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Bonus Quotation of the Day…

… is from pages 176-177 of Frank Knight’s 1940 review essay titled “‘What Is Truth’ in Economics?” as this essay is reprinted in Knight’s 1956 collection, On the History and Method of Economics:

The formal principles of economic theory can never carry anyone very far toward the prediction or technical control of the corresponding economic behavior. But such a result, by any method, is both utterly abhorrent to all human thinking and self-contradictory. The intelligent application of these principles is a first step, and chiefly significant negatively rather than positively, for showing what is “wrong” rather than what is “right” in an existing situation and any proposed line of action.

DBx: Economic science – and it is a science in the proper sense of this term – is not a tool for social control. Indeed, one of the great lessons of economics done well is that economies marked by extensive specialization and (hence) exchange are far too complex for their relevant details to be known to any one controlling mind (or committee of minds). This complexity makes it impossible for the course of real-world economies to be predicted with anything remotely close to the same precision with which, say, astronomy allows specific predictions of the timing and course of lunar eclipses.

Economics provides a scientific explanation for the emergence of the economic order that we observe in our world, but, again, it does not allow any detailed prediction of how that order will change. Nor does economics supply the information that would be necessary for a central agency (practically, the state) to rearrange the elements of the economic order in ways that improve the overall operation or sustainability of that order. The reason economics supplies no such information is that such information by its nature is dispersed, largely subjective, and rapidly changing; such information is impossible to be collected and ‘had’ in one mind or place.

The practical purpose of economics, therefore, is largely confined to exposing the folly of proposals for government intervention into the economy. Persons who push such proposals always proclaim their excellent motives, and very often these proclamations are sincere. But economics almost always reveals that these proposals will fail to achieve their objectives, or will unleash undesirable unintended consequences (or both), because the proposed interventions will inescapably be made without the detailed information necessary for them to have even a reasonable chance of success.

“No; flapping your arms will not send you soaring into the sky like an eagle.” “No; tariffs will not make the people of the country as a whole wealthier or more economically secure.” “No; those pills will not enlarge your manhood.” “No; the minimum wage will not yield net benefits to all unskilled workers.” “No; responding to the email from the sister of the dead Nigerian prince will not bring to you the promised $14.5 million from the prince’s alleged estate.” “No; government-imposed price ceilings on propane and bottled water will not increase poor people’s post-natural-disaster access to propane and bottled water.”

Humanity is endlessly populated with individuals who peddle fallacies, and with even more individuals who fall for fallacies. The most important role of economics is to constantly refute as many of these fallacies as possible. This task isn’t glamorous, and it’s repetitive. But it’s necessary.