Paul Heyne and the Trouble with Economists

The family visit is going well; the crazy uncle is behaving, the kids are seen and not heard, and harmony prevails. Then it happens. Somebody mentions “fair” wages, and things get ugly because the economist takes the unwitting bait…

Recently, my well-educated and smart sister claimed that school teachers aren’t paid enough. I innocently asked how teachers (who voluntarily accepted the job, and have other options in a vibrant economy) could not be paid “enough?” She answered that teachers should be paid a “living wage”—a concept I, honestly, do not understand. Undiplomatically, I said so… then asked why we don’t simply legislate universal wealth with a minimum wage of $100/hour?

Paul Heyne explains:

There is no defensible way to attach a specific numerical value to the concept of a “fair wage”… How would we define it? A wage sufficient to support a family? Such a wage would exclude from employment those whose skills and experience do not make them worth that much to an employer, such as teenagers who don’t have families to support. The same wage for everyone? That would not work for reasons too obvious to list. A wage that meets the employee’s needs? Consider the implications of a wage policy that allocates three times as much to an employee with seven children and an invalid spouse as to an unmarried employee with spartan tastes.

We both walked away frustrated. I think my sister lives in a world of fantasy, and she thinks I am selfish—for thinking that the proper wage is the value of the employee’s marginal product. Thus does an apologia for markets generally lead to an apology. Heyne echoes this experience: “Whenever my wife and I have economists and their spouses over for dinner, I try to keep the conversation away from politics, because otherwise it almost always ends up in a somewhat rancorous dispute.”

Enter Heyne’s delightful and insightful collection of essays, “Are Economists Basically Immoral?” And Other Essays. His essay on teaching introductory economics deeply influenced my early teaching. I followed his advice of teaching the first economics course as if it were the student’s last (and not the first on the road to a PhD), and of using “plausible stories” rather than “arbitrary rigor” to awaken excitement and curiosity in students. His advice led me to a teaching award—but also the same “criticism of colleagues…for failing to teach material that turns out to be presupposed in the next theory course” that Heyne himself describes in the book.

This book should prove a valuable delight to economists who want to defend the ethics of the market order, and also to those who are preoccupied with justice but remain perplexed by economics. As with many compilations that span an author’s entire career, the book repeats several key points, and could have been shortened by a third. Fortunately, Heyne keeps the reader’s attention through multiple “plausible stories,” all convincing and lovely.

Heyne disagrees with Milton Friedman’s conclusion that economics is a positive science. He sides with the Austrians, concluding that “values inevitably enter science,” and echoing Hayek’s explanation that the “facts of the social sciences” are the beliefs that acting agents hold about the world. But Heyne does borrow from Friedman the conclusion that most disagreements about policy come, not from disagreements on values, but on disagreements about the likely effects of economics policies. Why is it, then, that so many critics (particularly among the theologians with whom Heyne had his early training) find economics offensive, and “either immoral or absurd”? In a tongue-in-cheek discussion of environmental protection (that can be applied broadly), Heyne jokes that “in some ways the application of benefit-cost analysis to a household’s recycling efforts is akin to using time-and-motion studies to appraise the act of lovemaking”—pollution may be a cost-benefit analysis to the economist, but pollution is a wrong tout court to the ecologist.

This does not mean that economists don’t care. Quite the contrary. Economists don’t have all the answers, but they can force people to apply cost-benefit analysis, rather than wishful thinking, to their choices. Economics contributes to questions of justice – because it imposes the constraints of reality, and because it reminds us that the ethics appropriate for a family cannot work in a commercial society (without lapsing into authoritarian paternalism). Heyne summarizes the problem by remarking that the foundations of economics are in the law (as a reflection of justice). But he then asks if “economics can return the favor and provide foundations for law.” The answer is yes: because economics advances efficiency over waste in a world of scarcity, and because economics emphasizes the wealth-maximizing effects of contract enforcement, property rights, and rule of law.

Heyne contends that “social justice” is often bandied about, but rarely defined. In a world of limited knowledge, to ignore the price mechanism in the name of a “higher” good is to reject “the most reliable information available on what social responsibility entails, in favor of a subjective and usually quite arbitrary conception of the public good.” At its best, “social justice” is a vacuous statement. At its worst, advocating for “social justice” leads to a “dangerous reductio ad absurdum of minute central planning”:

Suppose we… made the pattern of income distribution among specific persons and groups the target of a national policy for economic justice. The entire economy would now have to be planned and controlled in minute detail, because only in this way could we prevent anyone from rising above or falling below our economic targets…

If “government economic policies must ensure that the poor have their basic needs met before less basic desires of others are satisfied”… is the government supposed to call a halt to all skiing (surely a luxury) until everyone in the society is receiving a sound education?…”

Where does this confusion come from? Building on the insights of Adam Smith and F.A. Hayek, Heyne reminds us that we live in two worlds, with two different sets of rules: the simple order of civil society, and the complex order of Adam Smith’s “commercial society.” While the smaller world is knowable and personal, the larger world lies beyond the ken of human control or understanding. Rules are not transferrable between the two. Imagine treating customers as family; we would go bankrupt and starve. Conversely, the rules of the market would crush the small order: little Susie, age 6, didn’t work enough this week, so she can’t afford a meal or a goodnight kiss from Mom and Dad.

Heyne concludes that the detractors of commercial society dislike it for two reasons. First, they think experts can improve upon the results of the market process, in what F.A. Hayek calls “the fatal conceit,” which he described this way:

The curious task of economics is to demonstrate to men how little they really know about what they imagine they can design. To the naive mind that can conceive of order only as the product of deliberate arrangement, it may seem absurd that in complex conditions order, and adaptation to the unknown, can be achieved more effectively by decentralizing decisions and that a division of authority will actually extend the possibility of overall order. Yet that decentralization actually leads to more information being taken into account.

But there is a second problem: detractors are unhappy that good things happen without good intentions. In a world of limited knowledge, it is simply not possible for individuals to engineer justice. Intervention, even if it is well meaning, promotes inefficiency and injustice. What is the alternative? General, clear, universally applicable, and ex ante rules (i.e. the rule of law).

Heyne lays some of the blame at the feet of economists. They are good at explaining cost-benefit analysis, but they frequently neglect the rest of the story: coordination in the extended order of the market. Economists also lose credibility by pretending that theirs is a value-free science, while in fact “economic theory takes for granted, far more extensively than economists seem generally to recognize, the normative force of established rights and obligations.” In their refusal to engage with ethical questions, economists “surrender the right to discuss the morality of the market to those who don’t understand how markets work.” More is the pity, because Adam Smith (the father of modern economics) got it right: he started with the ethical foundations (The Theory of Moral Sentiments), before explaining how markets work. But he also (crucially) emphasized that self-interest will not translate into the common good without the dictates of justice. Alas, “it did not take long for Adam’s Smith successors to filter out the explicit ethical and political concerns that mark The Wealth of Nations.” In many ways, Heyne can be read as a plea to return to the oft-forgotten first half of Adam Smith.

Admittedly, it is still puzzling that one should have to make an apologia for capitalism. After all, capitalism is the world’s most effective anti-poverty program. From early capitalism in 1800 to today, world life expectancy has grown from 26 to 66 years. The world’s income per capita has increased by a factor of nine. Before 1800, everybody was poor. In 1820, 94% of humanity subsisted on less than $2 a day in today’s money. That fell to 37% in 1990 and less than 10% in 2015—all from the gradual incorporation of more people into freer markets. Heyne reminds us that “a compelling social vision will be one that both explains and inspires”—capitalism explains, but economists often forget to inspire. Conversely, the anti-capitalist mentality inspires, but fails to explain, based as it is “on a belief remarkably immune to either theory or evidence.”

Of course, much more remains to be done. But the good news is that capitalism—when it’s tried —lifts hundreds of millions of people out of poverty.

So why do we still see poverty, and school teachers who aren’t paid “enough?” Simply, because the world doesn’t have enough capitalism; too many are still excluded from markets. In the US today, government chokes growth by controlling 40% of the economy, with another 10% of GDP spent on compliance with regulations. One in three American workers requires a costly and time-consuming license to work.

In the case of teachers, we could start by letting the market create wealth and quality, wresting education back from a state monopoly, teachers’ unions, educrats, and administrators who have increased costs and decreased quality.

But Heyne would also recommend not talking about economics at family gatherings.

Reprinted from Law & Liberty

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