Books / Digital Text

7. Conclusion: Economics and Public Policy

1. Economics: Its Nature and Its Uses

ECONOMICS PROVIDES US WITH TRUE laws, of the type if A, then B, then C, etc. Some of these laws are true all the time, i.e., A always holds (the law of diminishing marginal utility, time preference, etc.). Others require A to be established as true before the consequents can be affirmed in practice. The person who identifies economic laws in practice and uses them to explain complex economic fact is, then, acting as an economic historian rather than as an economic theorist. He is an historian when he seeks the casual explanation of past facts; he is a forecaster when he attempts to predict future facts. In either case, he uses absolutely true laws, but must determine when any particular law applies to a given situation.1 Furthermore, the laws are necessarily qualitative rather than quantitative, and hence, when the forecaster attempts to make quantitative predictions, he is going beyond the knowledge provided by economic science.2

It has not often been realized that the functions of the economist on the free market differ sharply from those of the economist on the hampered market. What can the economist do on the purely free market? He can explain the workings of the market economy (a vital task, especially since the untutored person tends to regard the market economy as sheer chaos), but he can do little else. Contrary to the pretensions of many economists, he is of little aid to the businessman. He cannot forecast future consumer demands and future costs as well as the businessman; if he could, then he would be the businessman. The entrepreneur is where he is precisely because of his superior forecasting ability on the market. The pretensions of econometricians and other “model-builders” that they can precisely forecast the economy will always founder on the simple but devastating query: “If you can forecast so well, why are you not doing so on the stock market, where accurate forecasting reaps such rich rewards?”3 It is beside the point to dismiss such a query—as many have done—by calling it “anti-intellectual”; for this is precisely the acid test of the would-be economic oracle.

In recent years, new mathematico-statistical disciplines have developed—such as “operations research” and “linear program-ming”—which have professed to help the businessman make his concrete decisions. If these claims are valid, then such disciplines are not economics at all, but a sort of management technology. Fortunately, operations research has developed into a frankly separate discipline with its own professional society and journal; we hope that all other such movements will do the same. The economist is not a business technologist.4

The economist's role in a free society, then, is purely educational. But when government—or any other agency using violence—intervenes in the market, the “usefulness” of the economist expands. The reason is that no one knows, for example, what future consumer demands in some line will be. Here, in the realm of the free market, the economist must give way to the entrepreneurial forecaster. But government actions are very different, because the problem now is precisely what the consequences of governmental acts will be. In short, the economist may be able to tell what the effects of an increased demand for butter will be; but this is of little practical use, since the businessman is primarily interested, not in this chain of consequences—which he knows well enough for his purposes—but in whether or not such an increase will take place. For a governmental decision, on the other hand, the “whether” is precisely what the citizenry must decide. So here the economist, with his knowledge of the various alternative consequences, comes into his own. Furthermore, the consequences of a governmental act, being indirect, are much more difficult to analyze than the consequences of an increase in consumer demand for a product. Longer chains of praxeological reasoning are required, particularly for the needs of the decision-makers. The consumer's decision to purchase butter and the entrepreneur's decision about entering into the butter business do not require praxeological reasoning, but rather insight into the concrete data. The judging and evaluation of a governmental act (e.g., an income tax), however, require long chains of praxeological reasoning. Hence, for two reasons—because the initial data are here supplied to him and because the consequences must be analytically explored—the economist is far more “useful” as a political economist than as a business adviser or technologist. In a hampered market economy, indeed, the economist often becomes useful to the businessman—where chains of economic reasoning become important, e.g., in analyzing the effects of credit expansion or an income tax and, in many cases, in spreading this knowledge to the outside world.

The political economist, in fact, is indispensable to any citizen who frames ethical judgments in politics. Economics can never by itself supply ethical dicta, but it does furnish existential laws that cannot be ignored by anyone framing ethical conclusions—just as no one can rationally decide whether product X is a good or a bad food until its consequences on the human body are ascertained and taken into account.

  • 1. Murray N. Rothbard, “Praxeology: Reply to Mr. Schuller,” American Economic Review, December, 1951, pp. 943–46.
  • 2. On the pitfalls of economic forecasting see John Jewkes, “The Economist and Economic Change” in Economics and Public Policy (Washington, D.C.: The Brookings Institution, 1955), pp. 81–99; P.T. Bauer, Economic Analysis and Policy in Underdeveloped Countries (Durham, N.C.: Duke University Press, 1957), pp. 28–32; and A.G. Abramson, “Permanent Optimistic Bias—A New Problem for Forecasters,” Commercial and Financial Chronicle, February 20, 1958, p. 12.
  • 3. Professor Mises has shown the fallacy of the very popular term “model-building,” which has (with so many other scientific fallacies) been taken over misleadingly by analogy from the physical sciences—in this case, engineering. The engineering model furnishes the exact quantitative dimensions—in proportionate miniature—of the real world. No economic “model” can do anything of the kind. For a bleak picture of the record of economic forecasting, see Victor Zarnowitz, An Appraisal of Short-Term Economic Forecasts (New York: Columbia University Press, 1967).
  • 4. Since writing the above, the author has come across a similar point in Rutledge Vining, Economics in the United States of America (Paris: UNESCO, 1956), pp. 31ff.
Shield icon library