Economic Ignoramuses

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Why People Ignorant of Economics Hate and Fear the FreEnterprise System

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This column is dedicated to the memory of Loyola political science senior Anthony Torres who on August 28, 2007 died in a traffic accident, and to all other members of our Loyola community who make up our tragic national highway fatality statistics.

For zillions of years, the human race lived in small groups of 25—50 people or so. We became hard wired to appreciate explicit cooperation: I scratch your back, you scratch mine; I’ll feed you when you’re hungry and/or sick; you reciprocate. Those who wouldn’t or couldn’t do this didn’t tend to leave their genes to the next generation. That is one of the reasons why the family is even today such a powerful institution.

However, in an economy of 6 billion, we can’t all cooperate this way. Rather, we can only cooperate through markets. That is, implicitly, not explicitly.

To illustrate this point, take the recent history of New Orleans. When Katrina struck, prices of oil, gas, milk, water, orange juice, batteries, candles and other such items catapulted. This was implicit cooperation in action. How so? Higher prices means that those first in line at the grocery don’t get everything on the shelves. Elevated prices have a rationing function; at normal costs, people would tend to stock up; if the prices are very much higher, they will in effect if not by benevolent intention leave something for others This is part and parcel of Adam Smith’s "Invisible Hand" at work. Also, higher prices in post Katrina New Orleans would encourage, through greater profit margins, businessmen from outside of the struck area to bring these goods to those here who needed them the most. This embodies yet another aspect of Adam Smith’s "Invisible Hand."

But were people in NO satisfied with these salutary rising prices? Did they understand their economic function? To ask this is to answer it: they were not happy campers. Flesh and blood politicians also biased against markets by their biology, sensed this; they lambasted entrepreneurs as price gougers, and threatened stiff legal penalties

Charging higher prices during emergencies is good implicit cooperation. But we’re not hard wired, biologically, to accept any such thing. Unless we know a bit of economics, we recoil in horror from such goings on. We characterize them as ruthless, uncaring, selfish, callous, etc. We are not biologically situated in a way so as to welcome such behavior. Rather, we, in our gut, expect our fellow creatures to cooperate with us explicitly, the way family members treat each other.

Appreciation of the finer points of economic cooperation simply conferred no biological advantage all those zillions of years ago. Nor are university students and even faculty members exempt from these irrational (in the modern context) feelings. Unless you are reasonably cognizant of economic theory, higher prices in such situations will seem like greed run amuck.

Let us consider another example. Some 40,000 people die on our nation’s roadways each year. Most people — innocent of economic reasoning — think this is ordained by some Higher Power if they think about this at all. Or, they attribute it to things like speed, drunkenness, vehicle malfunction or other driver error.

But these are merely proximate causes; the ultimate cause is of course poor roadway management. And who is in overall charge of vehicular traffic? Why, government, of course. The problem is that in this sector of the economy, there is no automatic negative feedback mechanism. Those responsible for not satisfactorily dealing with the proximate causes of our dying like flies on the highways continue in business. Ditto for the Army Corps of Engineers, FEMA, the post office, the FDA, indeed, all government agencies.

In sharp contrast, the reason we have no national crises concerning pizza, rubber bands, computers, Disney World, WalMart etc., is that these enterprises are in the private sector. There, fail to satisfy consumers, and you are history.

The obvious solution to massive highway deaths is to privatize this amenity. But such a turn away from highway socialism will appear anathema to most of us, who are victimized by our biology, and simply unable to appreciate the rather subtle economic reasoning underlying such a proposal.

Dr. Block [send him mail] is a professor of economics at Loyola University New Orleans, and a senior fellow of the Ludwig von Mises Institute. He is the author of Defending the Undefendable.

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