Mises on Schools

Ludwig von Mises:

Education rears disciples, imitators, and routinists, not pioneers of new ideas and creative geniuses. The schools are not nurseries of progress and improvement but conservatories of tradition and unvarying modes of thought. The mark of the creative mind is that it defies a part of what it has learned or, at least, adds something new to it. One utterly misconstrues the feats of the pioneer in reducing them to the instruction he got from his teachers. No matter how efficient school training may be, it would only produce stagnation, orthodoxy, and rigid pedantry if there were no uncommon men pushing forward beyond the wisdom of their tutors. [Theory and History: An Interpretation of Social and Economic Evolution , p. 263]

Laissez-Faire Capitalism

I've done quite a bit of reading lately concerning what different people have to say about capitalism. One thing to notice is that capitalism seems to have hundreds of different meanings. Long ago, I memorized the definition as "private property ownership of the means of production." This definition was also specifically contrasted with socialism, which was defined as "government ownership of the means of production." As you can guess, I tell the students in my courses this is how we should define capitalism and socialism.

I have also tended to see capitalism as Adam Smith's "simple system of liberty." With my recent readings I've encountered authors who call capitalism: Financial Capitalism, or Global Capitalism, or Corporate Capitalism, or Free-Market Corporate Capitalism, or Consumerist Capitalism, or Neoliberal Capitalism, or Disaster Capitalism. Not one of these capitalisms corresponds with my thinking of capitalism as Smith's simple system of liberty.  My concern is that when I use the word capitalism I am thinking about liberty while often my listener is thinking I mean one of these capitalisms.

To make these matters worse in my opinion, many people, perhaps most people, say that our system of political economy in the United States is capitalism. Certainly our system of political economy is characterized by private property ownership of the means of production, but our system of political economy is not Smith's simple system of liberty.  Confusion seems to characterize the analysis of capitalism.

What to do? I've recently read a number of people, who see capitalism much as I do, discussing whether or not to stop using capitalism as the word for "that simple system of liberty." Because capitalism has come to have so many different meanings, I am tempted to try to stop using the word. 

Or perhaps I can follow the lead of Deirdre McCloskey and say that I'm cool with just about any definition so long as the definition does not tautologically mean capitalism is bad:

I don't much care how "capitalism" is defined, so long as it is not defined a priori to mean vice incarnate.  The prejudging definition was favored by Rousseau -- though he did not literally use the word "capitalism," still to be coined -- and by Proudhon, Marx, Bakunin, Kropotkin, Luxemburg, Veblen, Goldman, and Sartre.  Less obviously, the same definition was used by their opponents Bentham, Ricardo, Rand, Friedman, and Becker.  All of them, left and right, have defined commercial society at the outset to be bad by any standard higher than successful greed.

Such a definition makes pointless an inquiry into the good and bad of modern commercial society.  If modern capitalism is defined to be the same thing as Greed -- "the restless never-ending process of profit-making alone. . . ., this boundless greed after riches," as Marx put it . . . -- then that settles it, before looking at the evidence. 

Still, since capitalism is a word that has been in use for so long by both proponents and opponents, I don't think it is going to work to try to stop using the word.  I suspect that the list of capitalisms above is not so much the consequence of prejudging capitalism as it is the consequence of mistakenly thinking each of these as invariably what becomes of capitalism over time.  Why mistakenly?  Because it seems the authors using each of these capitalisms has neglected to see that it is a system of political economy they are criticizing, and that means their concerns involve government as much as the private property ownership of the means of production.

As I think about each of the capitalisms I've read about lately, it seems to me there is nothing inherent in private property ownership of the means of production that requires capitalism to become Disaster Capitalism or Neoliberal Capitalism or any of these capitalisms.  Nor does it mean we cannot say any of these capitalisms is not truly capitalism when we define capitalism merely as the private property ownership of the means of production.  After all, there is private property ownership of the means of production in the US today, and each of the authors using these types of capitalism are criticizing aspects of the US system of political economy today.

In the past I have not wanted to give in to the idea that there could be different versions of capitalism.  I've wanted to say, "Now, look here, capitalism means Smith's simple system of liberty.  It cannot mean what people call Disaster Capitalism, or Consumerist Capitalism."  But, perhaps I've been wrong in this regard.  Perhaps I should accept the approach of saying there can be different versions of capitalism, and then make very clear the version of capitalism I'm writing and talking about.  I think it might be good to follow the lead of George Reisman and make clear that I'm writing and talking about Laissez-Faire Capitalism:

Laissez-Faire Capitalism is a politico-economic system based on private ownership of the means of production and in which the powers of the state are limited to the protection of the individual's rights against the initiation of physical force.  This protection applies to the initiation of physical force by other private individuals, by foreign governments, and, most importantly, by the individual's own government.

I might want to modify this definition just a bit, but it pretty much expresses what I mean by capitalism.  So, my intuition is that the best way to try to reduce confusion is to explicitly say that there are different versions of capitalism, and therefore the task is not to learn about capitalism but to learn about Laissez-Faire Capitalism, and perhaps the other versions as well.

Enemies Into Friends

SHELDON RICHMAN:

Mises, Hayek, and Buchanan were onto something important. In the popular mind, economics is a cold, detached study of the Economy, almost as though it were a machine that acts on society. In contrast, the catallaxy is where people who disagree about the value of things peacefully exchange goods and services in a never-ending cooperative effort to improve their lives. It is indeed a community where enemies may be changed into friends.

Humankind's Natural Propensities

Peter Boettke:

I often tell students that humankind has demonstrated two natural propensities--to truck, barter, and exchange (as Adam Smith taught); and to rape, pillage, and plunder (as Thomas Hobbes taught us)--and which propensity is pursued is a function of the institutional framework within which individuals find themselves living and interacting. The life experience can be a virtuous cycle of wealth creation and healthier and wealthier lives, or it can be a nasty and brutish hell on earth.  So while economics cannot give us exact point predictions, it can, as a science, inform us of tendencies and directions of change as well as the wealth-creating or wealth-destroying capacity of the political economic system. [Living Economics: Yesterday, Today, and Tomorrow, p. 385]

The Doings of Man

Peter Boettke:

If we fail as economic educators, then we fail in our job as economists. . . .The wealth and poverty of nations is at stake; the length and quality of life turns on the economic conditions individuals find themselves living within.

The discipline of economics illuminates all walks of human life, and as such it is an ambitious science.  It explains the doings of man, whether in the marketplace, the voting booth, the church, the family, or any other human capacity.  The economic way of thinking is not just one window on the world; it is the only window that deals with man as a human actor.  This may sound arrogant to the casual reader, but economics also teaches humility.  As F.A. Hayek put it, "The curious task of economics is to demonstrate to men how little they really know about what they imagine they can design." [Living Economics, p. 383] 

Economics: The Primary Civic Duty

In Human Action Ludwig von Mises writes:

". . . As conditions are today, nothing can be more important to every intelligent man than economics. His own fate and that of his progeny is at stake.

Very few are capable of contributing any consequential idea to the body of economic thought. But all reasonable men are called upon to familiarize themselves with the teachings of economics. This is, in our age, the primary civic duty.

Whether we like it or not, it is a fact that economics cannot remain an esoteric branch of knowledge accessible only to small groups of scholars and specialists. Economics deals with society's fundamental problems; it concerns everyone and belongs to all. It is the main and proper study of every citizen." (p. 875)

Of course, this is a pretty easy thing for an economist to believe. I wonder how many others, economists and non-economists, agree with Mises?

The President & Prosperity

Yesterday PRESIDENT OBAMA SPOKE before the Business Roundtable and said this:

Whatever differences we have in this country, all of us have a stake in meeting the same goal, which is an America in which a growing prosperity is shared widely by its people.

Of course, the President goes on to talk about how this growing shared prosperity can be achieved through his favorite government policies. I agree with the goal of a growing shared prosperity. I wonder how this goal should be pursued?

I think we can discover the answer to this question by reading LUDWIG VON MISES:

“. . .there is only one way a nation can achieve prosperity: if you increase capital, you increase the marginal productivity of labor, and the effect will be that real wages will rise. (p. 88)”

If you read all of the President's speech, and/or if you follow the President's policy proposals, I think you will be forced to the conclusion that the President seems to know very little about how the country's prosperity was achieved, and very little about how the country's prosperity can be sustained.

Oh, and if you have some time, you will learn many more valuable lessons by reading the entire set of lecture by Mises, than you will from following all the speeches and policies of the President. I would go so far as to suggest that if you study these seven lecture by Mises the result will be that you will be one of the most economically literate voters in the country.

Middle School Economics 3

Here is another good one from the same middle school civics and economics textbook I've been quoting from:

“The federal government may sometimes intervene in business to help control prices. One way the government does this is by subsidizing, or giving money to, certain industries. For example, to make sure that people can buy flour, cereal, and other wheat products cheaply, the government might give subsidies to wheat farmers. Because they are receiving money from the government, the farmers do not have to charge high prices for their crops. As a result, prices for wheat products stay low.”

Yes, indeed, this has been the history of U.S. government intervention into agriculture, eh? Anyone else getting nervous yet?

UPDATE 10-24: Before I write about my concerns with this quote, I want to comment on the comments by Craig and Tim.

I agree with Craig that this illustration of a subsidy is incomplete because it does not include a consideration of where the money for the subsidy comes from. If government chooses to subsidize any activity, we can certainly confine our analysis of the impact of the subsidy to what happens after the subsidy is received. But, government gets the money for the subsidy because it has the power to tax. The power to tax means that the money for the subsidy is taken from people. It is money that people would have spent or saved if it had not been taken from them. Perhaps the subsidy will indeed result in more of some good thing, but because the subsidy money is taken from people it is is also the case that the money reduces other good things. A good economic lesson to learn is: "There is no such thing as a free lunch." That lesson could be taught by this textbook if it offered a more complete discussion of what must be the case with any government subsidy. But it doesn't.

Now Tim's comment seems a bit out of place relative to what I've quoted. I think he is thinking about how the U.S. government has actually intervened in the market process for wheat production, which has resulted in a greater quantity of wheat produced in the U.S. than would have otherwise have been the case. I think this is why he is considering crowding out wheat production in other countries. And, if you read my update to my first post on middle school economics, Tim's comment is another illustration of one U.S. government policy being at odds with other U.S. government efforts in some other arena. Certainly, this seems to me another important lesson for our middle school students to learn about how the real world works, but it seems it is going to be neglected.

My first reaction to the quote is that if the author wants to discuss government efforts to control prices, then the discussion should not be about subsidies. Actual government efforts to control prices have mostly involved government trying to set minimum prices (e.g., minimum wages) or maximum prices (e.g. rent controls).

A second point to suggest is that the author should not use an agricultural illustration for keeping prices down because historically the U.S. government policy toward agriculture has been to impose a price floor. Even in the middle of The Great Depression when so many people were without jobs and thus without their usual source of income, U.S. government policy was to impose a price floor on agricultural products so that prices would by higher than they otherwise would have been. Still today, the prices of agricultural products are often higher than they otherwise would be because of U.S. government agricultural policies. So, by choosing to offer up this specific illustration, it seems to me this textbook encourages our middle school students to think U.S. government policy is to keep agricultural prices low, which is pretty much the opposite what is true.

A third point is about what economic analysis suggests in the general result of a subsidy. If government offers to subsidize an activity, you are going to get more of that activity. Government really cannot directly subsidize a price. This is why government is likely to use a price ceiling if the goal is to try to keep a price low. Typically when economists discuss a government subsidy, the outcome is expected to be a higher price associated with the subsidized activity, not a lower price. And, I think this brings us back to the U.S. government policies toward agriculture. The government has wanted to subsidize farmers, but the way this was done was for government to impose a price floor. Instead of keeping agricultural prices low, the U.S. government has acted in an effort to keep prices for agricultural products higher than they would otherwise be, and these efforts have gone so far is to directly pay agricultural producers to take land out of cultivation.

Agricultural policy is a great case study for the economic analysis of price floors, but it is a really poor case study for discussing the results of government subsidies. And, if the author wants to discuss government efforts to keep a price low, then the discussion should really be about an illustration of a price ceiling, e.g., rent controls.

Middle School Economics 2

The following is a suggestion in a middle school text on civics and economics for teachers to discuss with their students:

The U.S. Economic System – Identify – What are some ways the government helps protect workers? By establishing minimum wage laws, laws guaranteeing workers' safety, and laws to protect people from discrimination – Make Judgments – Do you think that the U.S. Government should control parts of our economy? Why or why not? Possible answers: Yes – without government control some companies would take advantage of the public interest by polluting, creating monopolies, and other problems. No – the government should stay out of business because it interferes with people's ability to make a living.

The material in italics are suggestions about what the answers to the questions might be. As you might guess, I have concerns. How about you?

UPDATE 10-24: As I read the text, it seems to me at this point the students do not have sufficient understanding of the economic world to make these judgments. Perhaps this is proven by the answers given to the question how government helps protects workers. Minimum wage laws do not protect workers, unless you mean only the workers who keep or are able to get jobs after the minimum wage is imposed. Minimum wages lead to unemployment, which surely cannot be protecting those unemployed workers who would otherwise have had jobs. And, is it ironic? In the list of ways government helps workers we have both minimum wage laws and protecting people from discrimination. Of course, if people have preferences for discriminating in hiring employees, minimum wages laws reduce the cost of acting on such preferences, and thus lead to increased discrimination that government wants to protect people from. In other words, if students had sufficient economic understanding, they would perhaps be as perplexed as I am, when their teacher notes that government protects workers with minimum wage laws. And, they would perhaps be curious about why government would attempt to protect workers with minimum wage laws and anti-employment discrimination laws, when the first policy makes it more likely there will be a perceived need for the second policy. But, perhaps there is an opportunity here as well to teach the lesson that being a politician is a pretty good gig because there is always a need for making more public policy to deal with the messes made by your earlier public policies.

Now consider the government control question. The answer yes to whether government should control the economy is enormously naïve, even though this sort of stuff is standard political bill of fare. I think the idea that companies take advantage by polluting seems nonsense to most economists (and remember this is in the section of the textbook teaching economics). One of the greatest sources of pollution are all of us in our role as consumers and workers when we drive cars to play and to work and to school and to shop, even when we shop for “needs” such as the weekly groceries. Companies pollute for the same reasons we as consumers pollute, we find it is cheaper than collecting the waste to dispose of in some other way. Of course, the monopoly part of this answer is nonsense because most monopolies are created, even enforced (see unions), by government. In addition, the answer completely neglects one of the most important issues concerning this question, and that is whether government can get sufficient information to do better with any identified problem than would voluntary action, not to mention whether the incentives faced by our governors, even when they are our elected representatives, will choose to act in ways that would direct government to truly serve the public interest rather than rent seeking. And, the no response is simple and inadequate for the same reasons. The incentives and information issues both suggest government cannot accomplish what it states it seeks to accomplish.

So, here again, I have to wonder if trying to bring economics to our middle schools might be such a good idea. I do think our middle school students should learn about how the world around them works. But, the quotes I've posted here suggest to me it is pretty likely that what our middle school students will learn from their textbooks on Civics & Economics will be at odds with learning how the world around them works.

Economics In Middle School

Recently I've been reading bits and pieces of a few middle school textbooks on Civics and Economics. I'm sure at least a few economists think it is a good idea to begin teaching economics earlier in the educational life of our kids. After all, there seem to have been many surveys that suggest the level of economic literacy is pretty darn low. So, let's start earlier to help our citizens become economically literate. But, perhaps it is also possible that what gets taught reduces economic literacy. Consider the following from one of those middle school textbooks:

In order to make a profit, people need to provide a good or service. In order to provide a good or service, they need resources. As you know, however, resources are not unlimited. As a result, businesses and individuals must compete for the resources they need. This competition eventually affects everyone, not just business owners. In time, it affects the prices we pay for the goods we want.

One result of the competition for these resources is scarcity. Scarcity is the lack of a particular resource. When a resource becomes scarce, it is harder for producers to obtain. Products made with that resource also become more difficult to obtain. As a result, the prices for these items usually rise.

I have to say that in all my years of teaching I don't think I've ever said any thing like this to my students. Oh, on the face of it, the words written here do sound a bit like economics, and I suppose they do sound a bit like things I have talked with my students about, especially in a course in microeconomic principles. But, there are aspects of what is written above that concern me.

So, what do you think? Could the quotation above tend to encourage our middle school students to misunderstand the nature of the real world?

UPDATE 10-24: I like the comments by both Kari and Casey, and Casey comes close to my response when I read the quoted passage. The textbook is suggesting that competition leads to scarcity. Of course, this is not a lesson that comes from the study of economics. Scarcity is a given. As Casey points out, competition through the market process mitigates or lessens the impact of scarcity in our lives. So, the lesson told in this quote is pretty much just the opposite of the lessons learned from economics. In addition, if we look again at the first paragraph quoted, there is a suggestion that competition affects our individual lives. This is surely the case. But, when you look at both paragraphs together, this textbook seems to suggest that competition affects our lives in a bad way. This of course is not true. At least, it is not true if economists understand at least something about how the world works. Competition within the market process is one part of the explanation for the wonderful material prosperity we enjoy today, and as Casey suggests, without that material prosperity far, far fewer people would live on this earth today. Thus, I am concerned that the lessons suggested by this quotation may well encourage our middle school students to misunderstand the nature of the real world.