Category Archives: Great Thinkers

Economics Is Everywhere – Richard Feynman Edition

Economics is everywhere. Physicist Richard Feynman, while working at Los Alamos laboratory, re-discovered Adam Smith’s division of labor after some computer troubles and apparently didn’t even know it (he never mentions Adam Smith or the division of labor in this story):
In this particular case, we worked out all the numerical steps that the machines were supposed to do–multiply this, and then do this, and subtract that. Then we worked out the program, but we didn’t have any machine to test it on. So we set up this room with girls in it. Each one has a Marchant [old-timey calculator]: one was the multiplier, another was the adder. This one cubed–all she did was cube a number on anindex card and send it to the next girl.
 We went through our cycle this way until we got all the bugs out. It turned out that the speed at which we were able to do it was a hell of a lot faster than the other way, where every single person did all the steps. We got speed with this system that was the predicted speed for the IBM machine.
-Richard Feynman, Surely You’re Joking, Mr. Feynman!, p. 126.

A Bit Drastic, But at Least They Correctly Identified the Problem

A barbarous solution to the barbarous problem of over-legislation:

A Locrian who proposed any new law stood forth in the assembly of the people with a cord round his neck, and, if the law was rejected, the innovator was instantly strangled.

-Edward Gibbon, Decline and Fall of the Roman Empire, p. 1435.

I personally prefer peaceful solutions that reform the institutional rules that make over-legislating and over-regulation possible in the first place. But before the days of Douglass North and James Buchanan, this was apparently what people had to work with.

An Economist’s Love Letter to Books

“No university will ever have at one time four economists of the quality of Adam Smith, David Ricardo, Irving Fisher, and Alfred Marshall, to say nothing of a dozen of their best colleagues—but they can all reside in one’s library. Their subtle minds are ever ready to instruct and tease and baffle.”
George Stigler (U. Chicago, 1982 Nobel laureate), Memoirs of an Unregulated Economist, p. 219.

Douglass North, 1920-2015

Many great economists live long lives. James Buchanan, Milton Friedman, F.A. Hayek, Ludwig von Mises, and Gordon Tullock all lived into their nineties. Ronald Coase died a centenarian. Sadly, Douglass North has joined that august club at age 95. Keynes’ prediction about the long run once again proves correct.

North’s ideas and influence will live even longer than he did; consider that his successful rebuttal to Keynes. North won the 1993 economics Nobel for his work as an economic historian, and for showing the importance of institutions in economic development. He also played a large role in inspiring the New Institutional Economics (NIE) movement, which has its own scholarly society.

What are institutions? North and the many economists he influenced use the word in a particular way. For example, the Competitive Enterprise Institute is an institution (it’s even in our name), but not in the Douglass North sense. For North, institutions are more like the rules of the game. In baseball, three strikes and you’re out is a baseball institution—again, in a very different sense than how the Yankees or Cubs are baseball institutions. How would a pitcher’s behavior change if the rule was four strikes per out, or two? How would a hitter behave differently if foul balls were automatic outs? That’s what Doug North’s research approach was about, except on a much larger historical scale.

One of North’s most famous papers is “The Role of Institutions in the Revival of Trade: The Law Merchant, Private Judges, and the Champagne Fairs.” It is set in 12th century France, and coauthored with Paul Milgrom and Barry Weingast, themselves distinguished economists. France had no functional national court system in the 12th century, and a dearth of professional judges and lawyers. Even so, informal markets, called Champagne fairs, opened up and spontaneously evolved their own institutions. Even without help from up on high, people found ways to make things work.

These spontaneous Champagne fair institutions ranged from how stalls were allocated to norms for bargaining and haggling, all the way up to the creation of private courts for resolving disputes. It’s a real-life illustration of Hayek-style spontaneous order. North adds the insight that the institutions that evolved in the Champagne fairs guided peoples’ behavior in certain directions. Different institutions would have guided behavior differently.

Over time, successful institutions displaced unsuccessful institutions, in an ongoing social evolutionary process. This insight continues to influence scholars in many disciplines, not just in economics.

Another famous paper about England’s 17th century Glorious Revolution, also coauthored with Barry Weingast, makes the case that checks on royal power made modern life possible. In the short run, a weaker king made people’s property rights more secure. No longer could the king just take what he wanted. Now he had to deal with a strong Parliament. Successfully removing James II, the last of the Stuarts, and replacing him with the more amiable William and Mary made Parliament a credible counterweight to royal ambition.

This new institution, which we now call separation of powers (note that John Locke’s Treatises came out at precisely this time), made modern commerce and the Industrial Revolution possible. There is obviously much more to the story of modernity, but North told an important part of the tale.

North also laid out his institutional approach in a number of books. To his credit, they are all short. One of them particularly influenced me as a student: Understanding the Process of Economic Change. Here, North goes a level deeper than the Champagne fair or Glorious Revolution articles.

Yes, institutions matter. Societies with secure property rights, the rule of law, and so on tend to be wealthier than societies that don’t. But where do those institutions come from? How do they emerge? How do institutions evolve over time? The general theme is that the institutions that best fit a given society’s circumstances emerge organically, from the bottom up. They can’t be planned and imposed from the top down. They just kind of happen, as unsatisfying as that is to say. They also change over time. What works in one time and place may not work in another, so institutions must be allowed to evolve over time. Legislation and social conventions that worked for railroads or horses might not work for self-driving cars. It is a brilliant performance.

One final point to make: economics is about human cooperation and voluntary exchange. It is quite literally a social science. Douglass North understood that point as well as anyone. Fred Smith and I have recently spent a good deal of time encouraging economists to move beyond the Homo economicus blackboard caricature and study Homo sapiens as well. Douglass North needed no such reminder. Nor do his numerous students who work every day to carry on his impressive intellectual legacy. As long as North’s career was, his influence will last far longer.

More to Markets than Wealth

From p. 92 of James Buchanan’s 2005 essay collection Why I, Too, Am Not a Conservative:

I have often noted how much better it would have been had Adam Smith entitled his treatise ‘the simple system of natural liberty’ rather than The Wealth of Nations, since his very title called direct attention to the aggregate of value generated, despite Smith’s intent and purpose.

Adam Smith’s intent and purpose, of course, was to describe and defend what he called the simple system of natural liberty. The fact that this system enables efficient wealth creation is a good thing, but a second-order benefit.

Buchanan’s intent and purpose is point out that, like Smith’s choice of title, many classical liberals only care about the wealth aspects of markets. This focus is a mistake. Markets’ virtues run far deeper, in a way that can resonate deeply with people of nearly all philosophical persuasions.

This is because market orders are almost completely subjective. Different people have different preferences, and want different things. Because markets treat people as equals, very different people are free to cooperate and exchange with each other however they want, so long as they respect others’ equal rights to do the same. That way you can get the bundle of goods you want, I can get the very different bundle of goods I want, and so on.

Compare this to an election where your choice is between one politician with one bundle of policies, or his opponent with a second bundle of policies. You can’t pick and choose the positions you like from each candidate, and discard the ones from each that you don’t. It’s an all-or-nothing deal.

Markets are more than wealth creation engines. They are dignity creation engines. You can choose how you eat, dress, live, work, and play in a way that top-down systems cannot, or will not, provide. Politics doesn’t work that way, but markets can, when they’re allowed to.

This, Buchanan argues, is markets’ true appeal. The fact that so many classical liberals focus instead on efficiency is as poor a salesmanship job as he saw in his long lifetime.

In a way, it is classical liberals’ own fault their views are unpopular.

Who Really Benefits from Economic Freedom?

From p. 40 of Don Boudreaux’s short new volume The Essential Hayek, in which Don performs the valuable service of putting Hayek’s most important ideas in plain, accessible English:

[P]eople often regard the case for economic freedom to be chiefly a case for the freedom of business. This is a mistake. At root, the case for economic freedom is a case for the freedom of consumers.

You can download a free copy of the book in PDF format here. The Fraser Institute, which published the book, also put together an accompanying website with videos and other materials.

I highly recommend reading at least the first two chapters, in which Don takes a Leonard Read/I, Pencil approach to books, paper, and ink. It’s as clear and vivid an explanation of Hayekian spontaneous order as I’ve ever seen, and it reads quickly and easily.

Reminder of Basic Principles

From p. 158 of The Social Dilemma, Volume 8 of Gordon Tullock’s Selected Works:

Altogether, the extent to which people have freedom is more or less an inverse function of the number of laws in force.

Think of it as a very 20th century way of saying the same thing Tacitus said about two millennia ago:

The more corrupt the state, the more numerous the laws.

Some principles are timeless. One of them is that simplicity is beautiful, and honest.