In January 1912, the United States emerged from a two-year recession. Nineteen more followed—along with a century of phenomenal economic growth. Americans in real terms are 700% wealthier today.

In hindsight it seems obvious that emerging technologies circa 1912—electrification, telephony, the dawn of the automobile age, the invention of stainless steel and the radio amplifier—would foster such growth. Yet even knowledgeable contemporary observers failed to grasp their transformational power.

In January 2012, we sit again on the cusp of three grand technological transformations with the potential to rival that of the past century. All find their epicenters in America: big data, smart manufacturing and the wireless revolution.

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Ms. McCloskey sees a problem in the way that economic models are dominated by a strange, sociopathic character—”Max U” as she calls him, referring to the standard economic problem of maximizing utility subject to various constraints. Her own scholarly work has become increasingly focused on bringing love, hope, faith, courage and other virtues back into economics…

[R]ecall that in 1759 Adam Smith earned his reputation by publishing “The Theory of Moral Sentiments,” in which he accounted for the emergence of sympathy and moral judgments. It was only in the 20th century that ethics disappeared from economics, partly as a result of the increased mathematization of the discipline. Ms. McCloskey says it was a fundamental error for economists to start making their arguments in terms of “Max U” alone. “In fact, ‘Max U’ would be a much more sensible person if he had gender change and became ‘Maxine U,’” she chuckles.

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This morning, while I was grinding my blend of French, Colombian and Italian coffee beans, it occurred to me that I could be doing harm to the coffee shop and diner businesses in my neighborhood by making my own coffee at home. Might I have a responsibility and obligation to consume their product, either within their premises or brought right to my door by one of their speedy, undocumented-alien delivery men?

…

How much of this country’s economy am I personally destroying by my consumption preferences? I honestly never intended to do so much harm.

Read the whole thing.

Here’s his response when the interviewer asks him why so many Austrian-influenced economists are libertarians. The correlation isn’t due to ideology:

What the position makes you have is not libertarianism, or anything like that, but humility. The economist is nothing more than a student of society, and any economist that tries to represent themselves as a saviour of society should be subject to ridicule.

Self-checkout lanes have been popping up in grocery stores across the country over the last several years. Some people worry that without the adult supervision of a cashier, underage kids might be able to illegally buy alcohol at these self-checkout lanes. California state Rep. Fiona Ma even introduced a bill that took effect on January 1 that prohibits Californians of any age from using self-checkout lanes to purchase alcoholic beverages.

Has this been a huge problem in the past? Two independent studies have been done to find out. A 2009 UCLA study, cited by Rep. Ma to support her bill, found that underagers failed in 80.5 percent of their attempts. A separate study done by researchers at San Diego State, found that young hooligans had a 90.6 percent failure rate.

So yes, kids can buy booze at self-checkout lanes. But it’s probably less successful than other methods. As Joe Eskenazi put it in SF Weekly’s blog, “The best way to get alcohol remains to rely on a fake ID, theft, or someone’s skeezy 23-year-old cousin.”

Of course, there is another factor in play here, and likely Rep. Ma’s real motivation. That factor is rent-seeking. Many grocery cashier jobs are unionized. The more people use self-checkout lanes, the less they use the cashiers. Unions don’t appreciate the competition, so they work with lawmakers like Rep. Ma to legislate their preferences over consumers’.

According to Maplight.org, labor interests donated $150,450 to Rep. Ma’s campaign fund in 2009-10. They are by far her largest contributors.

This is an example of what economist Bruce Yandle calls a Baptist-and-bootlegger problem. Back in the old days, many Baptist preachers favored Prohibition because they believed drinking was morally wrong. Bootleggers favored Prohibition, too. Black market profits are far higher than in legal markets. So the bootleggers would manipulate the Baptists into favoring a bad policy by using the language of morality.

Fast-forward to today. Almost nobody wants increased underage drinking. And unions don’t want competition. So the bootleggers make up a story about how automated checkout lanes are causing runaway underage drinking. Social conservatives jump on board, wanting to strike a blow for morality. The bill gets passed, the Baptists feel good, and the bootleggers financially benefit. So do legislators.

Consumers, of course, are left out of this coalition.

This is called regulatory capture, and George Washington University’s Susan Dudley gives some examples in the video below. Click here if the embedded video below doesn’t work.

Markets, in fact, work all too well. They are an aggregator of wishes and desires, however misguided they may be.

This is actually a more accurate description of democracy — especially the misguided wishes bit. There is little, if anything aggregate about the market process. It is the process of individuals making exchanges with other individuals, each individually trying to meet their individual wants and individual needs.

The first thing I learned in undergrad macro is that all economics is micro. GDP and other indicators try to sum up the results of that process. But it all happens at the individual level.

Every customer at a grocery store gets an individually customized bundle of goods. Usually, no two are the same. But in a democracy, there are usually only two bundles of policy stances to choose from. And almost nobody agrees with the entire contents of one of the bundles. Nobody gets what they want. The successful politician picks his positions based on aggregate opinion, and ignores individual opinion.

But I quibble. The point of Wagner’s piece is to steer young people towards studying economics, and he makes a good case. He also offers some great advice, though it does contradict most of the policy prescriptions he puts forth:

Economists ought to be more humble in what we know and how we teach it.

Precisely. Humility is at the core of the economic way of thinking, and should form the basis of any humane political philosophy. It’s ok to admit that it’s impossible to consciously push an economy in a given direction without unintended consequences. And it’s not ok to tell other people you know what’s best for them.

(via Russ Roberts)

TO THE EDITOR:

Amar Bhidé argues that “governments should fully guarantee all bank deposits — and impose much tighter restrictions on risk-taking by banks.” (“Bring Back Boring Banks,” Jan. 4).

The lure of profit is why banks take on risk in the first place. But the specter of loss encourages them to be prudent about it. When governments remove losses from the equation, banks lose any incentive to keep their risk-taking in check. Someone else will pick up the tab if a plan doesn’t work, so why not take a chance? Hence the financial crisis.

Capitalism is a system of both profit and loss. Wishing losses away would have consequences quite different from Bhidé’s good intentions.

RYAN YOUNG
Washingon, Jan. 4, 2012
The writer is a fellow at the Competitive Enterprise Institute.