If You Don’t Know Economics You Don’t Know Anything

I’m sure that you have had this experience before, or something similar to it. You are sitting at lunch in a nice restaurant or perhaps a hotel. Waiters are coming and going. The food is fantastic. The conversation about all things is going well. You talk about the weather, music, movies, health, trivialities in the news, kids, and so on. But then the topic turns to economics, and things change.

You are not the aggressive type so you don’t proclaim the merits of the free market immediately. You wait and let the others talk. Their biases against business appear right away in the repetition of the media’s latest calumny against the market, such as that gas station owners are causing inflation by jacking up prices to pad their pockets at our expense, or that Walmart is, of course, the worst possible thing that can ever happen to a community.

You begin to offer a corrective, pointing out the other side. Then the truth emerges in the form of a naïve if definitive announcement from one person: “Well, I suppose I’m really a socialist at heart.” Others nod in agreement.

On one hand there is nothing to say, really. You are surrounded by the blessings of capitalism. The buffet table, which you and your lunch partners only had to walk into a building to find, has a greater variety of food at a cheaper price than that which was available to any living person—king, lord, duke, plutocrat, or pope—in almost all of the history of the world. Not even 50 years ago would this have been imaginable.

All of history has been defined by the struggle for food. And yet that struggle has been abolished, not just for the rich but for everyone living in developed economies. The ancients, peering into this scene, might have assumed it to be Elysium. Medieval man conjured up such scenes only in visions of Utopia. Even in the late 19th century, the most gilded palace of the richest industrialist required a vast staff and immense trouble to come anywhere near approximating it.

We owe this scene to capitalism. To put it differently, we owe this scene to centuries of capital accumulation at the hands of free people who have put capital to work on behalf of economic innovations, at once competing with others for profit and cooperating with millions upon millions of people in an ever-expanding global network of the division of labor. The savings, investments, risks, and work of hundreds of years and uncountable numbers of free people have gone into making this scene possible, thanks to the ever-remarkable capacity for a society developing under conditions of liberty to achieve the highest aspirations of the society’s members.

And yet, sitting on the other side of the table are well-educated people who imagine that the way to end the world’s woes is through socialism. Now, people’s definitions of socialism differ, and these persons would probably be quick to say that they do not mean the Soviet Union or anything like that. That was socialism in name only, I would be told. And yet, if socialism does mean anything at all today, it imagines that there can be some social improvement resulting from the political movement to take capital out of private hands and put it into the hands of the state. Other tendencies of socialism include the desire to see labor organized along class lines and given some sort of coercive power over how their employers’ property is used. It might be as simple as the desire to put a cap on the salaries of CEOs, or it could be as extreme as the desire to abolish all private property, money, and even marriage.

Whatever the specifics of the case in question, socialism always means overriding the free decisions of individuals and replacing that capacity for decision making with an overarching plan by the state. Taken far enough, this mode of thought won’t just spell an end to opulent lunches. It will mean the end of what we all know as civilization itself. It would plunge us back to a primitive state of existence, living off hunting and gathering in a world with little art, music, leisure, or charity. Nor is any form of socialism capable of providing for the needs of the world’s 6 billion people, so the population would shrink dramatically and quickly and in a manner that would make every human horror ever known seem mild by comparison. Nor is it possible to divorce socialism from totalitarianism, because if you are serious about ending private ownership of the means of production, you have to be serious about ending freedom and creativity too. You will have to make the whole of society, or what is left of it, into a prison.

In short, the wish for socialism is a wish for unparalleled human evil. If we really understood this, no one would express casual support for it in polite company. It would be like saying, you know, there is really something to be said for malaria and typhoid and dropping atom bombs on millions of innocents.

Do the people sitting across the table really wish for this? Certainly not. So what has gone wrong here? Why can these people not see what is obvious? Why can’t people sitting amidst market-created plenty, enjoying all the fruits of capitalism every minute of life, see the merit of the market but rather wish for something that is a proven disaster?

What we have here is a failure of understanding. That is to say, a failure to connect causes with effects. This is a wholly abstract idea. Knowledge of cause and effect does not come to us by merely looking around a room, living in a certain kind of society, or observing statistics. You can study roomfuls of data, read a thousand treatises on history, or plot international GDP figures on a graph for a living, and yet the truth about cause and effect can still be evasive. You still might miss the point that it is capitalism that gives rise to prosperity and freedom. You might still be tempted by the notion of socialism as savior.

Let me take you back to the years 1989 and 1990. These were the years that most of us remember as the time when socialism collapsed in Eastern Europe and Russia. Events of that time flew in the face of all predictions on the Right that these were permanent regimes that would never change unless they were bombed back to the Stone Age. On the Left, it was widely believed, even in those times, that these societies were actually doing quite well and would eventually pass the United States and Western Europe in prosperity, and, by some measures, that they were already better off than us.

And yet it collapsed. Even the Berlin Wall, that symbol of oppression and slavery, was torn down by the people themselves. It was not only glorious to see socialism collapse. It was thrilling, from a libertarian point of view, to see how states themselves can dissolve. They may have all the guns and all the power, and the people have none of those, and yet, when the people themselves decide that they will no longer be governed, the state has few options left. It eventually collapses amid a society-wide refusal to believe its lies any longer.

When these closed societies suddenly became open, what did we see? We saw lands that time forgot. The technology was backwards and broken. The food was scarce and disgusting. The medical care was abysmal. The people were unhealthy. Property was polluted.

It was also striking to see what had happened to the culture under socialism. Many generations had been raised under a system built on power and lies, and so the cultural infrastructure that we take for granted was not secure. Such notions as trust, promise, truth, honesty, and planning for the future—all pillars of commercial culture—had become distorted and confused by the ubiquity and persistence of the statist curse.

Why am I going through these details about this period, which most of you surely do remember? Simply to say this: most people did not see what you saw. You saw the failure of socialism. This is what I saw. This is what Rothbard saw. This is what anyone who had been exposed to the teachings of economics—to the elementary rules concerning cause and effect in society—saw.

But this is not what the ideological Left saw. The headlines in the socialist publications themselves proclaimed the death of undemocratic Stalinism and looked forward to the creation of a new democratic socialism in these countries.

As for regular people neither attached to the socialist idea nor educated in economics, it might have appeared as nothing more than a glorious vanquishing of America’s foreign-policy enemies. We built more bombs than they did, so they finally gave in—the way a kid says “uncle” on a playground. Maybe some saw it as a victory of the US Constitution over weird and foreign systems of despotism. Or perhaps it was a victory for the cause of something like free speech over censorship, or the triumph of ballots over bullets.

Now, if the proper lessons of the collapse had been conveyed, we would have seen the error of all forms of government planning. We would have seen that a voluntary society will outperform a coerced one anytime. We might see how ultimately artificial and fragile are all systems of statism compared to the robust permanence of a society built on free exchange and capitalist ownership. And there is another point: the militarism of the Cold War had only ended up prolonging the period of socialism by providing these evil governments the chance to stimulate unfortunate nationalist impulses that distracted their domestic populations from the real problem. It was not the Cold War that killed socialism; rather, once the Cold War had exhausted itself, these governments collapsed of their own weight from internal rather than external pressure.

In short, if the world had drawn the correct lessons from these events, there would be no more need for economic education and no more need even for the bulk of what the Mises Institute does. In one great moment of history, the contest between capitalism and central planning would have been decided for all time.

I must say that it was more of a shock to my colleagues and me than it should have been, that the essential economic message was lost on most people. Indeed, it made very little difference in the political spectrum at all. The contest between capitalism and central planning continued as it always had, and even intensified here at home. The socialists among us, if they experienced any setback at all, bounded right back, strong as ever, if not more so.

If you doubt it, consider that it only took a few months for these groups to start kvetching about the horrible onslaught that was being wrought by the unleashing of capitalism in Eastern Europe, Russia, and China. We began hearing complaints about the rise of a hideous consumerism in these countries, about the exploitation of workers at the hands of capitalists, about the rise of the garish super rich. Piles and piles of news stories appeared about the sad plight of unemployed state workers, who, though loyal to the principles of socialism their entire lives, were now being turned out onto the streets to fend for themselves.

Not even an event as spectacular as the spontaneous meltdown of a superpower and all its client states was enough to impart the message of economic freedom. And the truth is that it was not necessary. The whole of our world is covered with lessons about the merit of economic liberty over central planning. Our everyday lives are dominated by the glorious products of the market, which we all gladly take for granted. We can open up our web browsers and tour an electronic civilization that the market created, and note that government never did anything useful at all by comparison.

We are also inundated daily by the failures of the state. We complain constantly that the educational system is broken, that the medical sector is oddly distorted, that the post office is unaccountable, that the police abuse their power, that the politicians have lied to us, that tax dollars are stolen, that whatever bureaucracy we have to deal with is inhumanly unresponsive. We note all this. But far fewer are somehow able to connect the dots and see the myriad ways in which daily life confirms that the market radicals like Mises, Hayek, Hazlitt, and Rothbard were correct in their judgments.

What’s more, this is not a new phenomenon that we can observe in our lifetimes only. We can look at any country in any period and note that every bit of wealth ever created in the history of mankind has been generated through some kind of market activity, and never by governments. Free people create; states destroy. It was true in the ancient world. It was true in the first millennium […]. It was true in the Middle Ages and the Renaissance. And with the birth of complex structures of production and the increasing division of labor in those years, we see how the accumulation of capital led to what might be called a productive miracle. The world’s population soared. We saw the creation of the middle class. We saw the poor improve their plight and change their own class identification.

The empirical truth has never been hard to come by. What matters are the theoretical eyes that see. This is what dictates the lesson we draw from events. Marx and Bastiat were writing at the same time. The former said capitalism was creating a calamity and that abolition of ownership was the solution. Bastiat saw that statism was creating a calamity and that the abolition of state plunder was the solution. What was the difference between them? They saw the same facts, but they saw them in very different ways. They had a different perception of cause and effect.

I suggest to you that there is an important lesson here as regards the methodology of the social sciences, as well as an agenda and strategy for the future. Concerning method, we need to recognize that Mises was precisely right concerning the relationship between facts and economic truth. If we have a solid theory in mind, the facts on the ground provide excellent illustrative material. They inform us about the application of theory in the world in which we live. They provided excellent anecdotes and revealing stories of how economic theory is confirmed in practice. But absent that theory of economics, facts alone are nothing but facts. They do not convey any information about cause and effect, and they do not point a way forward.

Think of it this way. Let’s say you have a bag of marbles that is turned upside down on the ground. Ask two people their impressions. The first one understands what numbers mean, what shapes mean, and what colors mean. This person can give a detailed account of what he sees: how many marbles, what kinds, how big they are, and this person can explain what he sees in different ways potentially for hours. But now consider the second person, who, we can suppose, has absolutely no understanding of numbers, not even that they exist as abstract ideas. This person has no comprehension of either shape or color. He sees the same scene as the other person but cannot provide anything like an explanation of any patterns. He has very little to say. All he sees is a series of random objects.

Both these people see the same facts. But they understand them in very different ways, owing to the abstract notions of meaning that they carry in their minds. This is why positivism as pure science, a method of assembling a potentially infinite series of data points, is a fruitless undertaking. Data points on their own convey no theory, suggest no conclusions, and offer no truths. To arrive at truth requires the most important step that we as human beings can ever take: thinking. Through this thinking, and with good teaching and reading, we can put together a coherent theoretical apparatus that helps us understand.

Now, we have a hard time conjuring up in our minds the likes of a man who has no comprehension of numbers, colors, or shapes. And yet I suggest to you that this is precisely what we are facing when we encounter a person who has never thought about economic theory and never studied the implications of the science at all. The facts of the world look quite random to this person. He sees two societies next to each other, one free and prosperous and the other unfree and poor. He looks at this and concludes nothing important about economic systems because he has never thought hard about the relationship between economic systems and prosperity and freedom.

He merely accepts the existence of wealth in one place and poverty in the other as a given, the same way the socialists at a lunch table assumed that the luxurious surroundings and food just happened to be there. Perhaps they will reach for an explanation of some sort, but absent economic education, it is not likely to be the correct one.

Equally as dangerous as having no theory is having a bad theory that is assembled not by means of logic but by an incorrect view of cause and effect. This is the case with notions such as the Phillips Curve, which posits a tradeoff relationship between inflation and unemployment. The idea is that you can drive unemployment down very low if you are willing to tolerate high inflation; or it can work the other way around: you can stabilize prices provided you are willing to put up with high unemployment.

Now, of course this makes no sense on the microeconomic level. When inflation is soaring, businesses don’t suddenly say, hey, let’s hire a bunch of new people! Nor do they say, you know, the prices we pay for inventory have not gone up or have fallen. Let’s fire some workers!

This much is true about macroeconomics: It is commonly treated like a subject completely devoid of any connection to microeconomics or even human decision making. It is as if we enter into a video game featuring fearsome creatures called Aggregates that battle it out to the death. So you have one creature called Unemployment, one called Inflation, one called Capital, one called Labor, and so on until you can construct a fun game that is sheer fantasy.