Quotation of the Day…

by Don Boudreaux on May 13, 2018

in Complexity & Emergence, Economics, Myths and Fallacies, Prices, Seen and Unseen

… is from pages 96-97 of my late Nobel-laureate colleague Jim Buchanan‘s 1977 paper “Law and the Invisible Hand,” as this paper is reprinted in Moral Science and Moral Order (2001), Vol. 17 of The Collected Works of James M. Buchanan:

To those who do not understand this principle [of emergent order], either from lack of formal instruction in economics (or because of perverse formal instruction which is by no means uncommon), or from some failure to sense its fundamental elements from ordinary perceptions of social reality, the economy has no “order.” The man of habit may seldom think, but if he is forced, for any reason, to look about him, failure to understand this principle requires some resort to “miracles” to explain such a simple fact as the observed presence of tomato juice on his grocer’s shelves each time he goes to the supermarket. In this situation, the man of habit is highly vulnerable to persuasion by those who, from either ignorance or design, propose to subvert the workings of economic process.

DBx: Yes. The “man of habit” (as Buchanan calls him or her) too seldom grasps not only the fact that economic processes and consequences in modern society are overwhelmingly ‘the result of human action but not of human design,’ but even the very possibility of there being any such undesigned, emergent, spontaneous, productive orders. The man of habit distrusts and dislikes the business owner because the business owner’s conscious goal is to make a profit. This intention, the man of habit supposes, prevents the business owner, as such, from serving others well. (Why the man of habit is not equally distrustful and disdainful of consumers and workers – none of whom is regularly supposed as such to consciously act to promote the welfare of strangers – reveals only the shallowness and inconsistency of the man-of-habit’s thoughts about economic matters.)

The man of habit sees prices and wages as intentionally chosen, highly arbitrary terms of trade that favor the powerful and harm the weak. Prices and wages, as the man of habit sees them, play no complex roles. They do not guide production decisions; they do not guide consumption decisions. As such, price ceilings and wage floors imposed by government have no, or only minimal, effect on the real economy. The chief effect of such interventions, thinks the man of habit, is only to change the distribution between buyers and sellers of the benefits of trade.

The man-of-habit’s mistaken understanding of prices and wages leads him to a mistaken understanding of taxes. If prices and wages are largely arbitrary – if prices and wages play no, or only a small, role in allocating resources and encouraging and directing productive efforts – it follows that the incomes that are the results of prices and wages play no important role. Raising taxes on those incomes thus has little effect on real economic activity except that the proceeds enable those parties who are favored with the tax revenues to spend more. Ditto for taxing some incomes differently than others.

As a rule, the man of habit interprets most economic phenomena as being either arbitrary or designed. The few exceptions to this rule arise when the man of habit comes to believe in “laws” or “forces” of history – “laws” or “forces” such as those that Karl Marx in the 19th century and Thomas Piketty in the 21st century are fancied to have discovered and revealed. Against these inexorable “laws” and “forces” puny individual men and women are helpless. Only collective action through the glorious and powerful agency of the state can prevent the masses from being crushed by the operation of these “laws” and “forces.”

The man of habit, in short, doesn’t grasp the economic way of thinking.


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