E C O N O M I C S

Overview

Economics is more than the study of money. It is intimately bound up in technology and politics and human nature itself.

At its heart, economics is about the satisfaction of human desires. At its lowest levels, that means daily subsistence for oneself; it means the movement of technology for survival. But as the wealth of clusters of individuals increases, economics begins to mean the satisfaction of ever more abstract desires. Finally, when group wealth has reached the point that even most abstract desires are being met, the focus of economics shifts from the individual to ordering the desires of others.

This segment will study economics from that perspective, with a special emphasis on what happens when--always for the noblest of reasons--individuals are treated as incompetent to make their own economic decisions.

Let's start with a review of the economic effects of the various kinds of political systems enjoyed throughout human history. This handy chart has appeared on the Web in many places; this is my modified version of it.

Two Cows: Political Economies Through History

My Views

Capitalism, or, The Trouble with Karl

The trouble with Karl Marx is that he was partly right. In his works with Engels--primarily Capital and The Communist Manifesto--Marx accurately described some of the economic ills of his age. The problem is that it's easy to conclude that, if his diagnosis of economic inequality was accurate, then his prescription for curing that problem must be accurate, too... but that's not so.

Marx's "solution" to what he perceived to be the imperfection of economic inequality followed directly from his utopian vision, his impatience and his arrogance. Like most liberal conceptions of human nature, Marx's dialectic presumes not only that "fairness" is a necessary social good, but that it can be mandated by the enlightened for immediate application, rather than being a product of voluntary behavior that must be encouraged (by example) in individuals over time. This early manifestation of liberal impatience with human imperfection thus called for the quick imposition of economic fairness by an elite.

The concept of "ownership" was held to be merely a primitive belief system that would be replaced by the more modern theory of economic equality, as taught by those whose refined sensibilities could appreciate its moral superiority. The bourgeoisie would complain at being dispossessed, but their clinging to the outdated and immoral dogma of "ownership" just proved that they needed someone to decide for them their needs and abilities. With the liquidation of the middle class and the suppression of subversive intellectuals, the proletariat would become the only class, thus eliminating all class distinctions and producing perfect fairness.

But this ignored the question of how to insure that those elite were themselves capable and willing to apply perfect fairness to everyone, and brushed aside the question of whether perfect fairness and humanity could coexist. The failure of Marx's presumptions--and of those who have chosen not to question those presumptions--made his prescription for improving the human species wrong. And it made implementing that prescription muderously evil.

The trouble is, although Marx's prescription was wrong, his description of the unequal distribution of wealth in his day was accurate. (Just as Adam Smith's description of the evils of unrestricted mercantilism was accurate.) In fact, Marx was right to object to the means of production being held solely by a few wealthy individuals. Those who labor ought to control some of the capital they create; this provides incentive to take care of the capital created, and to create more of it. This is the function of the concept of ownership.

But Marx and Engels rejected this self-interested aspect of human nature as unenlightened. Rather than trust individuals to decide for themselves the best employment of the the capital they help create--as guided by the moral institutions Adam Smith insisted were necessary if capitalism were to promote the common good--the liberal impulse is to distrust individual enterprise. In the utopian vision, the mere creation of capital is not a sufficient cause for owning that capital. Being able to create capital is not proof of ability or willingness to "fairly" employ that capital. Thus Marx and Engels concluded that all capital should be nationalized, to be controlled by the socialist state until the people became capable of perfect selflessness. At that point (so the theory went) the state would wither away and perfect communism--perfect fairness--would thrive.

As the essay on communism shows, that theory was spectacularly wrong.

Capitalism, on the other hand, came up with private investment in public corporations as a means by which to transfer the control of capital from a few individual owners to many smaller part-owners. It had the effect that Marx claimed to desire in that individual ownership of capital tends to be more evenly distributed when individuals are confident that they will be able to benefit from that ownership. As more people try to create and acquire capital, everyone's lot improves. But this is achieved only by recognizing the reality of human nature, of the self-interested desire of real, individual human beings to improve their material conditions. Like a judo expert, capitalism works with the human desire for material security instead of fighting it. By strongly defending the principle that capital, as a form of property, can be owned, individuals are reassured that their labor will be rewarded in the material terms that they desire. In this way, capitalism offers individuals an incentive to labor voluntarily that other economic systems cannot match.

Capitalism has a couple of great advantages over other systems. By far the most important is the fact that an individual will work much harder for himself and his family than he will for some distant bureaucrat or commissar. To put it another way, voluntary labor is more productive over the long run than involuntary labor.

But more than doing the same things better, capitalism does what other systems cannot: it encourages the voluntary cooperation which leads to the creation of capital that can't be generated otherwise. While some forms of capital may be created by an individual person, many more forms require the cooperative efforts of two or more persons. Capitalism's unique focus on upholding the individual's right to voluntary employ his capital as he sees fit tends to encourage more cooperative effort than other systems which assume that individuals cannot adequately decide for themselves what's in their best economic interests.

Capitalism thus produces public good--that is, products and services that improve the lives of everyone--even though the specific employment of capital isn't directed by one all-controlling state authority. Each individual owner of capital may be looking out only for his own good, but he is the person best fit to do so. After all, it's his capital that's on the line. If he uses it poorly, he becomes poorer--that's an incentive to wisdom no distant bureaucrat or central planner or academic theorist can hope to match.

An individual's voluntary cooperation with others to increase their mutual capital helps to create an environment where every owner of capital knows that cooperation is both possible and profitable. And this environment of trust leads not only to the generation of more capital than any other system can produce, it directs that capital to where it does the most good for the most people.

It is as though an "invisible hand" were at work... just as Adam Smith said. To paraphrase Winston Churchill's famous evaluation of democracy: Capitalism is without question a flawed economic system... but it's better than any other system we've thought of so far.

Resources

Published

Hazlitt, Henry -- Economics in One Lesson, Crown, 1979. The best introduction to economic reason. Clearly and intelligently written, this book manages in its few pages to demonstrate the simple errors at the heart of so much economic mythology. (The chapter on the "minimum wage" ought to be required reading for all taxpayers; it is a case study in repudiating the single worst political problem of our time: impatience.)

Muller, Jerry Z. -- Adam Smith in His Time and Ours: Designing the Decent Society, Free Press, 1993. A long-needed look at Smith's great achievement as a work of social philosophy, rather than as pure economic analysis. Muller successfully shows how Smith, even 200 years ago, argued not for unrestrained capitalism über alles, but for what we would recognize as an active middle way between modern liberalism, conservatism and libertarianism, directed at achieving the maximum freedom of individuals at the minimum expense to a good and moral society.

Smith, Adam -- The Theory of Moral Sentiments, Liberty Fund, 1982. The often forgotten other side of Smith's purpose in advocating capitalism, this book was based on his lectures as Chair of Moral Philosophy at the University of Glasgow.

Tilly, Charles -- Coercion, Capital, and European States, AD 990-1992, Blackwell, 1993. An interesting modern study of the formation, maturation, and dissolution of European nations, as seen in the dual contexts of economic and political change.

Von Mises, Ludwig -- Human Action: A Treatise on Economics, Laissez Faire Books, 1966. The magnum opus of Mises, this work encompassed his broad conception of "economics" as expressed choices of human behavior, based on assigning value to alternatives. From this, Mises produced a model underlying what we separate as economics, psychology, sociology, and politics.

WWW

The Dismal Scientist an on-line magazine of economic indicators.

U.S. Census Bureau Economic Clock U.S. Census Bureau economic statistics.

Capitalism FAQ an introduction to the theory and practice of capitalism, with an emphasis on debunking some popular myths.

Milton Friedman a Milton Friedman Web page.

The Friedrich Hayek Scholars' Page an F.A. Hayek Web page.

The Wealth of Nations the text of Smith's work, An Inquiry into the Nature and Causes of the Wealth of Nations.

Bomis: The Ludwig von Mises Ring a set of links to resources about Ludwig von Mises.

Laissez Faire Books good resources on economic issues.

Economist Jokes jokes about economists and economics.

International Financial Encyclopedia an encyclopedia of financial and economic terminology.

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