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The True Costs of Bad Economists, Explained

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Tags Calculation and KnowledgePhilosophy and Methodology

01/28/2020

The eloquent nineteenth-century French economist and liberal Frédéric Bastiat famously noted that what separates a good economist from a bad one is the ability to consider both the seen and the unseen. A bad economist does not recognize the costs down the road, and may thus come to advocate all too costly solutions (as in the commonly used analogy, peeing in one's pants in the dead of winter to escape the coldwarm at first, followed by freezing).

The distinction between the seen and the unseen is an important one, without which the true trade-off cannot be understood. And the trade-off is core to economics: every action is a choice, which means the alternatives must be known to figure out the better alternative.

Anyone can suggest solutions to problems without reference to the cost. But those are not actual solutions, since they may be what make us worse off later on.

Economics is about economizing. Without the unseen, there is no proper choice and no economics. There is only a fairytale.

It is thus the unenviable task of the economist to point out that the fairytale is nothing more than that, and that reality places strict limitations on what can be achieved and how. Yet although economists often do construct counterfactuals to assess the value of an alternative, they tend to overlook the fact that what currently is (and is seen) was previously a potential (and unseen).

What exists today is not the problem to be solved, but the solution to be explained.

It is highly unfortunate that economists tend to misunderstand our economic present in this way.

When looking at the economy and assessing its efficiency or value, it is irrelevant what one might theorize as an optimal solution. Taking what is as a starting point and imagining what could have been instead is of no value unless one recognizes where the status quo came from. The present is as much a result of the past, the actions and choices made, as the future will be of the actions and choices currently being made or that are yet to be made.

Joseph Schumpeter captured this in his discussion of "industrial mutation": we're acting within a market process "that incessantly revolutionizes the economic structure from within, incessantly destroying the old one, incessantly creating a new one."1

The status quo is just a way station between the past and the future.

Consequently, if we are to understand the economy we cannot be blinded by what happens to be the present, but must focus on where it leads us and explain it, where it came from. Any industry that exists today is the result of immense innovations, entrepreneurship, and competition in the past. What will be tomorrow depends on the disruptions currently underway and that will take place tomorrow and beyond.

In terms of economics, what currently is should be of very little importance: what matters, and that we should seek to understand, is the process that brought it about and that will create what will be in its place.

This is also the difference in perspective that has evaded the critics of Mises's claim that socialist economies are not in fact economies. What he meant was not simply that socialists cannot come up with prices for goods. That's a problem in the present, a solution which may ignore the past and the future. The real problem is the temporal flow.

Although it is certainly problematic to implement central planning within the present economy, this is a comparatively small problem compared to the continuous replacing of the present with the future. The problem of economics is not how to manage the present, how to rationally produce given the production processes and technologies already in place, but how to create a future that is better.

I attempted to make this argument in this linked piece, but the point seems to be elusive to most readers, who are too eager to look at what is rather than the greater progression of the market process.

We see the same issue at play in the critiques of Say's law. Critics assert that businesses respond to demand and to the common view that present corporations and big business are all too powerful. In terms of the former, consumers respond in their purchasing activities to what has been produced or what can be produced in the already existing production processes. But the real question is: what put those processes there, who did it, and in what shape or form?

That simply cannot be a matter of responding to demand: it is necessarily a result of entrepreneurial imagination, which created the present (and ephemeral!) market structure. In terms of the latter, today's large corporations are tomorrow's fond memories: they may have great influence within their industries at present (and through politics, which is a separate issue), but both they and their industries will eventually be undermined, out-competed, and disrupted by entrepreneurs who figure out better things to do and better ways to do them, acting in the service of consumers.

The inefficiency of a contemporary monopoly is only temporary, and is maintained and extended by a lack of entrepreneurship: whatever hinders entrepreneurs from attempting new solutions is what upholds the monopolies and provides large corporations their apparent "power."

This is also the reason that they, the incumbents, turn to politics, which is the only power that can keep them in this position. Without politics, corporations only last as long as their offerings serve consumers better than others'.

It is important to recognize this, because without this insight about how the economy progresses, by what means and in what manner, we can be led to believe that infractions that protect incumbents and hinder change may be solutions. In other words, we can end up attempting solutions that—as with the seen and the unseen—come at a much greater cost than letting things be. And where this is the case, we will all be worse off as a result.

It is time economists, both professional and lay, recognize this, and the implication—what I refer to as the Unrealized. I elaborate on this concept, and how it is core to understanding the market process, in my book The Seen, the Unseen, and the Unrealized.

Formatted from Twitter @PerBylund.

  • 1. Schumpeter, Capitalism, Socialism, and Democracy, ch. 7
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Contact Per Bylund

Per Bylund is assistant professor of entrepreneurship & Records-Johnston Professor of Free Enterprise in the School of Entrepreneurship at Oklahoma State University. Website: PerBylund.com.

Note: The views expressed on Mises.org are not necessarily those of the Mises Institute.
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