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Quotation of the Day…

… is from page 368 of the 2007 University of Chicago re-issue of F.A. Hayek’s 1941 The Pure Theory of Capital:

Unknown-3It is not surprising that Mr. Keynes finds his views anticipated by the mercantilist writers and gifted amateurs: concern with the surface phenomena has always marked the first stage of the scientific approach to our subject.  But it is alarming to see that after we have once gone through the process of developing a systematic account of those forces which in the long run determine prices and production, we are now called upon to scrap it, in order to replace it by the shortsighted philosophy of the business man raised to the dignity of a science.

DBx: Again, I am increasingly struck and distressed by how much of modern economics – economics since the time of J.M. Keynes (1883-1946) – is an elaborate practice of assuring the man-in-the-street that his economically untutored sense of the way economies work is, in fact, spot-on correct. The man-in-the-street, seeing only what Deirdre McCloskey calls the “first act” of economic phenomena, concludes that the first act is all that there is.

Does freer trade reduce domestic employment? The man-in-the-street concludes that it does because the man-in-the-street sees only the jobs lost to imports. Do minimum wages improve the welfare of low-paid workers? The man-in-the-street concludes that it does because the man-in-the-street never bothers to ask how employers and employees will adjust to mandated higher labor costs. Does more government spending improve the economy? The man-in-the-street concludes that it does because the man-in-the-street sees only the increased output and employment of those firms that receive the government spending. Must the government act to “correct” externalities? The man-in-the-street concludes that it must because the man-in-the-street neither bothers to ponder the processes that give rise to the apparent externalities nor questions the ability or willingness of government officials to act in the public interest.

If modern astronomy were akin to modern economics, a great deal of modern astronomy (although by no means all of it) would be devoted to explaining – with the use of fantastic mathematics and elaborate empirical demonstrations – that the man-in-the-street has been correct all along in believing that the sun and the planets and the stars all revolve around a stationary earth.