. But again, much slower than his freestyle. How about if we added a 250-pound weight to his waist?

At that point, he would sink to the bottom of the pool. The point I am trying to make however is that you would never say that under those circumstances Phelps’s failure to get across the pool represents swimmer failure. The failure is clearly due to the obstructions placed on his ability to swim. That, I argue, is the error we make when, in the context of highly regulated market economies, we continue as economic educators in discussing “market failure.”

Adam Smith long ago recognised that individuals can find workarounds and ingenious ways to realise gains from trade and gains from innovation even in the presence of what he identified as hundreds of impertinent obstructions which human folly may put in the way.

This led me to articulate another example in hopes of communicating an important economic lesson. To capture the idea of gains from trade and gains from innovation in the face of those impertinent obstructions, I asked readers to envision a horse race between three horses — one named Smith (for gains from trade), a second one named Schumpeter (for gains from innovation), and a third one named Stupidity (for those government-imposed obstructions).

My basic ideas was, following Smith, that as long as the Smith and the Schumpeter horses were running ahead of the Stupid horse, tomorrow will be better than today. The counter-factual is this: what if the Smith and Schumpeter horses were able to run freely, without that Stupid horse biting at their heels and bumping into them rather than staying in their lane.

...

Thankfully, those Smith and Schumpeterian horses are younger, fitter, faster and more nimble. Once unleashed, it is my sincere hope that they will burst out and catch up quickly to that dumb old hag of a horse Stupidity. They will leave Stupidity in its wake, and tomorrow will be better than today.

So, let’s get those tailwinds blowing harder than the headwinds, stop tying down our entrepreneurs, and let those Smith and Schumpeter horses run freely. 

Our greatest reason for hope is to be found not in bumbling bureaucrats [or self-important politicians] who attempt to lead from ossified institutions of authority, but in the erring entrepreneurs who have their judgements constantly contested by others and only the most nimble and creative are able to negotiate the turbulent times to provide the solutions to our woes.

Peter J. Boettke is a Senior Fellow with the American Institute for Economic Research. He is a University Professor of Economics and Philosophy at George Mason University, as well as the Director of the F. A. Hayek Program for Advanced Study in Philosophy, Politics, and Economics, and BB&T Professor for the Study of Capitalism at the Mercatus Center at George Mason University.
Boettke is a former Fulbright Fellow at the University of Economics in Prague, a National Fellow at Stanford University, and Hayek Visiting Fellow at the London School of Economics.

His post, of which this is an excerpt, first appeared at the blog of the American Institute for Economic Research.