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Quotation of the Day…

… is from page 41 of Fritz Machlup’s 1974 paper “Hayek’s Contribution to Economics,” as this paper is reprinted in Essays on Hayek (Fritz Machlup, ed., 1976) (references deleted):

The cause of liberty, he [Hayek] finds, rests on our awareness that our knowledge is inevitably limited. The purpose of liberty is to afford us an opportunity to obtain something unforeseeable; since it cannot be known what use individuals will make of their freedom, it is all the more important to grant freedom to everybody. Liberty can endure only if it is defended not just when it is recognized to be useful in particular instances but ratter continuously as a fundamental principle which may not be breached for the sake of any definite advantages obtainable at the cost of its suspension.

DBx: Freedom allows for, and encourages, innovation. Innovation is the application of creativity, and creativity by its nature cannot be predicted in any detail. Also, creativity and innovation necessarily disrupt.

Our options, therefore, boil down to three. One is to completely eliminate creativity and innovation. Doing so would, of course, completely eliminate economic growth. (In practice, doing so would reduce standards of living, but this reality can here be put aside.) Doing so would also require the elimination of freedom – all freedom. A second option is to ensure that the creativity and innovation lead over time to increases in living standards. A third option is to suffer the consequences of creativity and innovation decreasing living standards.

Markets fuel the second option. Creative and innovative actions in free markets are done by individuals spending their own, and only their own, money. And consumers – also spending their own, and only their own, money – get to choose, through their voluntary market choices, which innovations they value highly enough to pay for them and which they do not value so highly. This on-going, never-ending market process incessantly introduces new options that consumers judge against each other and against familiar options. The ability of consumers and suppliers to say ‘no’ to contractual offers ensures that, on the whole and over time, ever-better options become widely available.

In option 2, the “creative” in “creative destruction” outweighs the “destruction.” Evidence for this reality is supplied by history.

The third option is fueled by government interventions into the economy. The designer of an industrial policy, for example, might well be truly creative. He or she might well dream up a new output or a heretofore unheard of method or pattern of production. Imposing this new idea by force disrupts existing patterns of economic activities. But unlike the disruption that occurs in option two, industrial policy practically ensures that the “creative” in “creative destruction” is outweighed by the “destruction.” This unfortunate outcome arises both because government officials get to spend other people’s money, and because industrial policy necessarily shrinks the options available to individuals as consumers, as input suppliers, and as producers.

And although industrial-policy advocates seem not to realize it, the only creativity allowed under their scheme is that of the industrial-policy designers. Once the industrial policy is designed and implemented, all other creativity and innovation must be squelched; the creativity of all other individuals in the economy must be prohibited. The reason is that any creativity and innovation allowed once the industrial policy is underway will disrupt the industrial policy. Because the very point of industrial policy is to impose on the populace the detailed economic vision of the industrial-policy designer(s), anything that interferes with the pursuit of that vision cannot be allowed. And creativity and innovation necessarily interfere with the pursuit of that vision.

In short, every proponent of industrial policy should be asked – and expected to answer substantively – “Why do you believe that obliterating all creativity and innovation in those parts of the economy that fall under your industrial policy will improve the well-being of ordinary people?”

If you put this question to an industrial-policy proponent, he or she is highly likely to deny – and to deny sincerely – that the industrial-policy scheme that he or she envisions will obliterate all creativity and innovation. But this denial reveals only that the industrial-policy proponent hasn’t thought through the implications of his or her scheme. It would be akin to encountering someone who boasts of his ability to turn part of a pig into a kosher ham sandwich, and then – when being told of the actual meaning and implications of ‘kosher’ – nevertheless insists that his ham sandwich will be kosher.


Pictured above is a kosher ham sandwich – or, it could also be an industrial policy that permits creativity and innovation.

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