The University of Chicago Press, 11030 S. Langley Avenue, Chicago, IL 60628 • 180 pages • 1990 • $17.95 cloth
One can almost predict it. It usually happens whenever I give a talk to a civic club or some other group. It’s almost sure to occur at a social gathering when people discover that I teach economics. Sooner or later, someone is bound to ask: “What do you think is going to happen to interest rates?”
Years ago, I was not only surprised by the question but also somewhat annoyed, since I’m not greatly interested in what is largely a financial matter. But as the question persisted, I began to ask myself, “What would I do if I really knew where interest rates are headed?” I finally realized that the best response to the question was quite simple albeit a bit rude: “If I did know what was going to happen to interest rates, would I waste my time talking to you?”
Now Donald N, McCloskey, an economist at the University of Iowa, has written a book that addresses this very issue. Broadly speaking, his book is about the rhetoric economists use. It is directed mainly at non-economists, but it has much to recommend it to economists as well.
The book’s title derives from what Professor McCloskey calls “the great American question.” That is, “If you’re so smart, why ain’t you rich?” Speaking directly to the issue I have raised, he points out that if economists really did know the future of interest rates, they would be too busy phoning instructions to their stockbrokers to be attending cocktail parties.
But, of course, economists are no more knowledgeable about how to turn a quick buck than ordinary people are; in fact, they obviously know a good bit less than such active entrepreneurs as the John D. Rockefellers and Donald Trumps in our society. In that regard, McCloskey indicates that economists play roles akin to those of art, theater, and music critics. If these people could actually paint the Mona Lisa, write Hamlet, or compose Swan Lake, then surely they would be doing that instead of writing columns for newspapers and magazines.
Then why do people turn so often to economists for financial advice—not just at luncheons and cocktail parties, but professionally, and at a steep fee, for guidance on managing trust funds and other investments? (In fact, some firms such as Otto Eckstein’s Data Resources have used complex economic models to rake in enormous sums of money from clients.)
McCloskey offers an enlightening explanation. He tells us that “James Burk, a sociologist and former stockbroker . . . found that the advice-giving industry sprang from legal decisions early in the century . . . . The courts began to decide that the trustee of a pension fund or of a child’s inheritance could be held liable for bad investing if he did not take advice. The effect would have been the same had the courts decided that prudent men should consult Ouija boards or the flights of birds.” The result was aburgeoning business for economic forecasters.
By casting doubt on the ability of economists to prophesy the future, McCloskey is similarly throwing a blanket over the efforts of social planners to make dramatic improvements in our well-being through the power of centralized government control. If planners were so smart, then why haven’t they made countries rich? Of course, the current collapse of Communism in Eastern Europe and the Soviet Union confirms the validity of McCloskey’s disdain for such schemes.
Indeed, therein lies what McCloskey sees as the true nature of the benefits to be gained from economic expertise—not predicting future events but illuminating the past. As he puts it, “The point is to know history, not to change it.” In McCloskey’s view, economic rhetoric can perform a valuable social function by providing stories, such as those about the adverse impact of governmental regulation and the beneficial effects of entrepreneurial endeavors, that may guide us to make valuable improvements.
At times, such as in the recent efforts at deregulating transportation as well as privatization, these stories have been successful. Paraphrasing John Maynard Keynes, McCloskey notes that, at least occasionally, ideas do triumph over vested interests.
Not incidentally, McCloskey notes that the “story” of scarcity and the need for choice appeared first not in the writings of economists but in literature. In Daniel Defoe’s novel, Robinson Crusoe is compelled to select the items he can transport ashore on his small raft. In modern economics classes, Crusoe’s dilemma has been converted into the choice between “guns and butter.”
But McCloskey warns that our choices are individual, not collective. American well-being, he notes, does not depend on crushing Japan. Just as it isn’t of great importance to predict the future, so too, in McCloskey’s view, “The idea is not to ‘compete,’ whatever that might mean in thrillingly collective policies, but to become skilled and hardworking and therefore rich.”
All in all, one ends McCloskey’s book by feeling that it is a tale well told. It deserves a wide audience. But please don’t ask me to speculate on how wide that audience may be!
Professor Shannon teaches in the Economics Department, Clemson University.