Freeman

ARTICLE

The Nature and Significance of Economic Education

Economists Should Pursue Their Science with Objectivity, Detachment, and Passion

OCTOBER 01, 1998 by ISRAEL M. KIRZNER

For many years I have been fascinated by what at first glance seems a paradoxical feature in Ludwig von Mises’s attitude to the economics he taught. I believe that this seeming paradox in the life and work of my revered teacher can provide us with the key to understanding the role of economic education (and, I will further propose, to appreciating the special character and philosophy of the Foundation for Economic Education).

On the one hand, even the casual reader of Mises senses the enormous passion with which he preached the message of the free society and its dependence upon free markets. (See, for example, the almost dramatic closing paragraph of his magnum opus, Human Action, reprinted on the next page.) On the other hand, one of the foundations of economic science was, for Mises, the austere wertfreiheit with which, he maintained, the economist must pursue his scientific work. Science, Mises insisted, must never express or reveal the personal preferences, or judgments of value, of the scientist. The economist’s work requires objectivity and detachment, in order that its conclusions can be arrived at, and accepted by, persons subscribing to widely divergent sets of personal ideologies. Many superficial readers of Mises have failed to understand the manner in which his life and work showed that these two apparently contradictory attitudes—passion and scientific detachment—can and must be simultaneously maintained, without jeopardizing either the purity of the wertfreiheit or the white-hot fervor of the passion.

Economics is a science; the truth of its predictions does not depend on whether or not we find these truths palatable. But this circumstance does not, to be sure, wipe out the palatability or unpalatability of the predicted outcomes. Mises’s economic science, in fact, predicts consequences of central planning that are not only unpalatable, but tragically disastrous for human well-being—even for human survival. It was this which ignited Mises’s passion, not as a scientist, but as a human being agonizing over what he (so accurately!) foresaw as the inevitably horrible consequences of twentieth-century dirigisme. For Mises, economic education is the only tool we have with which to warn mankind of these terrible consequences. The content of this education is science. This content must be established and demonstrated with austere, disinterested objectivity. The purpose of this education, however, is to further human goals (since, after all, any human activity, including scientific activity, must have as its objective, some human goal). In the case of economics, that human goal is of such overriding importance for the human race that passionate concern becomes well-nigh inevitable and a morally natural phenomenon. It is this fascinating fusion of austere objectivity with passionate concern that characterized the life and work of Mises—and which, I believe, defines the philosophy of the Foundation for Economic Education.

But why is economic education needed? Why can we not rely on the truths of economics being recognized by the intelligent public without deliberate, organized effort at public enlightenment? We may identify two interrelated reasons:

  1. The conclusions of economics are, in general, counter-intuitive. Without careful guidance, the intelligent layman is likely to be led to accept as “obvious,” policy prescriptions that economics reveals as tending to generate wholly unwanted consequences.
  2. The reasoning by which economics reaches its conclusions is not only not self-evident, but in fact involves insights the subtlety of which is likely to be completely missed by the untrained. An education in economics does not have to be lengthy or very elaborate—but it is needed in order to introduce the intelligent layman to new ways of looking at and understanding the world. Let us take up in turn these two sources for the need for economic education.

The Counter-Intuitive Conclusions of Economics

The most significant of the counter-intuitive conclusions can be succinctly presented as follows:

First, despite individual freedom in the making of decisions in the free-market economy, there do emerge “law-like” regularities in economic phenomena—regularities that society can ignore or defy only at its own peril.

Second, these regularities appear as powerful tendencies in free markets toward the directing of scarce resources:

  • into those branches of production which the consuming public values most urgently and most highly;
  • into those methods of production which, judged from the consumers’ perspective, must be described as the most efficient;
  • with market consequences such that the rewards to owners of scarce resources express those resources’ respective relative productive values, as judged by consumers, and thus stimulate these owners to place their resources and talents in the efficient service of consumers. Many have identified these conclusions with what the textbooks often call Adam Smith’s “invisible hand” doctrine.

These conclusions are counter-intuitive. Very many intelligent, well-meaning persons during the past two centuries have simply assumed exactly the opposite of these conclusions to be the truth—and have concluded that government planning and control of market activities are crucially needed in order to avoid economic chaos, disorder, and social inefficiency. It was, however, true of the heyday of neoclassical economics (between, say, 1890 and 1930), that the overwhelming balance of professional opinion came to endorse the “invisible hand” conclusions. The major schools of economic thought (not including the German Historical School) agreed with these conclusions. And after World War I, with the demise of the German Historical School, it seemed to Mises[1] that economists of all schools were virtually unanimous in their understanding of markets. To deny these conclusions, it appeared, was simply to reveal a gap in one’s education.

This unanimity rapidly crumbled away during the central decades of this century. The dominant orthodoxy of the years between, say, 1935 and 1970, was one that urgently endorsed centrally planned intervention in market economies (and, indeed, looked rather favorably upon the possibility of efficiency under socialism even in its purest forms), on both macroeconomic and microeconomic grounds. Such intervention was needed at the macro level, the conventional wisdom ran, in order to avoid the instability predicted by Keynesian economics; it was needed at the micro level in order to avoid the distortions and inefficiencies predicted by the theorists of imperfect competition and/or of externalities.

Austrian economics never gave up the central conclusions of the earlier shared consensus of neoclassical economics. In fact, both Mises and Hayek significantly deepened Austrian economic understanding (of how markets work and of how they set benign, efficiency-enhancing, tendencies into motion) during these decades of eclipse.[2] They demonstrated (in effect if not always quite explicitly) how Austrian insights concerning the entrepreneurial role, the competitive process, and the knowledge-discovery process in fact respond effectively to both the macro and the micro concerns of the new interventionist orthodoxy in the economics profession. And their work and teaching during those lonely decades of the fifties and sixties laid the groundwork for the subsequent modest but important revival of Austrian economics during the past quarter of a century.

Economic education, aiming to enlighten the intelligent lay public to these significant—but still counter-intuitive—implications of economics, surely has a valuable role to play. Let us however now turn to the second of the reasons we have identified (as responsible for the need for economic education).

The Subjectivism and Subtlety of Economic Reasoning

Economic understanding does not call for sophisticated technical prowess. It does, however, require appreciation for a way of looking at human actions and of social interaction, which many at first find rather strange and unfamiliar. Economic understanding requires one to see the “objects” with which economic activity is concerned—the money, the natural resources, the capital equipment, the flows of half-finished goods, the fully produced goods ready for delivery to the consumer—from a subtly different perspective from that to which the layperson has been accustomed. Take, for example, the simple act of exchange. To the untrained eye, an episode of market exchange is seen as one in which an exchange of objects, presumably of equal value, occurs. When I buy a meal for $20, I have given up a $20 bill for food and service having a market value of $20. For the economist this episode is seen in an entirely different light. For me the meal was subjectively valued as being more important than the $20 bill that I was asked to surrender for the meal. For the owner of the establishment that sold me the meal, its value was lower than that of the prospective $20 he hoped to receive from me. So that this simple episode of exchange must have meant, in the prospective judgments of both the consumer and the vendor, that new, additional value was being created by this exchange. This elementary insight, so foundational to economic reasoning and understanding, is strange and unfamiliar to the world of commerce and of everyday activity.

In fact, the subtlety of such “subjectivist” insights often eludes analysts equipped with sophisticated mathematical tools. Their training, and the scope of their analytical tools, lead them to focus on the objects exchanged in such episodes, rather than on the human motives expressed in the purposeful actions of which such episodes consist. And it has been this “blind-spot” in modern mathematical economics that has tended to render it, in general, surprisingly insensitive to the role of expectations and of knowledge in economic decision making and in market processes.

Without the subtlety conferred by the subjective perspective, the market process appears to consist of endless sequences of exchanges. From the subjective perspective, however, it becomes possible (if not indeed imperative) to recognize the market process as involving processes of mutual discovery (to use a Hayekian phrase) on the part of market participants. It becomes possible to recognize scope for superior entrepreneurial vision into the future, and for the consequence that such vision can be expected continually to shake up existing patterns of production and of market exchange (in directions inspired by more accurate or, at least, more up-to-date assessments of the underlying realities).

Not only does the subjective perspective taught in economic reasoning offer new and deeper understanding of market phenomena and of market processes, it permits us to judge these phenomena and processes from a more comprehensive and all-encompassing vantage point. One of the most pervasive fallacies in public opinion has been that of seeing the gain that one participant derives from a market exchange as having necessarily been extracted and subtracted from his partner in that exchange. After all, if I profit from an exchange with my neighbor, that profit can only have arisen from my neighbor’s presumed, corresponding, loss. It is of course an elementary economic insight, yet one often entirely missed, that my profit must, at least prospectively, be in fact accompanied, not by a loss to my exchange partner (as in a “zero-sum game”), but by profit to him (a “positive-sum game”). No one, after all, engages in a voluntary act of exchange unless he or she expects to gain from it. This kind of entirely fresh perspective introduced by the subjective foundations of economic reasoning often (correctly) strikes beginners in economics as offering revolutionary new insights. It does not require lengthy training to introduce beginners to this kind of perspective. But economic education clearly has a “revolutionary” role to play in this regard.

Economic Education and Economic Policy

An eminent economist once provocatively declared that economists qua scientists have no business making normative pronouncements on economic policy (or, in fact, on anything else). To make such pronouncements, George Stigler somewhat impishly asserted, was to engage in “preaching.”[3] As a citizen the economist may certainly express dismay at the consequences of economic policies; he may abhor these consequences. But those who initiated and executed these policies, he argued, obviously desired these consequences (which others are viewing with abhorrence). We have no reason to presume that those engaged in actions or in executing policy are unaware of the consequences of what they do. To object to these policies is then simply to assert what those with the power to initiate policies refuse to accept, namely, that their consequences are indeed abhorrent. To so object, Stigler maintained, is merely to preach, not to engage in scientific discourse. The position we have been articulating in this lecture (and, I suggest, the position consistently taken by FEE) utterly rejects Stigler’s contention.

That contention rested on the premise that we must assume those who take actions or undertake policies to be correctly aware in advance of the likely consequences of those actions or policies. But, as we have argued here, the truth is that, because of sheer economic ignorance, well-meaning policy makers may be completely unaware that what they are doing may in fact generate consequences quite the reverse of what they wish to achieve. Someone once defined the job of an economist as that of warning people when and how they are seeking to run in two opposite directions at the very same time. My teacher, Mises, used to say something like the following in his lectures on price controls: “These laws passed by the legislators are bad not because I, Mises, do not like their consequences. These laws are bad because they produce consequences which they, the legislators themselves, would not like and certainly did not aim at.” In other words, economic ignorance is rife; it leads voters and politicians to support policies the consequences of which they themselves can only regret. The economist has a role to play in offering policy advice, and this role is not one of preaching, but one of pointing out the respective consequences of alternative policies among which voters and legislators must choose. Economic education is vitally and essentially relevant for this role. And this returns us to the paradox with which we began this lecture, the paradox of passion and austere wertfreiheit that permeated Mises’s life and work.

The Passionate Pursuit of Austerely Defined Economic Education

If one recognizes, as Mises did, how central planning in all degrees is likely to generate disastrous human consequences, it becomes clear that a passionate urge to spread elementary scientific economic understanding among the public involves no contradiction whatever. The phenomenon of economic ignorance is so widespread, and its consequences so frightening, that the objective of reducing that ignorance becomes a goal invested with independent moral worth. But the economic education needed to reduce such ignorance must be based on austere, objective, scientific content—with no ideological or moral content of its own. Precisely because it is necessary to “persuade” (that is, to educate) the lay public, it is necessary that this public be convinced of the objectivity and ideological impartiality of the insights being transmitted.

If public policies seeking to increase the scale and scope of government intervention in the economy are to be successfully fought at the legislative and executive levels, the economic understanding of the public must certainly and urgently be enhanced. For this to be achieved, the delicate interface between moral passion and scientific detachment must be recognized and respected.

There is, we have insisted, a fundamental difference between economic education (the raison d’être of this Foundation) and “libertarian” ideology or rhetoric. The former is not, and must not be, a mere “public relations” expression of the latter. The legitimate moral, and even passionate, commitment with which the Foundation and its supporters seek to promote its goals need not (in fact, dare not) compromise the detachment and objectivity of the content of the economic education, the dissemination of which makes up those goals.


Notes

  1. Ludwig von Mises, Epistemological Problems of Economics (Princeton, N.J.: Van Nostrand, 1960 [translation of Grundprobleme der Nationalökonomie, 1933]), p. 214.
  2. It was in 1949 that these two Austrian economists published major works (unappreciated for a long time) developing these deepened insights: Ludwig von Mises, Human Action: A Treatise on Economics (New Haven: Yale University Press, 1949) and F.A. Hayek, Individualism and Economic Order (London: Routledge and Kegan Paul, 1949).
  3. George J. Stigler, “The Economist as Preacher,” in The Economist as Preacher and Other Essays (Chicago: University of Chicago Press, 1982).

The body of economic knowledge is an essential element in the structure of human civilization; it is the foundation upon which modern industrialism and all the moral, intellectual, technological, and therapeutical achievements of the last centuries have been built. It rests with men whether they will make the proper use of the rich treasure with which this knowledge provides them or whether they will leave it unused. But if they fail to take the best advantage of it and disregard its teachings and warnings, they will not annul economics; they will stamp out society and the human race.
—Ludwig von Mises, Human Action

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