Teaching Economics (with Steve Horwitz)

Steve Horwitz joins us to debunk some global myths about economics. 

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Teaching Economics

The newest addition to the libertarianism.org editorial staff, Steve Horwitz, joins us to debunk some global myths about economics. We dive into how good economics is about tracing out the patterns of unintended consequences that emerge from the choices individuals make in the face of uncertainty and based on the information and incentives created by the price system.

Are people interested in economics? Is economics rooted in individual choice? What was the study of economics prior to 1920? What does “constrained optimization” mean? What are the biggest global myths about economics? Should we worry about the increase in economic inequality?

Further Reading:

WTF?!: An Economic Tour of the Weird, written by Peter Leeson

Human Progress Website

Microfoundations and Macroeconomics: An Austrian Perspective, written by Steven Horwitz

Related Content:

The False Feminist Economics Methodenstreit: Competition versus Cooperation, written by Mikayla Novak

The Austrian Tradition in Economics, Free Thoughts Episode

[music]

00:01 Aaron Ross Powell: Welcome to Free Thoughts. I’m Aaron Powell.

00:08 Trevor Burrus: And I’m Trevor Burrus.

00:09 Aaron Ross Powell: Joining us today is Steve Horowitz. He’s the distinguished Professor of Free Enterprise in the Department of Economics, in the Miller College of Business, at Ball State University. And starting this month he’s the new economics editor at libertarianism.org. Welcome to Free Thoughts, Steve.

00:23 Steve Horwitz: Hey guys. Glad to be back.

00:26 Aaron Ross Powell: You’ve spent a lot of years teaching economics. In that time have things gotten better or worse when it comes to the public’s understanding of economic issues?

00:38 Steve Horwitz: Well, if we ignore for the moment the President, perhaps…

[laughter]

00:44 Trevor Burrus: Please, can we?

00:45 Steve Horwitz: Yeah.

[laughter]

00:48 Steve Horwitz: I think it’s gotten better. I think there are some basic… The basic kind of stuff that economists care about, I think the public sort of gets. And, at one level, right? We’re not debating… No, I shouldn’t say that so quickly, but we’re really not debating capitalism versus socialism anymore, with a few outliers to be noted. The idea that markets generally are the way to go and understanding the basic ideas why that is. Even the people we think of as being critics of market, like a Krugman or someone like that. Still, at the end of the day, the sort of median spot where people and the public, I think, are with respect to these issues, is better in many ways than it was a couple generations ago, for sure. There’s still issues that are problems. Thinking carefully about inequality, for example, and what economists has to say about that, I think is important. But, in general, yeah, I do think things are better. And I think part of the reason things are better, I actually think there’s more people teaching and doing public intellectual work in economics who get it, who really understand economics, are good at explaining it and get the idea that markets work and why they work and so on.

02:09 Trevor Burrus: Would you include like Freakonomics in that example of good teaching of economics or at least getting people to think about cost and benefits in a different way?

02:20 Steve Horwitz: Yeah. I think Freakonomics is, I think of as kind of the teaser for economics. It makes economics really sexy in some ways and it is good. If we think of economics as the economic way of thinking I think that kind of stuff is really good. Same with Pete Leeson’s new book which is similar to Freakonomics in that way. In that sense, yeah. I’m not sure that those things move the sort of economics that you need to understand the big policy questions all that far, but they certainly get people interested in economics. I think that’s a good thing. And I think the general… The success of Freakonomics for example, is an indicator of just, sort of a more general interest in economics as a thing than I think was the case even when I started grad school in the ’80s.

03:13 Aaron Ross Powell: So the public’s understanding is at least getting marginally better. Does the same hold true among university students? I mean we hear that… If you listen to the media now, it sounds like the university has run so far left that they’re all Maoists.

[laughter]

03:30 Aaron Ross Powell: And that’s often driven by the students themselves. So what have the last decades looked like among, say undergraduates?

03:43 Steve Horwitz: You have to be careful here because I… There’s a selection bias problem for me since I… If I’m teaching economics majors, right? I’m gonna get a different view. But if I think about the students I’ve taught, say in intro classes over the years, I don’t think there’s… There’s certainly, by my measures, no significant move to the left. And if anything, a slight move towards sort of better appreciating again markets. Not a big one, but slight. And one of the things I’ve really found is, again especially teaching intro, both at St. Lawrence and now at Ball State, is how… What’s the word I want here? How little students really know as the basis for their opinions before they walk into an economics class? And I think one of the great things about teaching economics, again, particularly intro, is the ability to sort of get students to see issues in ways they never thought about before.

04:42 Steve Horwitz: And at the very least, to get them to recognize it’s a lot more complicated than their simple slogans would suggest. For example, the rich are getting rich, the poor are getting poorer or women make 80% of what men make. I mean, those kind of things we see knocked around, students come in with those, presumably from high school, which is a whole other question. But I think one economics class at the very least gets those students to understand that the issues are more complicated than that.

05:09 Trevor Burrus: When you teach your intro class, do you focus it to look at the trendy misconceptions or at least conceptions that are missing the complexity of questions like the gender pay gap? Do you try and focus that on addressing some of those issues to keep the students interested?

05:26 Steve Horwitz: I certainly try to bring them up as examples. One of the changes I’ve made over the years, I really spend a full week on two issues that I think, where I think are those sorts of things. One is a week on Environmental Economics. And one of my favorite days in intro is when I argue that the optimal quantity of pollution is not zero.

[chuckle]

05:51 Trevor Burrus: I say that all the time, yes. It’s true.

05:53 Steve Horwitz: Yeah, that blows the minds of students. My students at St. Lawrence in particular, were very sort of green and crunchy and they didn’t quite know what to do with that, but it stuck, I had evidence that it stuck with them, and I thought that was a victory for the economic quick thinking. At least, if we understand there’s a cost to pollution reduction. So that’s one week. I spend another full week on the inequality stuff and I have a whole sort of series of videos and sort of class discussions that go with that ‘cause I think that issue is really important.

06:24 Steve Horwitz: Gender wage gap, I do… It comes up when we talk about labor markets, but I don’t focus on that too much. I have a… Historically I’ve taught a whole course on the economics of gender where essentially a huge hunk of the course is about thinking through the gender wage gap. And there too, it’s the same thing, I think, where students who’ve never thought about it before suddenly are sort of, “Wow. Okay. It’s more complex.” It’s fascinating to watch college age women work their way through that too. So I think the answer’s yeah.

06:57 Steve Horwitz: I do think the other thing though is that in teaching an intro class, you certainly want to get students engaged by showing them how economics is applicable. It doesn’t always have to be to the sort of big political issues. And as I’m talking I’m also realizing I’m, in the last two years, unsurprisingly, I spend more time talking about using international trade examples than I would have before. Thanks to the orange man.

07:28 Aaron Ross Powell: Taking a big step back, how did you get interested in economics to begin with?

07:35 Steve Horwitz: Oh, well, okay. So there’s some family history here. My dad is a PhD in Accounting and taught finance and accounting and was a business school dean for 11 years. His brother, my uncle, never finished his PhD in Economics, but came close and for… It wasn’t actually a practicing econometrician. It sounds like a practicing voodoo artist or something. But anyway. But a practicing econometrician for decades so there’s some of that. And their first cousin is a math professor, just retired at Penn. So there’s all that in my blood.

08:11 Steve Horwitz: But the story for me is I became a libertarian at age, about 16. Seriously. When I went to college I was gonna be a computer science major. I needed a fifth course, second semester of my freshman year and I thought to myself, “If you’re gonna keep talking about this libertarianism stuff you better learn some economics young man.” So I took Intro Econ as a fifth course just for that reason, and had the experience I think that almost every economist has at some point where the scales fall from your eyes and you go, “Wow, okay, yes.” And for me it was… Yeah, I’ve always sort of understood the world this way. Now I have this systematic way of thinking and talking about it. And it was so easy and so natural for me that I was like, “Oh, this is what I wanna do.” Right? “More please.” so for me it was…

09:07 Aaron Ross Powell: What is this… You say thinking about the world this way, and a lot of people who don’t spend time hanging out around economists and aren’t reading all this stuff think of economics as you’re just studying money.

09:19 Steve Horwitz: Yeah.

09:19 Aaron Ross Powell: Then it’s almost… It’s interesting, it’s almost from the accounting that your dad did. So what is this way? And you talk about and you’ve talked about the past, the economic way of thinking.

09:29 Steve Horwitz: I think the easiest way to talk about it is understanding that human choices are made on the basis of us determining the marginal benefits and marginal cost of each choice we make. By marginal here we mean if I take this next step, if I make this next choice, what are the benefits that come from this choice? What are the cost of this choice? And all the stuff I’ve done in the past it doesn’t… We talk about what we call sunk cost, that doesn’t matter. It’s thinking about the world in terms of that kind of cost benefit analysis, thinking about the world in terms of people who respond to incentives. We wanna understand people’s choices. What are the incentives they’re facing? What knowledge do they have available to them? How does that inform their choices?

10:18 Steve Horwitz: I’m dedicated enough to the economic way of thinking and married a woman who is an adoptee of some of the economic way of thinking that our wedding rings are actually engraved with MB greater than MC which is basically the economist way of saying, “It was worth it.”

[laughter]

10:37 Trevor Burrus: I just had to wrap my brain around that for a second.

10:41 Steve Horwitz: Even you guys may know Jacob Levy, but Jacob Levy called that the geekiest thing he’d ever heard of. Now when Jacob…

[chuckle]

10:46 Trevor Burrus: Yeah, it’s a lot, that’s saying a lot.

10:49 Aaron Ross Powell: So was that your idea or her’s?

10:51 Steve Horwitz: Actually, it was her’s.

[chuckle]

10:55 Trevor Burrus: So you…

10:56 Steve Horwitz: It’s why I’m sticking around.

10:57 Trevor Burrus: You mentioned the choice aspect. Would it be fair to say that economics is rooted in individual choice? Because sometimes I see economics that doesn’t seem to be talking about choices that much. I’m thinking of big macro equations, or monetary theory, or things like this that that don’t really talk about individual choice.

11:16 Steve Horwitz: Yeah, I think that’s correct, it is, or at least should be rooted in individual choice. And again, ultimately, only individuals choose. Of course, individuals make choices within the context of organizations, like household, and firms, and non-profits and so on. But even when we say things, we say things like, “Walmart lowered its prices today.” We’re… That’s fine, but we also recognize it’s a bit of a metaphor. It really means that some individuals within the organization we call Walmart, decided to make that change. So, yeah, it is rooted in individual choice.

11:53 Steve Horwitz: And, I think, the other way of thinking about that is, my friend Pete Boettke would say, “All good economics is relative price economics. It’s about individuals facing the prices of various goods and making their decision based on the relative price, the price of one good compared to another.” So, when we think about things like macro, part of the problem with macro the standard macro is that, that again and yeah, it’s not rooted in individual’s choice. It’s sort of looking at the way in which aggregates bump into each other and are correlated with each other. I think there’s ways to do macro that get it back to individual choice, I wrote a whole book about it, and done other things on it. But yeah, in the end, good economics is about tracing out the patterns of unintended consequences that emerge from the choices individuals make in the face of uncertainty and based on the information and incentives created by the price system.

12:49 Aaron Ross Powell: What does that then have to do with money? I mean, where do we get… What you’ve described, sounds so different from the… If you say, “I’m an economist,” and what people think you do, that why… What’s this big disconnect?

13:04 Steve Horwitz: The way that Mises would have put it is, we study… Economics is this sort of broad category of the study of human action, as he called it. He wanted to actually call it sociology, I think… He wanted the term “sociology” for it. But within that broad study of human action, which is kind of what I’ve just described, Mises also talked about what he called catallactics which is the study of economic exchange and monetary exchange, in particular. So, when economists, historically, we certainly talked about economics, we were thinking in terms of the prices that emerge when people exchanging money for goods, and we certainly talk about how do firms profit maximize, and all those kind of questions, that are money questions.

13:52 Steve Horwitz: But the principles that underlie that analysis can be extended to any situation that involves, again, sort of constraint… Many [14:04] ____ constrained optimization. But certainly, any situation where we face scarcity, where we have to make choices, where we have to… We have to act on the basis of determining benefits and cost. And the work of people like certainly Gary Becker, and others in the mid-20th century, that extended economics upward in its imperial march from money and finance into areas like the family and [14:29] ____ this sort of other places that were occupied by other disciplines certainly is evidence of that, that the fact that economics is really about human action, and choice, right? It just so happens that a lot of those of the ones that interest us, most frequently, are the ones that involve money and prices and so on.

14:47 Trevor Burrus: I’m interested if you could talk a little bit about… A little sketch of economics in the 20th century in the sense of one person we always hear about is, Samuelson, for example, and the influence of people like Paul Krugman and how that all kind of fits together within the professional economist discipline that you’re in, and the influences, and then the people who are kind of disagreeing with that. How does that work and how has that been in history?

15:14 Steve Horwitz: Wow. Let’s see if we can condense this down.

[laughter]

15:18 Steve Horwitz: So, I think the key… A couple of key events here. Sort of, economics, really, until about the 1920s was primarily, for lack of a better term, a kind of literary discipline in the sense that, most of economics, if you pick up an economics book from the late 19th, early 20th centuries, it’s mostly words, and if there’s math, it’s in the footnotes. And I think what happened in the ’20s and ’30s, was economists… Changes in sort of philosophical understanding of science and economists wanting to… Getting a bad case of physics envy, began to think that the way you did science was through quantification and modeling and so on. And in the ’20s and ’30s, that approach, which grew out of some economics of the late 19th century in legitimate ways, began to become dominant.

16:15 Steve Horwitz: I think there’s an interesting story to be told about World War II which sort of created incentives for economists to continue to develop those kind of mathematical models, and certainly the Great Depression, where economists were sort of relied upon to get us out of this mess even though, arguably, we were somewhat responsible for getting us in it. And also, the Keynesian models that developed in the 1930s were these sort of aggregate models that required measurements and required quantification. And so by the end of World War II, the discipline has become much more of both theoretically quantified and empirically through econometrics quantified.

16:57 Steve Horwitz: And a guy like… What Samuelson does is sort of write two books, the Foundations… His book… The Foundations book which was sort of the one for the economist but then his principles textbook, both of which laid out economics as this sort of applied mathematical discipline. And those textbooks were used for generations in undergraduate, graduate school. I joke about my dad is that he… He’s kind of a… He’s still alive. Sort of a, moderate liberal ACLU Democrat type, right? But he has this incredible, sort of, understanding of private property and incentives, and so on. He might’ve well been a libertarian if he hadn’t had Samuelson’s textbook when he was in college.

[chuckle]

17:43 Steve Horwitz: That’s my joke. So… But even Samuelson’s book really wasn’t about the ideology, by the way, [17:47] ____ but though the ideology was awful at it. In fact, he has that famous graph that the Soviets would pass us, right? That he kept revising, edition after edition, when it turned out not to be true.

17:58 Steve Horwitz: But the real thing the people like Samuelson did was to recast economics as this exercise and constrained optimization all the time and that is still, fundamentally, the way it’s taught today. And there have been changes and advances, and I think the big change since the ’60s or ’70s… In some ways the late ’60s were about the worst period for economics. It was both quantitative in those ways, but it was also completely bought into the sort of Keynesian demand management story, and the market failure story, and the belief that the government could solve problems was tremendous. And then, we get the public choice revolution, we get other kinds of changes, plus the empirical failure of both socialism and Keynesian-ism.

18:47 Steve Horwitz: And since the ’70s, while the discipline remains highly quantitative in all those ways, the kind of work that are done by public choice economists, by Austrian School economists, by what’s so-called new institutional economist, that really give much more scope to much more… Treat markets as having been much more robust than we thought before and recognizing how brittle government is has sort of changed the kind of way textbooks treat things. I think if you looked at a textbook today versus 40, 50 years ago, it would be more sympathetic to markets than it was back then.

19:23 Trevor Burrus: You mentioned this term, constrained optimization, it sounded like you were kind of negative about what that means. And what does that mean?

19:31 Steve Horwitz: Well, it simply means that what… The fundamental insight of economics is that, we’re always… We have preferences, there’s things we’d like to do, and goals we’d like to accomplish, but we’re always facing constraints. Our knowledge is scarce, resources are scarce, everything’s scarce, right? And so what we try to do is optimize, given our preferences and given those constraints, what’s the best we can do? And I think that as I’ve just stated it, I think that’s perfectly fine. What it often becomes… Even the economics textbooks, and economic courses, you can draw this up using calculus and you have to make all kinds of assumptions about the stability of people’s preferences, and then everybody knows all the prices they face and so on, right? It just ignores the sort of rich uncertainty and complexities of actual human life when we try to model it in that strict way.

20:27 Steve Horwitz: But the basic insight that we’re always… Even though we’re often uncertain about what our preferences might be, and exactly what the constraints are, we still go through life facing that, engaging in acts of constrained optimization. We probably don’t actually optimize, we sort of muddle through somehow, but still thinking about how do I… How do I get the most out of the situation that I’m in? What’s the best course of action for me, given what I’d like to accomplish and given the constraints I faced? That’s the basic economic attitude right there.

21:01 Aaron Ross Powell: We started this conversation with you saying that public’s understanding of economics was, if not good, at least getting better. That said, the public gets a lot wrong, and so I wondered if you could tell us what you think, what are some of the most pervasive or harmful, or as an economics professor, frustrating myths that the public believes about economics?

21:29 Steve Horwitz: Yeah. So a couple of things I would say here, I think the two biggest global ones are not of the belief that economic activity is a zero-sum game. That someone… When someone wins, someone benefits, that means someone else is losing, and so the flipside of that, not understanding that exchange is mutually beneficial and interactions in markets are mutually beneficial. I think that’s the, at the fundamental level, that’s a big one. I also think… I’m gonna give you three, I think.

22:06 Steve Horwitz: The second one is the belief that economies require some level of design and construction in order to be successful. Again, flipping it the other way, an inability to see the possibility of what Hayek called, spontaneous order, or undesigned order, or unintended order. And, for me, with students, I often work on that with sort of… If you think biological evolution, Darwinian evolution is correct and that which I’m not convinced all of them do [chuckle], but let’s assume that they do, right? You already understand what undesigned order is, and you don’t have a… You are fine with it in the natural world, but this is just the social world story, same kind of story. So…

22:55 Aaron Ross Powell: So, you’re advocating Social Darwinism, is what you’re saying?

[laughter]

22:58 Steve Horwitz: Yeah. I haven’t got that one yet. And actually, the joke of course is… And if anyone ever raised that, the joke is that historically it was the reverse. Darwin took that idea from the Scotts, so we should call biology, natural Smithianism or something like that, right? ‘Cause he took it from them.

23:17 Steve Horwitz: I think the third one is a little more subtle one, and it’s more of a macro one, but the idea that consumption drives the economy, right? That if we just buy more stuff, things are better, right? And that’s just wrong, and it’s wrong in the sense that that what would really ultimately matter is production investment, are what create wealth consumption, as the name suggest, consumes it.

23:42 Steve Horwitz: But the other part of that is, when we think about the business cycle, people, say, “Oh we have to get out of the recession by beefing up consumption.” Well, in fact, consumption is the least cyclical of all the components of GDP. Consumption stays fairly constant across the business cycle, what goes up and down is the investment. You know you’re in a recession when business people aren’t investing. So the real secret to avoiding business cycles is to not have those changes in… Problematic changes in investment, and if you’re in a recession, you want policies that encourage firms to invest. So, that’s another one that I find, and that one is all over the popular media and [24:21] ____ in people’s heads, that when they buy stuff, they’re doing a good thing for the economy.

24:26 Trevor Burrus: Now, you mentioned these three which are, sort of, theoretical problems with how people are looking at different policy issues. But previously, you also mentioned inequality a couple of times, which I’ve noticed has become an accepted truth over the last 10 or so years that everyone has to acknowledge that inequality is increasing. But you’ve said, you challenge that idea or at least it’s not as simple as people think.

24:52 Steve Horwitz: Yeah, so… What I like to say is, it might be true that measured income inequality, compared at two points in time, is increasing. So, given how we measure it, right? Usually it’s sort of some measure of household income, and if we compare, say, 20 years ago with today, and say, what are the top 20% get today versus 20 years ago, what the bottom 20% get. By those kinds of measures, yeah, I think there is inequality, and measured that way, it’s probably increasing. But that ignores a whole bunch of issues that we might wanna think about here. One, it ignores income mobility. It’s not the same people who are rich in year one as in year 20, and it’s especially not the same people who are poor in year one as in year 20. So, people frequently start out poor, and most people work their way out of poverty over the course of some number of years. So when we say inequality is increasing, it’s not like the people who started rich or all of a sudden richer, and the people who started poor are suddenly poorer, right? So that’s the mobility question’s part of it.

26:03 Steve Horwitz: The other question is, what about absolute living standards, as your Cato colleagues at humanprogress.org, have so aptly demonstrated. Poor and middle class Americans, and I’ve contributed to this literature too, live way better than we did in the 1970s. I’m old enough to remember the 1970s, I know things are better now. And, in fact, poor Americans today, by a number of measures, live better in material terms than average Americans did 40 years ago. So even if it’s the case that inequality is growing, should that bother us if the real… Real ability of the poor to consume, and to sort of, have material goods and other sorts of things, is better than it used to be. So why are we worried about inequality, is another question.

26:49 Steve Horwitz: And then, I think the last issue is, to the degree it’s true that inequality is increasing. To what degree has that been the result of what we might call regressive regulations? Things like zoning laws, and occupational licensure, and minimum wage, and so on, that make it more difficult for folks who start out poor to get richer and other policies that redistribute from the poor to the rich, corporate bailouts, and all those kinds of things. So I think, when you start asking those kinds of questions, the inequality debate looks a lot more complicated than the rich are getting rich and poor are getting poor.

27:30 Aaron Ross Powell: This question is fairly abstract, so let me see if I can try to make it make sense, but you… Earlier on, you talked about how when we’re kind of looking at this economic way of thinking, we’re looking at people’s preferences and they’re trying to satisfy their preferences within a system of all sorts of constraints and scarcity and so how are they going to behave? What decisions are they gonna make? And so there’s… On that side of economics there’s a descriptive side so you can as an economist, you can say, “Look, this is how I think the world works and I can use that to describe phenomenon that are happening.”

28:07 Aaron Ross Powell: But economists and that all the people in this building at Cato who do economics work are making normative assertions as well. They’re saying like not just this is how things work, but here’s how they ought to work or here’s how you, whether you’re a policy maker or a personnel, or another kind of person of the world, ought to behave. That those are all about if preferences vary, right? Like people… I have different preferences than you do and we can kinda talk about our preferences without valuing them differently. But in order to make these normative claims that economists make or when we say we ought to free up markets and it’s wrong to over-regulate or it’s wrong to restrict people’s economic choices, or whatever, there’s a value system at work there. And so how are we…

29:03 Aaron Ross Powell: What are those values? Is it simply just maximizing people’s preference satisfaction is always good. And does that value then play into these kind of concerns that we have, when we say this is wrong for an economic standpoint, but maybe the public simply has a different… A set of different values, and so it’s not wrong from the perspective of those values.

29:29 Steve Horwitz: Yeah. Wow. Okay. So I think sort of trying to satisfy as many people’s preferences as possible is part of the story, right? But I think we have to even maybe step back one more abstract from that, right. The way I often put it is, if we want a world of sort of peace, prosperity and social cooperation, that is, if we want a world of progress basically. If we want a world where human beings live longer and better and more fulfilled lives, if we want a world, especially where we reduce the number of absolutely poor people, if we want all of those things, then what economics can tell us is what sets of institutions are most likely to produce those kinds of outcomes in general, right?

30:25 Steve Horwitz: So the normative part becomes look, you know, to people who might sort of think that you need government intervention to do X, Y, or Z, often the response is to say, “Well okay, I understand the goal you want to achieve here, but the intervention is not going to achieve that goal and in fact, letting markets work and under the right institutional framework, is much more likely to achieve it.” So take simple examples, like rent control, if the idea is how do we make sure there’s plenty of affordable housing for people? Well rent control is not gonna do that. It’s gonna create shortages, it’s gonna reduce the quality of housing, it’s gonna allow… Give all the power to landlords, because anytime you have a shortage economy the seller has power. Instead if we wanna think through how…

31:17 Steve Horwitz: You might say, “I agree with your goal here, creating more affordable housing for people,” but let’s look at the ways in which, for example, the supply of housing is being restricted by zoning laws, by historical preservation laws, by all kinds of things that NIMBY stuff that make it hard to create more housing and in so doing bring the price down. So just as an example, I think, if we can share those general goals and then the normative judgment comes in because one has that set of goals, that set of call moral values, whatever everyone wants to call them, right? And you can’t escape that at some level. That’s always part of the story. And I think you… Part of the argument for economists is if we want to achieve those things here are the institutions and here are the practices we think are best to do that. Is that the kind of thing you were thinking about?

32:12 Aaron Ross Powell: Yeah, I guess, I mean so to give a kind of an example of where this we might… So we argue that we should, that increasing immigration brings with it often enormous positive economic growth and all sorts of other benefits that a country that has much more liberalized immigration is going to be wealthier, see more economic growth, better labor markets, and so on. And we say, “So therefore, if you want to restrict immigration, you’re just hurting yourself, you’re hurting the country and…

32:44 Aaron Ross Powell: But those kind of economic arguments for immigration seem to depend on what people care about is increasing wealth. When it might be that they care about other things that they place value in something other than economic growth and instead want solidarity or more of a static culture or certain values, or we rally against tariffs ‘cause tariffs look like just mind-numbingly dumb economic policy. But maybe it’s because we don’t… We free marketers don’t value American industry and the very fact that Americans are employed doing things even if as a result T-shirts are more expensive or whatever. Or staplers… It’s good to have staplers made in Pennsylvania, even if those staplers are bad, simply because they’re American staplers.

33:45 Aaron Ross Powell: And so that’s where I guess I get to this question of value is that it feels like a lot of the time economists are simply saying to people either on the one hand, that there’s the argument you gave, which is you can take their values as they are and say, “But you’re mistaken about how to maximize those. How to fulfill those. You’re getting the details wrong.” But a lot of the time, it also feels like economist are basically saying, “Well those aren’t things that you should value as much as you should value maximizing wealth.”

34:18 Steve Horwitz: So I think two things about that. I think at some level, if someone makes the argument you just made, I want them to make that argument eyes wide open. I want them to look at me and say, “Yes, I think we should make staplers in America because having American industry is good. And I understand that it will impoverish many of my fellow citizens and it will put them at each other’s throats because they’re fighting over a shrinking pie. But I think it’s so important that I’m willing to pay that price.” If someone says that to me, I can’t argue with them because they’re not wrong. That’s a value judgment. It’s their value saying they prefer those other things to the peace, prosperity, and social cooperation. At that level, I can’t. You can’t. And again, Mises made this point too where he said, “If someone doesn’t… Isn’t interested in those other good things you’re never going to per… You can’t persuade them that your means are the right means to that end.”

35:19 Steve Horwitz: I do think another point though that’s worth mentioning here is: You can’t eat GDP, but you gotta have… Many of the other things that people often say they value are possible because we have a materially progressing economy. We talk about how much we value people’s health. But unless you got, in the broad sense of the term economic growth, you can’t get the resources, you won’t get the innovation to provide the medicines and so on, that can cure diseases and keep people healthy. So in that sense, right?

36:04 Steve Horwitz: And I do think many economists make the mistake of sounding like material stuff is the end point. That’s the goal. But for me, it’s those… Even that is a means to these other kinds of things. And I love the word progress here. I think the word progress, even though we can’t often define it very precisely. Maybe like pornography, we know it when we see it. But that’s the thing. Progress to me means getting better at all those things that human beings care about.

36:36 Trevor Burrus: Another thing that economists often discuss is how the price system lets goods go to their highest and best uses in many ways that if someone really wants to purchase some piece of land to put a factory on it, that demonstrates that it’s the highest and best use of that land over a different use of the land. But does money really, actually correlate to those kind of values? This goes with Aaron’s question. If Rush were to announce a concert and come to your hometown to play, and you’re a huge Rush fan, and you would want to get in line to buy Rush tickets, but also you mistakenly bet on Michigan to get into the College Football Playoffs so you lost all of your money.

37:19 Steve Horwitz: You’re killing.

37:21 Trevor Burrus: I’m just… Yeah. I’ve it doubling down on this. So you lost all of your money, you literally have no money. So you can’t buy a Rush ticket, but you are actually the biggest Rush fan. Rush tickets are not going to the biggest Rush fans. They’re going to people who have a lot of money who may not be the biggest Rush fans. So is that a just way of distributing something like Rush tickets or something else like food where We’re not… We’re distributing it by how much money you have and not by how much you actually need it or want it.

37:49 Steve Horwitz: Right. So… Alright. When I teach this sort of idea in Intro, it’s great to loop us back to where we were, sort of talking more concretely about teaching. When I teach about the role that prices play as sort of allocators, in the way that we’re talking about, one of the things I do is I say to the class, “Look. Let’s think about all the ways that we could allocate resources.” Prices are one. Paying money for something is one. I said, “Imagine we have a big pile of stuff in the middle of the floor here. How can we divide it up? How can we determine who gets it?” They’ll quickly come up with some ways. We can distribute it randomly. Does your driver’s license end in an even or an odd number? We could have you line up. That’s another one. We could ask you to write an essay about why you’re the world’s biggest Rush fan. Why you deserve this. We can talk about some notion of need. Or we could also play Fight Club. I just say, “Come get it,” and you guys could come down here and get into a big old rumble over it too.

38:56 Steve Horwitz: And one of the things they say is all of those are at least potential ways of allocating resources. In that sense, none of them are wrong. Okay. They have costs, and they have trade-offs. People who can afford to wait in line will benefit from the line waiting system. People who have much more brute strength than I do will benefit from Fight Club. Although I do point out to them, if you go with Fight Club, the first thing people are gonna do is spend lots of resources on baseball bats and whatever. And suddenly, we’re getting very costly, a very costly allocation system.

39:29 Steve Horwitz: Whatever the cost and benefits of all of those, using prices to allocate resources, whatever flaws it has, and you’ve identified one. You might have a deep desire for something, but if you don’t have the money, you can’t express that in the way, in the lingua franca, in the way that matters. But a huge advantage of the price system is, unlike all the rest of them, the price system also encourages people to supply more of it. When prices change and when people are willing to pay a lot for something, that sends a signal that encourages greater supply. Even in my example, I assume that there was this pile of stuff on the floor that we’re gonna allocate, which leaves open the question, “Where’s the next pile of stuff gonna come from?” And the price system solves both of those problems. It helps us allocate the existing pile of stuff, and helps us, and gives us an incentive to create more. One of its flaws, is what you’ve identified.

40:21 Steve Horwitz: But, a system that did even as much as I might think that I would have the most powerful claim for front row tickets to this imagined Rush concert, even if I couldn’t afford it, because I’m such a long-time devoted fan that certainly… I might imagine again, myself, having that, but that doesn’t make Rush tickets appear in the way that being willing to pay for them does, willing and able to pay for them does. So yeah. It’s a problem with allocating by price and by monetary exchange, but I think that’s a smaller problem than the problems that all those other systems face.

41:02 Aaron Ross Powell: Continuing this topic of economic education, we’ve talked throughout this episode about you teaching students. But there’s also… You’re now economics editor for libertarianism.org, we at the Cato Institute are trying to communicate these ideas to the broader public, and not just university students. And we’re trying to do it from this obvious perspective of economic liberalism, of pro-free markets, of libertarianism. So are there… I guess, what do we as libertarians… Are the things that we do wrong when we’re communicating on these ideas? Or are there ways that we could be better at communicating economic ideas?

41:50 Steve Horwitz: Yeah. I think we’re still… I want to put this carefully. We’re still overly plagued by the Rand [41:58] ____ virus.

[laughter]

42:03 Aaron Ross Powell: That was the careful way of putting it?

42:05 Steve Horwitz: Libertarians tend to talk about free markets and economic ideas in terms of both the heroic individual or that markets enable me to get the stuff I want. That kind of way of talking. And again, moving away from Rand, or as we were talking about before. Or in terms of this sort of very materialistic kind of measure of things. And I think we would do ourselves a better favor, if we were to do a couple of things. We would be better off talking about, again, economics as this realm of human choice, where we all have different preferences, different knowledge, we’re all facing constraints, and we’re all trying to talk to each other and figure out how to make the best use possible of the limited stuff that we have. That’s the challenge. It’s figuring that out.

43:01 Steve Horwitz: And, also framing that in terms of the reason we think that markets work well, and that one needs to understand economics, so that one can appreciate that, is precisely because it’s about these questions of progress, and particularly these questions of progress for the least well-off. We have one of the most amazing accomplishments of the last couple of decades is the dramatic drop in global poverty. And, I have no doubt that that is due to the general freeing of economies across the globe, in particular freeing of trade across the globe has just…

43:37 Steve Horwitz: If you brought someone back from 30 years ago, it’s incredible what’s happened, right? And sort of reminding, as libertarians, reminding people that the reason we care about freedom in general, but certainly the reason we care about economic freedom and economic liberalism is ‘cause it improves people’s lives and disproportionately improves the lives of the least well-off among us. And so I think there’s some rhetorical challenges there that we’re not always really, really good about.

44:05 Steve Horwitz: And one other thing I should mention too. I think there is a tendency among libertarians when they talk about economics, to separate the world into Austrians and some Chicago school economists over here. And everyone else is a Keynesian socialist over there, right? It’s just so frustrating, the way in which libertarians are quick to demonize and sort of overly simplify. What are more complicated things in that? There’s plenty of non-Austrian, non-Chicago economists out there who are appreciative of market, and who are not in fact Keynesian. Those are two orthogonal to each other.

44:50 Steve Horwitz: I even saw on Facebook today… Apparently Krugman is doing this online course of some sort, right? And someone, I think was joking, but I never know. But between libertarians and my Facebook. I never know. But sort of said, “Wouldn’t be kind of cool to get some libertarian friends together and take this class,” and sort of sort of suggesting that they would be critical of Krugman. “We’d probably get thrown out, right?” And I’m like, “Guys, you would be the first one’s yelling if a group of students walked into my classroom and did that to me. Why, why… And the guy’s got a Nobel Prize for a reason.” “His New York Times columns are terrible. Yeah, he’s become a partisan ideologue.” “Yes, but he actually seriously contributed to our economic understanding and Pop Internationalism is a great book.” So, that kind of stuff… As you can see my blood pressure starting to rise. That kind of stuff drives me crazy.

45:41 Steve Horwitz: In fact there’s another meme out there… I think it’s a Homer Simpson one, right? And Simpson is lying in bed with smoking a cigar, and the caption is something like, “What libertarians are like after they read one economics book. Suddenly they know everything.” No, you don’t. You don’t. And I know your heart’s in the right place, and I’m glad that you think economic freedom is important. But in fact, you just… You probably don’t know as much as you think you do and you need a little bit of humility just to sort of be willing to sort of understand that it’s probably more complicated than you think it is.

46:19 Aaron Ross Powell: With all of that in mind, let’s turn to this new role that you have taken on as Economics Editor at libertarianism.org, which I said at the beginning, is kicking off this month. Can you tell our listeners what your goals are as economics editor, and maybe what they can expect to see?

46:41 Steve Horwitz: Yeah. I think what I would like… What I’m asking people to contribute, let’s put it that way. So I think that reflects the vision, is I want that site to be able to do one thing mostly, and a second thing a little bit. Mostly to explain and explore key economic concepts in a way that’s accessible and useful to precisely the kind of people we were just talking about, right? Sort of libertarians who are not especially knowledgeable about economics but genuinely sincerely wanna learn more. So this is primarily an exercise in understanding a concept from economics, understanding something about the history of economics, that story we were talking about a little bit earlier.

47:32 Steve Horwitz: And I think there’s space in there too for application type pieces. But for me, the focus of even of those would be on making sure we understand the principle, or we understand the concept, or we understand how economists talk about these things. And all with an eye towards why does this matter for people who care about economic liberty? I hope… And I’m encouraging my contributors to sort of write in a way that while it’s… The Liberty content is clear, it’s not so heavy-handed and overwhelming that these things couldn’t be useful in a classroom, right? Because I think good economists who can write well and write something like this that becomes a piece on the web that can be shared in ways that I think would be really useful, and that students might really get a lot out of.

48:23 Steve Horwitz: So I expect these to be in that sense somewhat didactic, but I’m hoping to get writers who are also outstanding teachers, and who can explain these concepts in clear and accessible and cleverer ways with excellent, illustrative examples. I think some of them will be sort of short blog posty op-ed length type things, 800 words. But I have some ideas for longer form pieces that I hope I can see appear in the next… Over the next bit. So I think it’ll be a wide range of stuff, but I think of it as a resource for libertarians who want to expand their knowledge of Economics, and want it in a form that, again, is clear and accessible.

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49:16 Aaron Ross Powell: Thanks for listening. Free Thoughts is produced by Tess Terrible. If you enjoyed today’s show, please rate and review us on iTunes, and if you’d like to learn more about libertarianism, find us on the web at www.libertarianism.org.