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Quotation of the Day…

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… is from page 6 of the first chapter of the 3rd edition (1972) of what is regarded by many (including me) to be the greatest economics textbook ever written, University Economics [2] by Armen Alchian [3] and William Allen:

Although many of us solve our personal problems, we may still be grossly ignorant about how our actions and laws affect the rest of society.  Comprehension of these larger effects requires economic theory, even if virtually none is required to for individual decisions.  We can be sure, as we shall see later, that economic analysis is ignored when the following incorrect assertions are proposed: the rationale of the capitalistic system requires a “harmony of interests”; customers must take what producers offer them; minimum-wage laws help the unskilled; discrimination can be stopped; pollution of air and water unquestionably should be stopped; automation reduces available jobs; tariffs protect domestic wage earners from foreign labor; our otherwise unlimited productive capacity is curtailed by monopolistic capitalists who arbitrarily set prices high; unions protect workers from greedy employers; inflation hurts the wage earner and benefits the employer; private firms serve private interests while publicly owned agencies serve public interests; used-book markets must reduce the royalties of textbook authors; social conscience and civic sensitivity are or should be the guides to business corporate behavior; unemployment occurs because not enough jobs are available or because some people are shiftless and lazy; or American agriculture produces a surplus of wheat because it is so productive.  And that’s only a tiny sample!

This passage begins with the important insight that success at achieving personal goals, including earning profit by running a private business firm, does not imply that the successful person understands economics.  He or she might understand economics, but such understanding does not come from success or experience in business.  The two kinds of knowledge – knowledge of how to successfully carry out one’s plans, on one hand, and, on the other hand, knowledge of how the disparate plans of millions or billions of strangers interact with one another and are led, or not, by prices or by politicians into complex patterns of mutual coordination – are very different from each other.

This passage from Alchian & Allen – written nearly a half-century ago – lists economic misunderstandings that were prevalent in that era.  Not all such misunderstandings are as prevalent today.  For example, the John Kenneth Galbraith obsession with private corporations foisting on consumers products that consumers really don’t want at extortionately high prices isn’t quite as prominent today as it was back then.  (Although a gussied-up version of this obsession has recently emerged [4].)  But it’s striking how many of the fallacies that were prominent in the late 1960s and early 1970s remain with us today – such as the belief that minimum wages are an effective means of helping all low-skilled workers, or that tariffs protect domestic workers from falling into poverty due to the competition of lower-paid foreign workers, or that the optimal level of industrial emissions into the air and water is zero.