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Were Adam Smith and Hayek Mistaken?

Here’s a letter to Liberty & Law:


Attempting to defend industrial policy carried out in the name of economic nationalism, Oren Cass commits several errors that reveal his unfamiliarity with economics (“Comparative Disadvantage,” January 15). Detailing these errors would require a full-length essay, so I here mention only two.

First, Mr. Cass mistakenly presumes that nations compete against each other economically. They don’t, as economists since Adam Smith have demonstrated. An especially notable such demonstration is offered by Paul Krugman in his 1996 book, Pop Internationalism. It’s regrettable that Mr. Cass, when insisting on a reality of which all economists are aware (namely, that comparative advantage is “endogenous”) approvingly mentions Krugman’s work on strategic trade theory, yet nevertheless ignores Krugman’s equally notable work debunking the myth that nations are economic rivals and that – contrary to another of Mr. Cass’s contentions – workers in high-wage countries are harmed by trade with workers in low-wage ones.

Second, when he writes that “[t]he social benefits that we expect from individuals pursuing their self-interest do not extend to macro-economic allocations,” Mr. Cass summarily and emphatically dismisses what is perhaps the single most important discovery of modern economics, namely, that people’s attention within a market economy to their own diverse, individual self-interests results in an undesigned allocation of resources that promotes economic growth and enriches almost everyone. This process is what Adam Smith famously described as being guided productively by “an invisible hand,” what F.A. Hayek identified as a beneficial “spontaneous order,” and what extensive empirical research has overwhelmingly verified.

Mr. Cass, of course, is free to dispute the validity of this discovery. If his disputation succeeds he might even become a strong candidate for an economics Nobel Prize. But a conclusion as sweeping as his cannot legitimately be done so summarily, in a single sentence, and with no support other than a link to one of Mr. Cass’s own earlier essays.

Donald J. Boudreaux
Professor of Economics
Martha and Nelson Getchell Chair for the Study of Free Market Capitalism at the Mercatus Center
George Mason University
Fairfax, VA 22030