Bonus Quotation of the Day…

by Don Boudreaux on June 30, 2020

in Complexity & Emergence, Economics, Government Intervention, Myths and Fallacies, Prices

… is from page 59 of the 1969 Arlington House edition of Ludwig von Mises’s 1944 Yale University Press book, Omnipotent Government: The Rise of the Total State and Total War (available free-of-charge on-line here):

The classical economists demonstrated that each constellation of the market has a corresponding price structure. Prices, wages, and interest rates are the result of the interplay of demand and supply. There are forces operating in the market which tend to restore this – natural – state if it is disturbed. Government decrees, instead of achieving the particular ends they seek, tend only to derange the working of the market and imperil the satisfaction of the needs of the consumers.

DBx: Do not lose sight of a key goal of Adam Smith and other classical economists. They saw about them a productive economic order that obviously was not the result of any conscious planning or direction. They sought to understand this order. Never did they insist that this order is or can be made perfect (whatever “perfect” might mean). Their first goal was to understand the order and, also then, to explain this order.

Market competition and the prices, profits, and losses that it generates when consumers spend, and investors invest, their own money gives rise to this order. To explain how the competitive price system works, early economists often made assumptions – for heuristic purposes – that abstract away from frictions and other sources of “imperfections.” My belief has always been, and it remains (even for the case of David Ricardo), that classical economists were never under any delusions that free markets are “perfect” or perfectible. Evidence of imperfections was ample enough.

But unlocking the mystery of the observed order was certainly a challenging-enough task. Disorder and failure rarely need explanation. They just happen. What must be explained is observed order, and this explanation is all the more important and challenging when it’s obvious that the observed order is the result of no one’s intention.

So explanation was done often on the assumption that real-world frictions and imperfections don’t exist. The purpose of such an assumption was to focus attention, without pointless distractions, on the forces that bring about and sustain the undesigned order.

Careless and unreflective economists later mistakenly concluded that markets work only if they are as “perfect” as are the models of markets in some economists’ writings. And then another unwarranted leap was made: if real-world markets aren’t textbook perfect, government can improve upon them – and will improve upon them if governments are given the authority to do so.

To this day, astonishingly, those who are unhappy with markets – those who, correctly or incorrectly, assert “Market failure!” – blithely allege that all will be well if government officials are allowed to intervene. Almost never do these champions of intervention bother to explain how government officials will get the knowledge they must possess in order to arrange for government-orchestrated economic processes to operate better than market processes.


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