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Wednesday, August 25, 2010

The Economic Way of Thinking Makes a Comeback

As readers of this magazine know, its main goal, and that of FEE as a whole, is economic education—that is, to explain and spread essential economic insights so more people become familiar with the “economic way of thinking,” as Israel Kirzner called it. This brings insight to politics, society, and history. Above all, it gives a better understanding of the basis of a free society and of the malign consequences for liberty, prosperity, and social peace of denying the realities of economic life—or trying to, rather.

Even a brief look at the contemporary media or political debates—or conversations with acquaintances—quickly reveals how much this understanding is needed. Put simply, the level of ignorance of basic economic insights is staggering. Elementary fallacies such as the “broken window” argument pop up regularly and are apparently widely shared.

All of this has obvious and damaging effects on public debate and ultimately on public policy. To the extent that policy and debate actually reflect widespread misunderstanding of economic principles, among both the general public and the opinion-forming elite, they will be misguided—at best futile, at worst damaging and counterproductive. When results are disappointing, the reasons will not be understood and the frequent response will be to push even further down the wrong route and to reinforce failure.

One view is that ’twas always thus. According to this school of thought, the evidence we have from social surveys and mass observation is that the economic way of thinking is counterintuitive and difficult for the majority to grasp. Some argue that this reflects how we are hardwired as a species to think about the world in certain ways that in turn predispose us to look at economic matters in a particular fashion. So we see only intended results and ignore unintended ones, underestimate the benefits of trade and are wary of strangers, see the costs of change more readily than the benefits, and so forth. If these perspectives are widely held, then a democratic system that reflects popular predilections will always tend in an economically harmful direction.

It Wasn’t Always Thus

However, the evidence of history suggests that this condition is not predetermined or inevitable. Even if there is some kind of biological predisposition, it is not so strong that it cannot be overcome by education and propaganda (in the original, good sense of the word). The record also suggests that this is true for intellectual and political elites as well as the general public. The evidence for this is the history of the early nineteenth century in both Britain and France, as well as the United States, when economic ideas were widely understood and were a major part of popular culture and public discussion.

The works of Smith, Malthus, Ricardo, and Nassau Senior were all widely read and discussed. In France, Say’s 1803 Treatise of Political Economy was one of the best-selling books of its time. The works of their popularizers made their ideas accessible to the mass of the public.

An early example of this in England was Jane Marcet (1769–1858), who published a successful introduction to economics (particularly Say and Ricardo) in her 1824 Conversations on Political Economy. Even more prominently, the great classical-liberal feminist and pioneer sociologist Harriet Martineau (1802–1876) published a series of short stories that illustrated and explained economic principles, collected as Illustrations of Political Economy (1831). Sold in a low-cost format, these were the best sellers of the time. Martineau followed up with further series on such topics as reform of the Poor Law, which was equally successful. Later in life she wrote regular editorials for the Daily News, a popular paper, many of which were concerned with economic exposition and argument. John Stuart Mill also combined the roles of economic thinker and popular expositor. His Political Economy was a popular as well as intellectual success.

Educated Public, Educated Policy

All this had a significant effect on public opinion as reflected in popular culture and entertainment, letters to the press, and voting patterns. On issues such as free trade, government regulation, the Poor Law, and government finance, there was a clear movement toward support for economically sensible policy, limited government, and sound money. Thus demands for the repeal of the income tax, for stringent reductions in government spending, and for complete free exchange (which meant general laissez faire and not just free trade) became a staple of British radical working-class politics and liberal politics generally, as reflected in the policy of Gladstone as both chancellor and prime minister. Moreover, these attitudes and the underlying understanding persisted. When a campaign began to restore protection in the early1900s, the response was a popular countermovement that culminated in the landslide victory of the Liberals on a free-trade platform in 1906.

Of course there were also plenty of rejoinders and hostile responses to this successful spreading of economic ideas. The two most prominent exponents of this reaction were Thomas Carlyle and John Ruskin. It was Carlyle who coined the phrase “the dismal science” to describe economics—on grounds that economic thinking led to support for the abolition of West Indian slavery, an institution he supported. He and Ruskin did not put forward a form of economics of their own. Rather, they attacked economic reasoning as such. In this they were more clear-sighted and intellectually honest than many contemporary authors.

How It Was Lost

So if we compare the situation for much of the twentieth century and today with what went before, we have to ask, “What happened?” There are many explanations of why economic reasoning fell out of favor, such as the rise of mass media. Three seem particularly pertinent, however. First, from about the 1890s onward economics became increasingly mathematical and, as such, abstruse and inaccessible for many people. At the same time it was affected by the general movement of intellectual life into the academy, with its associated specialization.

A second factor was the movement to make economics into a value-free social science. It lost its earlier connection to political and social philosophy and its moral element, which had been one of its main features. Arguments about efficiency are simply less moving than ones that combine this with a moral perspective (as Martineau’s work did, for example). Finally, functioning as both cause and effect was a general shift of public discourse to a position that denied constraints, one based on the passionate conviction that everyone could have his cake and eat it too—as a right. Since a central insight of economics is the necessity of tradeoffs, economic argument found itself at odds with this sentiment and found fewer receptive listeners.

Recently, though, there are the first faint signs that economics is once again becoming a part of wider culture. There is the success of a new generation of popularizers, including Russ Roberts, who has followed the example of Martineau in using the fictional mode. This can only be a good thing, and we must try to ensure that politics and public discourse, from all points on the ideological compass, once again become economically aware.

  • Stephen Davies is a program officer at the Institute for Humane Studies and the education director at the Institute for Economics Affairs in London.