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Saturday, July 1, 2000

Paul Heyne, R.I.P.

Heyne Was the Most Effective Economic Educator in America

Contributing editor Thomas DiLorenzo is an adjunct scholar of the Mises Institute at Auburn University and a professor of economics at Loyola College in Maryland.

Most Americans have probably never heard of University of Washington economist Paul Heyne, who recently passed away. That’s a shame, for Paul was arguably the most effective economic educator in America for the past 25 years.

Most free-market economists consider Heyne’s textbook, The Economic Way of Thinking, to be by far the most effective tool for teaching the principles of economics. During the 1960s and ‘70s that honor resided with University Economics by UCLA economists Armen Alchian and William Allen, whom Professor Heyne acknowledged as his inspiration. The approach of Professors Heyne, Alchian, and Allen differs significantly from the dominant mainstream approach, which is almost exclusively devoted to a mind-numbing rendition of technique after technique in which students are forced to more or less memorize hundreds of theorems, formulas, and diagrams. Students inevitably become lost in the fog of technique, and most of them are miseducated.

In contrast, Paul Heyne believed that principles of economics must be taught “as tools of analysis.” This means first picking an application of economic theory (the minimum wage, trade disputes, merger waves, price controls, exchange rate fluctuations, traffic congestion, and so on), and then explaining the unique contribution that economic theory makes to understanding the application. Once a particular economic theory is introduced in this way, The Economic Way of Thinking applies the same theory to several other applications. Heyne believed this is the only way that students can truly learn not just economics but the economic way of thinking.

His book went through nine editions over the past 20 years, but was never quite a market leader. One likely reason for this is stated by Heyne in his preface: teaching people to think like economists requires one to become familiar with both current economic events as well as economic theory, and to be able to apply that theory to myriad contemporary issues. Most academic economists are, well, too lazy for that. They prefer instead to take the easy way out and just recite a theory or two a day, accompanied by elaborate diagrams and mathematical manipulations that they long ago memorized.

Popular in the Old Soviet Bloc

The Economic Way of Thinking became enormously popular in the former communist countries in recent years, and Heyne himself spent a considerable amount of his time as an invited lecturer before audiences of Russians, Czechs, Slovaks, Hungarians, Bulgarians, Poles, and Romanians, among others. These are people who “can’t afford to spend time learning an economics that is merely intellectual aerobics,” he explained in the preface to his eighth edition; they “need to understand how markets work and what institutions are essential if effective cooperation is to occur in a society characterized by an extensive division of labor.”

That is exactly what The Economic Way of Thinking teaches and what most other textbooks fail quite miserably at. That is because Heyne’s vision of what economics is all about has its roots in Adam Smith; the Austrian school economists, most notably Nobel laureate E A. Hayek; and Nobel laureate James M. Buchanan (a fellow traveler of the Austrian school). To these men, what matters and what most ordinary people do not understand is the process of exchange: the process by which literally millions of people in society coordinate their plans through markets—as long as they possess the freedom to do so. How this process works “is the great puzzle that the economic way of thinking begins to resolve” and few people have ever done it better than Paul Heyne.

Focus on Exchange

Focusing on market exchange through social cooperation and the division of labor—as opposed to mere “economizing” behavior, which is the subject of most economics texts—forces one to learn the importance of “the use of knowledge in society,” the title of the most famous essay by Hayek, whom Heyne greatly admired. This has significant implications for the study of economic theory and policy. For example, to Heyne the corporate takeover market is a mechanism that, among other things, tells us which kinds of corporate structures succeed and which do not. Indeed, allowing corporate restructurings to take place is the only way to gain such information. By contrast, too many other economists (and especially non-economists), because they fail to understand this straightforward point, condemn the takeover market as wasteful and call for regulation.

The Economic Way of Thinking also explains why such “middlemen” as real estate agents, stockbrokers, and speculators, who are generally reviled by the politically correct, are in fact indispensable to the smooth operation of markets. The beneficial role of speculators, Heyne wrote, is to “even out the flow of commodities into consumption and diminish price fluctuations over time.”

Paul Heyne devoted the last 40 years of his life to teaching economics to students all over the world through his lectures and his outstanding textbook. His legacy to the economics profession is to have helped revive the study of markets as they should be studied: as institutions that facilitate, in Adam Smith’s words, “man’s propensity to truck, barter, and exchange” and not as an endless array of “optimization” problems and puzzles that are quickly forgotten.