Browsed by
Tag: Sandy Ikeda

Critical Thinking Doesn’t Mean What Most People Think – Article by Sanford Ikeda

Critical Thinking Doesn’t Mean What Most People Think – Article by Sanford Ikeda

Comments 0 Comment
The New Renaissance Hat
Sanford Ikeda
July 4, 2017
******************************

Academics like to say that we teach “critical thinking” without thinking too critically about what it means to think critically.

Being Critical, Not Thinking Critically 

Too often in practice, people equate critical thinking with merely being skeptical of whatever they hear. Or they will interpret it to mean that, when confronted with someone who says something that they disagree with, they either:

a) stop listening (and perhaps then start shouting),

b) find a way to squeeze the statement into our pre-existing belief system (if we can’t we stop thinking about it), or

c) attempt to “educate” the speaker about why their statement or belief system is flawed. When this inevitably fails we stop speaking to them, at least about the subject in question.

Ultimately, each of these responses leaves us exactly where we started, and indeed stunts our intellectual growth. I confess that I do a, b, and c far too often (except I don’t really shout that much).

To me, critical thinking means, at a minimum, questioning a belief system (especially my own) by locating the premises underlying a statement or conclusion, whether we agree with it or not, and asking:

1) whether or not the thinker’s conclusions follow from those premises,

2) whether or not those premises are “reasonable,” or

3) whether or not what I consider reasonable is “reasonable” and so on.

This exercise ranges from hard to excruciatingly uncomfortable – at least when it comes to examining my own beliefs. (I’ve found that if I dislike a particular conclusion it’s hard to get myself to rigorously follow this procedure; but if I like a conclusion it’s often even harder.)

Teaching Critical Thinking

Fortunately, people have written articles and books that offer good criticisms of most of my current beliefs. Of course, it’s then up to me to read them, which I don’t do often enough. And so, unfortunately, I don’t think critically as much as I should…except when I teach economics.

It’s very important, for example, for a student to critically question her teacher, but that’s radically different from arguing merely to win. Critical thinking is argument for the sake of better understanding, and if you do it right, there are no losers, only winners.

Once in a while, a student speaks up in class and catches me in a contradiction – perhaps I’ve confused absolute advantage with comparative advantage – and that’s an excellent application of genuine critical thinking. As a result we’re both now thinking more clearly. But when a student or colleague begins a statement with something like “Well, you’re entitled to your opinion, but I believe…” that person may be trying to be critical (of me) but not in (or of) their thinking.

It may not be the best discipline for this, but I believe economics does a pretty good job of teaching critical thinking in the sense of #1 (logical thinking). Good teachers of economics will also strategically address #2 (evaluating assumptions), especially if they know something about the history of economic ideas.

Economics teachers with a philosophical bent will sometimes address #3 but only rarely (otherwise they’d be trading off too much economic content for epistemology). In any case, I don’t think it’s possible to “get to the bottom” of what is “reasonable reasonableness” and so on because what ultimately is reasonable may, for logical or practical reasons, always lie beyond our grasp.

I could be wrong about that or indeed any of this. But I do know that critical thinking is a pain in the neck. And that I hope is a step in the right direction.

Sanford (Sandy) Ikeda is a professor of economics at Purchase College, SUNY, and the author of The Dynamics of the Mixed Economy: Toward a Theory of Interventionism. He is a member of the FEE Faculty Network.

This article was published by The Foundation for Economic Education and may be freely distributed, subject to a Creative Commons Attribution 4.0 International License, which requires that credit be given to the author. Read the original article.

Shut Out: How Land-Use Regulations Hurt the Poor – Article by Sanford Ikeda

Shut Out: How Land-Use Regulations Hurt the Poor – Article by Sanford Ikeda

Comments 0 Comment
The New Renaissance Hat
Sanford Ikeda
February 28, 2015
******************************

People sometimes support regulations, often with the best of intentions, but these wind up creating outcomes they don’t like. Land-use regulations are a prime example.

My colleague Emily Washington and I are reviewing the literature on how land-use regulations disproportionately raise the cost of real estate for the poor. I’d like to share a few of our findings with you.

Zoning

One kind of regulation that was actually intended to harm the poor, and especially poor minorities, was zoning. The ostensible reason for zoning was to address unhealthy conditions in cities by functionally separating land uses, which is called “exclusionary zoning.” But prior to passage of the Civil Rights Act of 1968, some municipalities had race-based exclusionary land-use regulations. Early in the 20th century, several California cities masked their racist intent by specifically excluding laundry businesses, predominantly Chinese owned, from certain areas of the cities.

Today, of course, explicitly race-based, exclusionary zoning policies are illegal. But some zoning regulations nevertheless price certain demographics out of particular neighborhoods by forbidding multifamily dwellings, which are more affordable to low- or middle-income individuals. When the government artificially separates land uses and forbids building certain kinds of residences in entire districts, it restricts the supply of housing and increases the cost of the land, and the price of housing reflects those restrictions.

Moreover, when cities implement zoning rules that make it difficult to secure permits to build new housing, land that is already developed becomes more valuable because you no longer need a permit. The demand for such developed land is therefore artificially higher, and that again raises its price.

Minimum lot sizes

Other things equal, the larger the lot, the more you’ll pay for it. Regulations that specify minimum lot sizes — that say you can’t build on land smaller than that minimum — increase prices. Regulations that forbid building more units on a given-size lot have the same effect: they restrict supply and make housing more expensive.

People who already live there may only want to preserve their lifestyle. But whether they intend to or not (and many certainly do so intend) the effect of these regulations is to exclude lower-income families. Where do they go? Where they aren’t excluded — usually poorer neighborhoods. But that increases the demand for housing in poorer neighborhoods, where prices will tend to be higher than they would have been.

And it’s not just middle-class families that do this. Very wealthy residents of exclusive neighborhoods and districts also have an incentive to support limits on construction in order to maintain their preferred lifestyle and to keep out the upper-middle-class hoi polloi. Again, the latter then go elsewhere, very often to lower-income neighborhoods — Williamsburg in Brooklyn is a recent example — where they buy more-affordable housing and drive up prices. Those who complain about well-off people moving into poor neighborhoods — a phenomenon known as “gentrification” — may very well have minimum-lot-size and maximum-density regulations to thank.

When government has the authority to restrict building and development, established residents of all income levels will use that power to protect their wealth.

Parking requirements

Another land-use regulation that makes space more expensive is municipal requirements that establish a minimum number of parking spaces per housing unit.

According Donald Shoup’s analysis, parking requirements add significantly to the cost of housing, particularly in areas with high land values. For example, in Los Angeles, parking requirements can add $104,000 to the cost of each apartment. Parking requirements limit consumers’ choices and increase the cost of housing even for those who prefer not to pay for parking.

Developers typically build only the minimum amount of parking required by law, which indicates that those requirements are binding. That is, in a less-regulated environment, developers would devote less land to parking and more land to living space. A greater supply of living space will, other things equal, lower the cost of housing.

Smart-growth regulations

In the 1970s, municipalities enacted new rules that were designed to protect farmland and to preserve green space surrounding rapidly growing cities by forbidding private development in those areas. By the late 1990s, this practice evolved into a land-use strategy called “smart growth.” (Here’s a video I did about smart growth.)  While some of these initiatives may have preserved green space that can be seen, what is harder to see is the resulting supply restriction and higher cost of housing.

Again, the lower the supply of housing, other things equal, the higher real-estate prices will be. Those who now can’t afford to buy will often rent smaller apartments in less-desirable areas, which typically have less influence on the political process. Locally elected officials tend to be more responsive to the interests of current residents who own property, vote, and pay taxes, and less responsive to renters, who are more likely to be transients and nonvoters. That, in turn, makes it easier to implement policies that use regulation to discriminate against people living on low incomes.

Conclusion

Zoning, minimum lot sizes, minimum parking requirements, and smart-growth regulations demonstrably and significantly increase the cost of housing for everyone by raising construction costs and restricting the supply of housing.

The average household in the United States today, rich or poor, spends about a third of its income on housing. But higher home prices hit lower-income households disproportionately hard because a dollar increase in housing expenditure represents a larger percentage of a poorer household’s budget. Indeed, the bottom 20 percent of households spends around 40 percent of income on housing.

In other words, these land-use regulations are unfairly regressive. Relaxing or even removing them would be a step toward achieving greater equity.

Sanford Ikeda is an associate professor of economics at Purchase College, SUNY, and the author of The Dynamics of the Mixed Economy: Toward a Theory of Interventionism.
***
This article was originally published by The Foundation for Economic Education.
Dissent Under Socialism – Article by Sanford Ikeda

Dissent Under Socialism – Article by Sanford Ikeda

Comments 0 Comment
The New Renaissance Hat
Sanford Ikeda
August 26, 2014
******************************

The Daily Mail reports that “France’s Socialist government provoked outrage … by becoming the first in the world to ban protests against Israeli action in Palestine.” The socialist interior minister justified the ban by citing the potential for violent clashes in Paris between opposing groups, which he deemed a “threat to public order.”

My object here is not to comment on any aspect of the conflict in the Middle East or on this ban, which may or may not be justified. What caught my eye in the story is the following quote:

Sylvie Perrot, another pro-Palestine activist from Paris, said: “Fascist states stop people demonstrating against wars—it is beyond belief that French Socialists are following their example.”

Au contraire! 

If you understand the nature of socialism, it’s quite believable.

Collectivism and dissent

Let me begin by defining “collectivism” as any economic system in which the State controls the principal means of production. Collectivism requires central planning of some kind over the resources the State controls. The particular brand of collectivism we’re talking about depends on the aims of the controllers. 

In theory, “socialism” aims to unite people around the world regardless of nationality toward a common internationalist goal, while in theory “fascism” aims to unite people of a particular nation toward a common nationalist goal. The ends differ but all forms of collectivism use the same means: State control (de facto or de jure) over the means of production. Given their common collectivist roots, then, it shouldn’t be surprising that fascism and socialism employ similar policies.

Even more than that, however, F. A. Hayek points out, in The Road to Serfdom:  

That socialism so long as it remains theoretical is internationalist, while as soon as it is put into practice … it becomes violently nationalist, is one of the reasons why “liberal socialism” as most people in the Western world imagine it is purely theoretical, while the practice of socialism is everywhere totalitarian.

I would recommend the chapters in The Road to Serfdom where Hayek explains why this is the case (especially “Individualism and Collectivism,” “Planning and Democracy,” “Planning and the Rule of Law,” and “The Socialist Roots of Naziism”), but here are two important points in that explanation.

First, to the degree that the State undertakes central planning of the resources it controls, it can’t allow any person to interfere with or oppose the plan. Or, as Hayek puts it, “If the state is precisely to foresee the incidence of its actions, it means that it can leave those affected no choice.”

Second, the more resources the State controls, the wider the scope and more detailed its planning necessarily becomes so that delay in any part of the system becomes intolerable. There is little room for unresponsiveness, let alone dissent. Hayek again:

If people are to support the common effort without hesitation, they must be convinced that not only the end aimed at but also the means chosen are the right ones. The official creed, to which adherence must be enforced, will therefore comprise all the views about facts on which the plan is based. Public criticism or even expressions of doubt must be suppressed because they tend to weaken public support. [emphasis added]

My point is that even if genuine socialism of some kind did exist in France (or anywhere else), the government there could not allow spontaneous political demonstrations, for the reasons Hayek outlines in The Road to Serfdom. Collective political ends must trump individual expression. 

That a socialist government would ban political demonstrations should then come as no surprise.

The problem is central planning 

Friends of mine have objected that these arguments are misplaced because genuine socialism doesn’t exist in France, and that political parties who brand themselves “socialist” aren’t really socialist at all, at least in the sense defined here. 

But Hayek’s point is that intolerance for dissent grows with the scope of central planning. Thus, the principle also applies in the case of a mixed economy, such as the United States, with more limited central planning. To the extent that the U.S. government tries to pursue collectivist ends—say, during times of war—the greater the pressure on public officials to quell open displays of protest.

Moreover, the more things the central government plans for, the less freedom—of expression, assembly, association—there can be. If the State controls all means of production and all resources are placed in the hands of the authorities, then in effect all forms of expression—in politics, science, religion, art—are political and any form of dissent from the official creed is intolerable and must be forbidden. That would lead, and has led, to the death of free inquiry, because dissent, rebellion, and radical criticism are essential to the growth of knowledge.

One of the political virtues of private property is that it establishes a sphere of autonomy in which we are safe from the threat of physical violence. In that sphere of autonomy, we can say or not say, or do or not do, anything we like, so long as we don’t initiate physical violence against others. Private property is the garage where we can form a band or invent the personal computer or paint protest signs. As private property disappears, not only do our economic liberties disappear, but so too do our political liberties.

What is not forbidden …

Indeed, taken to its logical conclusion, under pure collectivism no freedom at all would remain, and not only the freedom to peacefully assemble in protest against government activities. In a completely collectivist system, it’s not a stretch to say that what isn’t forbidden would in fact be mandatory.

From California, which at least for now is a ways off from pure collectivism, comes an even-nuttier though still-scary scenario:

A Southern California couple received a letter from Glendora city officials threatening to fine them $500 if they don’t get their sun-scorched brown lawn green again, reports AP. Which Laura Whitney and Michael Korte would gladly do, except for one thing: They could also be fined $500 if they water their lawn too much; they’re currently only watering twice a week.

Thus, what is mandatory may also be forbidden. Don’t forget, 1984 was 30 years ago.

Sanford Ikeda is an associate professor of economics at Purchase College, SUNY, and the author of The Dynamics of the Mixed Economy: Toward a Theory of Interventionism.
***
This article was originally published by The Foundation for Economic Education.
Plot Holes in Fiction and in Life – Article by Sanford Ikeda

Plot Holes in Fiction and in Life – Article by Sanford Ikeda

Comments 0 Comment
The New Renaissance Hat
Sanford Ikeda
August 23, 2014
******************************

Fans of J.R.R. Tolkien’s trilogy The Lord of the Rings (LOTR) have long been aware of a possible plot hole. The central narrative concerns the hero, Frodo Baggins, who must destroy a powerful ring by walking through forbidding terrain and defeating or eluding monstrous foes and throwing the ring into a live volcano. The journey takes many months and costs Frodo and his companions dearly.

Over the years, many readers have noticed a much easier and less dangerous solution. Why, they ask, didn’t Frodo just have Gandalf ask his friends the mighty eagles to fly him swiftly over enemy territory so he could then simply toss the ring into the volcano? I’ve run across this post on Facebook a few times, which cleverly patches that hole with only a slight change in the narrative. (Others argue that there’s really no hole to patch because the “eagle solution” itself has flaws. And so the debate continues.)

Anyway, it occurred to me that the kind of social theory that I and many Austrian economists engage in could usefully be framed in terms of plot holes.

What’s a plot hole?

I’ll define a plot hole as a failure of logic, a factual mistake, or an obvious solution to a critical problem central to a story. (Here’s a slightly different definition from Wikipedia.) Of course, any particular plot hole may involve more than one of these errors of fact, logic, or perception, and there may be more kinds of plot holes than these. But here are examples of each of the ones I’ve mentioned. They come from movies, but some of them, such as the plot hole in Lord of the Rings, have literary counterparts.

Factual hole: In the movie Independence Day, key characters survive a massive fireball by ducking into the open side-door of a tunnel just as the inferno blasts by. Anyone who knows about firestorms would tell you that the super-heated air alone would instantly kill anyone in that situation.

Logical hole: In Citizen Kane, miserable Charles Foster Kane dies alone. How then does anyone know that his last word was “Rosebud”? Keep in mind that it’s a reporter’s search for the meaning of that word that drives the story forward.

Perceptual hole: The LOTR problem mentioned above is an example of this. No one seems to realize that there may be a much safer and effective way to defeat the enemy.

I would think that one of the things that makes writing fiction difficult is that events and characters have to hang together. The writer needs always to keep in mind the rules of the universe she’s creating, to recall what her characters know and when they know it, and to make sure that these details all constrain every action and event.

Life is full of “plot holes”

In real life, we make mistakes all the time. I think it’s interesting that those mistakes appear to fit neatly into the three categories of plot holes I’ve identified.

Factual hole/error: A person who doesn’t know the difference between liters and gallons buys a 100-liter barrel to hold 100 gallons of rainwater. No explanation necessary.

Logical hole/error: Thinking that since you’ve made a string of bad investment decisions, your next decision is therefore more likely to be a good one. But it’s quite the contrary: If you’ve been consistently making bad decisions, it follows that if nothing else changes, your next decision will also be bad one. (See “gambler’s fallacy.”)

Perceptual hole/error: Selling your car for $15,000 when, unbeknownst to you, you could have sold it for $20,000. The better deal simply escapes your notice and, if you were ever to learn about it, you would feel regret.

Here’s the difference though: In fiction, a writer can get away with any of these three plot holes as long as no reader sees it. Even if you do notice one, but you otherwise enjoy the story, you might be willing to overlook it. But in real life, you can’t ignore factual or logical plot holes. If you try to, they will come back and bite you. It will be painfully obvious that you can’t put 100 gallons of water into a 100-liter barrel. And if you bet on your next investment being a winner because you’ve just had a bunch of losers, it’s very likely that you’ll be disappointed. These kinds of holes you’re bound to discover.

I wrote about errors in an earlier column, but the distinction comes from my great teacher Israel Kirzner. He identifies a class of errors that derive from “overoptimism.” The more optimistic you are, the more likely it is that you’ll deliberately pass up solid opportunities for gain and thus the more likely it is that you’ll be disappointed. That’s not to say that optimism is a bad thing. If you weren’t optimistic and so never acted on that optimism, you’d never know if that optimism were warranted or not. You would never learn.

The other kind of error, what Kirzner calls “overpessimism,” happens when you’re so pessimistic that you unwittingly pass up a realizable opportunity. And because you don’t take chances, you don’t learn. This type of error is akin to a perceptual hole. Thinking you can only get $15,000 for your car means not selling to someone who would in fact pay more. Here, it’s not inevitable that you will discover your error because, after all, someone does buy your car (for $15,000). But you could have done better if you’d been more alert.

So errors of overpessimism, what I’m calling perceptual holes, are very different from factual and logical holes in that they are much harder to detect.

Plot holes and social theory

For many Austrian economists like me, economics, as a branch of a social theory, accepts as a datum that people are prone to make mistakes. But given the right rules of the game—private property, free association—they can discover those mistakes and correct them via an entrepreneurial-competitive process. Unlike plot holes in fiction writing, then, plot holes in living social systems are a feature, not a bug.

So our challenge as flesh-and-blood people, and what makes our lives interesting, is to discover plot holes, especially perceptual ones, and to fill them in. The challenge of social theorists is to understand as much we can about how that happens. In novels it’s the people outside the story who discover holes; in society it’s the people living the story who do.

Plot holes in novels spell failure. Plot holes in real life mean opportunity.

Sanford Ikeda is an associate professor of economics at Purchase College, SUNY, and the author of The Dynamics of the Mixed Economy: Toward a Theory of Interventionism.
***
This article was originally published by The Foundation for Economic Education.
Heterogeneity: A Capital Idea! – Article by Sanford Ikeda

Heterogeneity: A Capital Idea! – Article by Sanford Ikeda

Comments 0 Comment
The New Renaissance Hat
Sanford Ikeda
June 26, 2014
******************************

When Thomas Piketty’s Capital in the 21st Century was released in English earlier this year it sparked vigorous debate on the issue of wealth inequality. Despite the prominence of the word in the title, however, capital has not itself become a hot topic. Apparently none of his defenders have taken the opportunity to explore capital theory, and, with a few exceptions, neither have his critics.

To prepare to read Mr. Piketty’s book I’ve been studying Ludwig Lachmann’s Capital and Its Structure, which, along with Israel M. Kirzner’s Essay on Capital, is among the clearest expositions of Austrian capital theory around. A hundred years ago the “Austrian economists”—i.e. scholars such as Eugen von Böhm-Bawerk who worked in the tradition of Carl Menger—were renowned for their contributions to the theory of capital. Today capital theory is still an essential part of modern Austrian economics, but few others delve into its complexities. Why bother?

Capital is Heterogeneous

 

Among the Austrians, Böhm-Bawerk viewed capital as “produced means of production” and for Ludwig von Mises “capital goods are intermediary steps on the way toward a definite goal.” (Israel Kirzner uses the metaphor of a “half-baked cake.”)  Lachmann then places capital goods in the context of a person’s plan: “production plans are the primary object of the theory of capital.” You can combine capital goods in only a limited number of ways within a particular plan. Capital goods then aren’t perfect substitutes for one another. Capital is heterogeneous.

Now, mainstream economics treats capital as a homogenous glob. For instance, both micro- and macroeconomists typically assume Output (Q) is a mathematical function of several factor inputs, e.g. Labor (L) and Capital (K) or

Q = f(L,K).

In this function, not only is output homogenous (whether we’re talking about ball-bearings produced by one firm or all the goods produced by all firms in an economy) but so are all labor inputs and all capital inputs used to produce them. In particular, any capital good can substitute perfectly for any other capital good in a firm or across all firms. A hammer can perfectly replace, say, a helicopter or even a harbor.

On the other hand, capital heterogeneity implies several things.

First, according to Mises, heterogeneity means that, “All capital goods have a more or less specific character.” A capital good can’t be used for just any purpose:  A hammer generally can’t be used as a harbor. Second, to make a capital good productive a person needs to combine it with other capital goods in ways that are complementary within her plan: Hammers and harbors could be used together to help repair a boat. And third, heterogeneity means that capital goods have no common unit of measurement, which poses a problem if you want to add up how much capital you have:  One tractor plus two computers plus three nails doesn’t give you “six units” of capital.

Isn’t “money capital” homogeneous? The monetary equivalent of one’s stock of capital, say $50,000, may be useful for accounting purposes, but that sum isn’t itself a combination of capital goods in a production process. If you want to buy $50,000 worth of capital you don’t go to the store and order “Six units of capital please!” Instead, you buy specific units of capital according to your business plan.

At first blush it might seem that labor is also heterogeneous. After all, you can’t substitute a chemical engineer for a pediatrician, can you? But in economics we differentiate between pure “labor” from the specific skills and know-how a person possesses. Take those away—what we call “human capital”—and then indeed one unit of labor could substitute for any other. The same goes for other inputs such as land. What prevents an input from substituting for another, other than distance in time and space, is precisely its capital character.

One more thing. We’re talking about the subjective not the objective properties of a capital good. That is, what makes an object a hammer and not something else is the use to which you put it. That means that physical heterogeneity is not the point, but rather heterogeneity in use. As Lachmann puts it, “Even in a building which consisted of stones completely alike these stones would have different functions.” Some stones serve as wall elements, others as foundation, etc. By the same token, physically dissimilar capital goods might be substitutes for each other. A chair might sometimes also make a good stepladder.

But, again, what practical difference does it make whether we treat capital as heterogeneous or homogenous? Here, briefly, are a few consequences.

Investment Capital and Income Flows

 

When economists talk about “returns to capital” they often do so as if income “flows” automatically from an investment in capital goods. As Lachmann says:

In most of the theories currently in fashion economic progress is apparently regarded as the automatic outcome of capital investment, “autonomous” or otherwise. Perhaps we should not be surprised at this fact: mechanistic theories are bound to produce results that look automatic.

But if capital goods are heterogeneous, then whether or not you earn an income from them depends crucially on what kinds of capital goods you buy and exactly how you combine them, and in turn how that combination has to complement the combinations that others have put together. You build an office-cleaning business in the hopes that someone else has built an office to clean.

There’s nothing automatic about it; error is always a possibility. Which brings up another implication.

Entrepreneurship

 

Lachmann:

We are living in a world of unexpected change; hence capital combinations, and with them the capital structure, will be ever changing, will be dissolved and re-formed. In this activity we find the real function of the entrepreneur.

We don’t invest blindly. We combine capital goods using, among other things, the prices of inputs and outputs that we note from the past and the prices of those things we expect to see in the future. Again, it’s not automatic. It takes entrepreneurship, including awareness and vision. But in the real world—a world very different from the models of too many economists—unexpected change happens. And when it happens the entrepreneur has to adjust appropriately, otherwise the usefulness of her capital combinations evaporates. But that’s the strength of the market process.

A progressive economy is not an economy in which no capital is ever lost, but an economy which can afford to lose capital because the productive opportunities revealed by the loss are vigorously exploited.

In a dynamic economy, entrepreneurs are able to recombine capital goods to create value faster than it disappears.

Stimulus Spending

 

As the economist Roger Garrison notes, Keynes’s macroeconomics is based on labor, not capital. And when capital does enter his analysis Keynes regarded it the same way as mainstream economics: as a homogeneous glob.

Thus modern Keynesians, such as Paul Krugman, want to cure recessions by government “stimulus” spending, without much or any regard to what it is spent on, whether hammers or harbors. (Here is just one example.)  But the solution to a recession is not to indiscriminately increase overall spending. The solution is to enable people to use their local knowledge to invest in capital goods that complement existing capital combinations, within what Lachmann calls the capital structure, in a way that will satisfy actual demand. (That is why economist Robert Higgs emphasizes “real net private business investment” as an important indicator of economic activity.)  The government doesn’t know what those combinations are, only local entrepreneurs know, but its spending patterns certainly can and do prevent the right capital structures from emerging.

Finally, no one can usefully analyze the real world without abstracting from it. It’s a necessary tradeoff. For some purposes smoothing the heterogeneity out of capital may be helpful. Too often though the cost is just too high.

Sanford Ikeda is an associate professor of economics at Purchase College, SUNY, and the author of The Dynamics of the Mixed Economy: Toward a Theory of Interventionism.
***
This article was originally published by The Foundation for Economic Education.
Slogans or Science? – Article by Sanford Ikeda

Slogans or Science? – Article by Sanford Ikeda

Comments 0 Comment
The New Renaissance Hat
Sanford Ikeda
May 20, 2014
******************************

The debate over raising the legal minimum wage (LMW) to $10 an hour has people on both sides saying things they should know better than to say. For example, a friend recently posted the following meme (which isn’t the worst I’ve seen) on Facebook:

One year ago this week, San Jose decided to raise its minimum wage to $10/hour.

Any jobs disappear?

The number of minimum wage jobs has grown.

Any businesses collapse?

The number of businesses has grown.

Any questions?

Yes, several, but I’ll get to those in a bit.

Memes like these are just as silly and misleading as the simplistic arguments they’re probably attacking. In fact, the economic analysis of significantly raising the minimum wage says that, other things equal, it will reduce employment below the level where it would otherwise have been. It doesn’t say that that employment will fall absolutely or businesses will collapse.

A little thinking can go a long way

Have a look at this chart published in the Wall Street Journal. At first, it seems to support the simplistic slogans. But it’s important to compare similar periods, such as March–November 2012 (before the increase was passed) versus March–November 2013, (just after it went into effect). The LMW increase wasn’t a surprise, so in the months before it was passed, businesses would have been preparing for it, shaking things up. Comparing those two periods, which makes the strongest case for the meme’s assertions, the total percentage increase in employment (the area under the red line) looks pretty close, going just by my eyeballs and a calculator. In fact, the post-hike increase might actually be smaller, but you’d need more data to be sure. So if you compare similar periods, the rate of employment growth seems not to have been affected very much by the hike. So is the meme right?

According to that same chart and other sources, hiring in the rest of California and the country, where for the most part there was no dramatic increase in the LMW, was also on the rise at pretty much the same time. Why? Apparently, the growth rate of the U.S. economy jumped in 2012, especially in California. So the demand for inputs, including labor, probably also increased. I’m certainly not saying this correlation is conclusive, but you could infer that while hiring in San Jose was rising, it wasn’t rising as fast as it might have otherwise, given the generally improving economy.

That’s a more ambiguous result, and of course harder to flit into a meme.

You are stupid and evil and a liar!

Those strongly in favor of raising the LMW cast opponents as Republican apologists for big business. Take this post from DailyKos, which apparently is the source of the above meme. The author writes, “Empirically, there’s no clear negative effect that can be discerned. The concerns of Teahadists like Paul Ryan and Marco Rubio is [sic] rather unfounded in academic literature and in international assessments of natural experiments.”

Now, the overwhelming conclusion of years of economic research on the effects of a minimum wage on employment is that it tends to increase, not lower, unemployment. As this article from Forbes summarizes, “In a comprehensive, 182-page summary of the research on this subject from the last two decades, economists David Neumark (UC-Irvine) and William Wascher (Federal Reserve Board) determined that 85 percent of the best research points to a loss of jobs following a minimum wage increase.”

So, saying there is “no clear negative effect” is an outrageously ignorant claim. And there’s not one mention of the economic evidence that significantly raising the LMW will hurt the very people you wish to help: the relatively poor. But why address solid scientific research when there’s sloppy sloganeering by politicos to shoot down?

Attacking easy targets is understandable if you want to vilify your opponents or win an easy one for the cause. In that case, you take the dumbest statement by your rival as the basis of your attack. Such is the way of politics. In intellectual discourse, however, you may win the battle but you’ll lose the war. That is, if your goal is to learn from fruitful intellectual discussion, you must engage your opponent’s best arguments, not her weakest ones.

Let me use a counterexample. The sloganeering approach to attacking those who oppose raising the LMW is the equivalent of someone saying: “Well, this past winter was one of the coldest on record in the Midwest. So much then for global warming!” That may be “evidence” in a mud-slinging contest, but it’s not science.

What’s the theory?

While weather is complex and unpredictable, economic systems are even more so. Does that mean there are no principles of economics? Of course not. In fact, it’s because of such complexity that we need whatever help economic theory can offer to organize our thinking. And it doesn’t get any more basic than this: The demand curve for goods slopes downward.

That is, other things equal, the costlier something is, the less of it you’ll want to buy.

Note that the caveat—other things equal—is as important as the inverse relation between price and quantity demanded. That’s why my earlier back-of-the-envelope analysis had to be conditional on more data. Unfortunately, those data are often very hard to get. Does that mean we abandon the theory? Well, that would be like letting go of the rope you’re hanging on to for dear life because you’re afraid it might break.

So what exactly is the theory behind the idea that raising the LMW will increase hiring low-wage workers and boost business? If raising wages will actually increase employment and output, then why not also mandate a rise in interest rates, rents, electricity rates, oil prices, or the price of any of the other myriad factors of production that businesses ordinarily have to pay for? I would hope that this idea would give even the meme promoters pause.

As far as I know, the only situation in which forcing people to pay a higher wage rate will increase employment is when there is a dominant employer and there are barriers to competition. Economists term this “monopsony,” a situation that might occur in a so-called “factory town.” There, the dominant employer (of labor, capital, land, or whatever) can lower what she pays for inputs below the revenue that an additional unit of input earns the company. I would love to hear that argument and challenge it, because it’s the strongest one that standard economics can offer in favor of coercing businesses to raise wages. But so far I’ve not come across it, let alone any discussion of the economic literature on monopsony in the labor market, most of which questions its relevance. Some almost random examples are here and here.

Margins of analysis

Finally, economics teaches us that we can adjust to a particular change in different ways. In a thoughtful article on the effect of the LMW increase in San Jose that all sides of the debate should read, we get the following anecdote:

For his San Jose stores to make the same profit as before the wage increase, the same combo meal would be $6.75. “That would chase off a large percentage of my customers,” Mr. DeMayo said. He hasn’t laid off San Jose workers but has reduced their hours, along with some maintenance such as the drive-through lane’s daily hosing, and may close two unprofitable stores.

Employers can adjust to higher costs in one area by cutting back on spending in others. That might mean less unemployment than otherwise, but it doesn’t mean that raising the LMW has no negative employment effect at all. It means that the effects are harder to see. There’s that darn “other things being equal” again!

Slogans and memes are no substitute for science, or even clear thinking.

Sanford Ikeda is an associate professor of economics at Purchase College, SUNY, and the author of The Dynamics of the Mixed Economy: Toward a Theory of Interventionism.
***
This article was originally published by The Foundation for Economic Education.
Labels and Ideological Bubbles – Article by Sanford Ikeda

Labels and Ideological Bubbles – Article by Sanford Ikeda

Comments 0 Comment
The New Renaissance Hat
Sanford Ikeda
August 30, 2013
******************************

Be mindful of how you label the people with whom you disagree.

***
When I engage in an ideological discussion I try to be sensitive to how I ideologically label the person with whom I’m talking and how she labels me. I’m not talking about dismissive or openly pejorative words (e.g. evil, stupid, silly), but proper terms of discourse. More than just good manners, how we habitually label our opponents in ideological dialogue could reveal something unpleasant about the ideological world we inhabit.
***

Getting the Label Right

***
Now, some people argue that “ideas matter, labels don’t.” When we’re talking about specific ideas, such as for example military intervention in the Middle East, then yes calling it liberal, libertarian, progressive, socialist, or whatever may add nothing to the discussion. But when referring to the worldview of a particular person or group of like-minded persons, especially in the context of a public debate, then how we label ourselves and others can matter a great deal. If the goal is to promote constructive dialogue then it’s important to get the labels right.
***
We prefer in such cases to be called by the label that we identify ourselves with. I don’t like being called a conservative or a liberal because those labels signify sets of ideas and policies, many of which I do not hold. I prefer to be called a libertarian. (Classical liberal might be better but no one in the mainstream knows what that is.)
***
Colleagues I’ve known for decades at my college assume that I’m a conservative because I’ve come out publicly against nationalized healthcare, from which they wrongly infer that I oppose same-sex marriage and that I “support our troops” in foreign wars. Readers of The Freeman have, I’m sure, had to defend themselves against the charge of being “pro-business” because of our skepticism of regulation and high taxes. We have to explain that upholding the free-market is not pro-business, pro-consumer, or pro-labor (although the free-market position is in a sense “pro” all those things and more). That kind of mislabeling, however annoying, can be the result of an honest mistake—one I know I make myself.
***
Mistakenly mislabeling someone is one thing: conservative for libertarian, marxist for progressive. Another is deliberately mislabeling your opponent, a trick that forces her to waste time defending herself against the false charge. But there’s a third kind of mislabeling that reflects a deeper sort of error, one that issues from exclusivity and insularity.
***

Who calls herself a Neoliberal or a Statist?

***
For example, I’m reviewing a book about cities whose author uses the word “neoliberal” a lot. It’s used mostly by Europeans on the political “left”—e.g., social democrats, progressives, socialists, greens—to refer to people or groups who hold some sort of “libertarian” views. I’ll explain in a moment why I’m using scare quotes here.
***
From what I’ve been able to gather from my European colleagues, however, no one actually identifies herself as a “neoliberal.” Neoliberal is apparently a term some attach to positions “on the (extreme) right,” which apparently includes people thought to have an anti-union or pro-business agenda. There are such people, of course, but there’s a reason no one self-identifies as a neoliberal.
***
As Stanley Fish explained a few years ago in The New York Times: “…neoliberalism is a pejorative way of referring to a set of economic/political policies based on a strong faith in the beneficent effects of free markets.” So “neoliberal” is pejorative.
***
And before libertarians get too indignant, let me point out that we sling words like “collectivist” and “statist” when describing our opponents, and to my knowledge no one self-identifies with those terms, either. To be sure, among our ideological comrades, they may have a fairly clear meaning and may spark a certain esprit de corps. But consistently using a word, over a wide range of venues, to describe others that no one ever uses to self-identify is a pretty good sign that you live in an ideological bubble.
***
Evidently, while the author of the book I’m reviewing says she’s writing for “an interdisciplinary readership,” she takes it for granted that it will be an ideologically sympathetic one.
***

Our Ideological Bubbles

***
An ideological bubble, as I’m using the term, is a social network with shared ideological understandings that closes its members off to others with opposing views. You can be a staunch market-anarchist, for example, but still be willing to have a serious, civil conversation with people with whom you strongly disagree. Put simply, you live in an ideological bubble if the only people whom you will talk to seriously about ideology are those you already agree with.
***
An ideological bubble insulates us from real-time criticisms of our principles and positions, retarding our intellectual growth. It gives us a false sense of security and breeds self-satisfaction, off-putting harshness, and intolerance—things destructive to civility. Also, keep in mind that it’s often the bystanders to a debate whom we want to persuade, and they will consider our language and conduct when judging our ideas.
***
One of the things I’ve learned from my great teacher Israel Kirzner is that we can’t realistically be aware of all of our current limitations because we simply don’t know all that we don’t know. We have blind spots, and that means intellectual bubbles of all sorts are inevitable.  But that doesn’t mean that they have to remain invisible to us. Kirzner also taught us that creative discovery is possible. The signs are there, and keeping an eye open to them will give us a chance to make them at least a little more permeable.
***
Sanford Ikeda is an associate professor of economics at Purchase College, SUNY, and the author of The Dynamics of the Mixed Economy: Toward a Theory of Interventionism.
***
This article was originally published by The Foundation for Economic Education.
Bookstore Wars: Creativity versus Scale – Article by Sanford Ikeda

Bookstore Wars: Creativity versus Scale – Article by Sanford Ikeda

Comments 0 Comment
The New Renaissance Hat
Sanford Ikeda
August 22, 2013
******************************

Independent bookstores appear to be making a comeback after several years of decline. As reported by MSNBC, the number of independent bookstores has risen significantly.

Some 1,000 independent bookstores went out of business between 2000 and 2007, according to the American Booksellers Association (ABA), as consumers turned to online buying, downloading e-books, or flocking to Barnes & Noble and (now defunct) Borders. But the ABA said that since 2009, the number of independent bookstores has risen 19 percent, to 1,971.

If my arithmetic is right, that still means the industry hasn’t rebounded to where it was in 2000 (about 2,600 stores), but it’s not bad. Meanwhile e-book sales, which had been rising at triple-digit rates, have evidently lost a bit of steam, last year growing at about 5 percent overall.

These facts perhaps illustrate two important lessons:  First, the scale of a business’s operations is not the same thing as its competitiveness; and second, the kind of competition that counts in free markets has much less to do with efficiency than with creativity.  Selling books and digital media in massive volume seems to make firms sluggish in addressing customer preferences for more personalized service and responsiveness.

Efficiency and Scale Are Important

Free-market economists are typically painted by friends and foes alike as cheerleaders for efficiency. Indeed, many economists do tout efficiency as the prime virtue of the free market, keeping prices low and employment high. In standard economics, efficiency refers to using the lowest-cost means to reach a given end.

If Jack is in New York and wants to be in Philadelphia, then among the alternative means available to him—walking, boating, flying, driving, or taking the train—efficiency implies that Jack chooses the one that minimizes the cost to him of getting to Philadelphia. In manufacturing, the production process that, other things equal, produces a given rate of output at the lowest cost is the efficient one.

(Note:  Cost, like benefit, always refers to the cost to someone of doing something.  Sometimes the chooser experiences the costs, sometimes someone else does, but neither costs nor benefits are ever disembodied.)

One form of efficiency is economies of scale. Economies of scale occur when using more of all inputs (scaling up) increases output so much that the cost per unit of output falls. (In econ-speak that’s when the long-run average-cost curve slopes downward.) Critics pick up on this and argue that the free market therefore necessarily favors big businesses over small businesses because the bigger a firm is, the more efficient in terms of unit costs it tend to be, and that allows it to charge lower prices and drive smaller firms out of the market.

But Not as Important as Competition

That story, however, only looks at the relative efficiencies of existing firms and markets. If the fundamental goal is to improve the well-being of people as they see it, then you have to pay more attention to competition, particularly entrepreneurial competition. In that sense, competition trumps efficiency (as Israel M. Kirzner has explained).

That’s because, again, efficiency means choosing from among given alternatives the one that achieves a given goal at the lowest cost. Where the standard economic concept of efficiency falls short is that in the real world neither ends nor means are simply given to anyone. Ends and means, outputs and inputs, have at some point to be discovered by someone. Yes, efficiency is a good thing, like having a clean and orderly workplace, but it’s entrepreneurship in the competitive process that does the heavy lifting of finding the work to be done and putting you in a position to do it.

The resurgence of independent bookshops in the face of book megastores, I think, is an example of how creative competition overcomes the scale efficiency of providing a particular product. There’s nothing inherently wrong or uncompetitive about megastores or inherently virtuous about small businesses. Big and small businesses have their niches, whether online or in brick-and-mortar shops. But central to the competitive process is the ability, whatever your size, to be aware of changing circumstances and to adjust appropriately to them. The MSNBC article quotes an independent bookseller as saying, “We learned how to get books that people couldn’t find online, and to cater as much as we could to the customer. When a customer walks in, we try to make them feel wanted and at home.”

Scale economies in both the online and brick-and-mortar parts of the industry do little to win over customers who prefer personalized service or the intangibles of local businesses. Independent bookstores are more flexible, for example, at staging readings of local authors and other neighborhood events. The giant bookseller Borders Books, one of the pioneers of book retailing, apparently didn’t do a good job adjusting and closed a couple of years ago (I wrote about it here). Today Barnes & Noble scrambles to cope with competition from the e-book, Amazon.com, and, it seems, local bookshops.

While the diminished growth of e-book sales is hardly a harbinger of decline—5 percent is nothing to sneeze at—it does suggest that sometimes the demand side of the market doesn’t change quite as fast as the supply side—that is, a lot of innovation is just discovering better ways to satisfy fairly stable tastes. Still, it’s competition—for new markets, new techniques, new resources, and yes, new tastes—and not efficiency that drives, and is driven by, the creative discovery of ends and of means.

The Lesson Applied

The other day a friend told me that, when she told her fiancé she couldn’t understand why a mildly alcoholic beverage called “Chu-hi,” which is very popular in Japan, isn’t sold in stores here, his response was something like, “If there were a demand for it, it would be.” Knowing that I write this column she then said to me, “That’s the free market, right?”

Okay, class, what do you say?

Sanford Ikeda is an associate professor of economics at Purchase College, SUNY, and the author of The Dynamics of the Mixed Economy: Toward a Theory of Interventionism.
***
This article was originally published by The Foundation for Economic Education.
The Extraordinary Business of Life – Article by Sanford Ikeda

The Extraordinary Business of Life – Article by Sanford Ikeda

Comments 0 Comment
The New Renaissance Hat
Sanford Ikeda
May 25, 2013
******************************

I heard it again from this year’s commencement speaker: the common mistake of thinking economics is just about business and making money. I know I’m not the only economics teacher who every year has to disabuse his students (and many of his own colleagues from other disciplines) of that same error.

Economics is not business administration or accounting. Economics is a science that studies how people interact when the means at their disposal are scarce in relation to their ends. That includes business, of course, but a whole lot more as well.

Where Does That Notion Come From?

Well, for starters, perhaps from one of the greatest economists in history, Alfred Marshall. He opens his highly influential textbook, first published in 1890, with this statement:

“Political Economy or Economics is a study of mankind in the ordinary business of life; it examines that part of individual and social action which is most closely connected with the attainment and with the use of the material requisites of wellbeing.” (Emphasis added)

This definition more or less prevailed until 1932, when another British economist, Lionel Robbins, defined economic science as being concerned with an aspect of all human action insofar as it involves making choices, not with a part of individual action. Economics, in other words, is the science of choice. Its starting point is not the “material requisites of wellbeing” but a person’s subjective valuation of her circumstances. Ludwig von Mises got it, which is why he called his magnum opus, simply, Human Action.

Similarly, Libertarianism Isn’t Pro-Business

An equally common mistake is to think that supporters of the free market are “pro-business” and favor so-called crony capitalism. But a consistent free-market supporter is neither pro-business nor anti-business, pro-labor nor anti-labor. A free market to us is what happens when you safeguard private property, free association, and consistent governance and then just leave people alone.

Part of the misunderstanding here might stem from the term “free market” itself. Since people tend to associate markets with buying and selling, jobs, and making (and losing) money, it’s perhaps understandable that they would think that advocates of the free market must be concerned mainly about business-related stuff: profits and losses, efficiency, and creating and marketing new products.

Indeed, I’ve met quite a few who claim to favor “free-market capitalism” merely because they believe in making as much money as possible in their lifetimes. It’s not surprising that many of these folks do tend to be pro-business and supporters of crony capitalism. I want to ask them not to be on my side.

Connotations aside, the free market encompasses far more than the stuff of business or a money-making scheme. Yes, it does include the essentials of private property, free association, and stable governance. But a dynamic market process that generates widespread material prosperity and promotes the pursuit of happiness would not be possible if it were based solely on the relentless pursuit of one’s narrow self-interest. Markets would not have gotten as far as they have today (with per-capita GDP up more than fiftyfold since 1700) if people didn’t also follow norms of honesty and fair play, trust and reciprocity. Such norms are without question partly the result of self-interest; few would trade with us if we weren’t honest and fair. But, as Adam Smith taught us, these norms also arise in large measure from a sense of sympathy, of fellow-feeling and fairness, that comes from our ability to see others as we see ourselves, and vice versa. This is why in most contexts I usually prefer the term “free society” to “free market.”

Bourgeois Virtue

But I think one good reason the association between business on the one hand and economics and classical liberalism on the other has been so persistent is that business and the free society arose together. That is, the liberal idea—that certain fundamental individual rights exist prior to and apart from the State—sparked one of the most momentous social changes in history: the commercial revolution and the emergence of the modern urban middle class. 

The triumph of liberty, of personal freedom, unleashed the creative potential of people, who found expression in art, religion, literature, but most of all—or at least most visibly—in the Marshallian “ordinary business of life.” The changes that have taken place in the past 500 years—scientific revolutions, religious reformations, political upheavals, artistic rebirths—were driven by the same human propensities as the commercial revolution and fueled by the wealth it produced. Indeed, the social and political changes of the past century—for women, workers, and minorities—would not have been possible without the entrepreneurial pressures of competition and innovation that forced radical changes in conventional thinking and socially conservative attitudes.

Tradition’s Worst Enemy

In short, business is the most dynamic social institution known to mankind. The critical and competitive attitudes that enable business to flourish erode custom and break old ties even as they foster new ones. The products of business tend to offend people whose sensibilities were refined by generations of tradition. The free market is tradition’s worst enemy.

Business has become part of the default mode of modern society. We take it for granted. We don’t realize what a radical, subversive force it is, to the point where it sounds strange to say so. But try to imagine a world without businesses and commerce. A world like the Dark Ages of, say ninth century Western Europe: static, grindingly poor, strictly hierarchical, socially intolerant, and, apart from the occasional battle or beheading, boring like you wouldn’t believe.

So, while it’s still a mistake to think economics and classical liberalism are somehow about studying and promoting business, maybe at a deeper level it’s not such a bad one to make after all. Business is subversive.

Sanford Ikeda is an associate professor of economics at Purchase College, SUNY, and the author of The Dynamics of the Mixed Economy: Toward a Theory of Interventionism.
***
This article was originally published by The Foundation for Economic Education.
On Brakes and Mistakes – Article by Sanford Ikeda

On Brakes and Mistakes – Article by Sanford Ikeda

Comments 0 Comment
The New Renaissance Hat
Sanford Ikeda
March 30, 2013
******************************

Here’s an observation from a recent column in The Economist magazine on “The Transience of Power”:

“In 1980 a corporation in the top fifth of its industry had only a 10% chance of falling out of that tier in five years. Eighteen years later that chance had risen to 25%.”

Competition makes it hard to stay at the top even as it offers a way off the bottom. Data on income mobility also support the idea. And despite occasional downturns (some quite large, as we well know), per-capita gross domestic product in the United States keeps rising steadily over time. These two phenomena, economic growth and competitive shaking out, are of course connected.

Different Ways of Thinking About Economic Growth

Economists in the mainstream (neoclassical) tradition are trained to think of growth mainly as raising the rate of producing existing products. For example, a higher rate of saving allows firms to employ more and more capital and labor, generating ever-higher rates of output. It reminds me of the Steve Martin movie, The Jerk, in which a man who is born in a run-down shack eventually strikes it rich and builds himself a much bigger house that is just a scaled-up version of the old shack.

But economist Paul Romer, for one, has said,

“If economic growth could be achieved only by doing more and more of the same kind of cooking, we would eventually run out of raw materials and suffer from unacceptable levels of pollution and nuisance. Human history teaches us, however, that economic growth springs from better recipes, not just from more cooking.”

So growth through innovation, technical advance, and making new products is more important than just using more inputs to do more of the same thing. The late Harvard economist Joseph Schumpeter came even closer to the truth when he famously described competitive innovation as a “gale of creative destruction”—building up and tearing down—with creation staying just ahead of destruction.

But standard economic theory has had trouble incorporating the kind of economic growth driven by game-changing innovators such as Apple, Facebook, and McDonalds. Mathematically modeling ignorance and error, ambition and resourcefulness, and creativity and commitment has so far been too challenging for the mainstream.

What’s the Source of Economic Growth?

Achieving economic growth through innovation means someone is taking chances, sometimes big chances, to break new ground. As Schumpeter put it, what it takes is finding “the new consumers’ goods, the new methods of production or transportation, the new markets, the new forms of industrial organization.” Although talented people are behind this process, we sometimes put too much stress on bold “captains of industry” such as Steve Jobs, Mark Zuckerberg, and Ray Kroc. The personalities of the players are important—but so are the rules of the game.

Imagine if cars had no brakes. How slowly and cautiously we would have to drive!  Clearly, brakes on cars enable us to drive faster and safer. How? Well, brakes give us the freedom to make a lot of mistakes—entering a turn too fast or taking our eyes off the road for too long—without causing disaster. We can take more chances with brakes than without them. (Of course, good brakes can also seduce us into driving recklessly, but that’s a story for another day.) Similarly, economic development of the Schumpeterian variety presupposes lots of experimentation, and that in turn means making plenty of mistakes.

Markets Mean Mistakes

Now imagine a world in which people looked down on innovators. That’s hard to do in our time, but as Deirdre McClosky argues in her 2010 book, Bourgeois Dignity: Why Economists Can’t Explain the Modern World,  it wasn’t that long ago when most people disdained innovators who challenged established ways of thinking and doing. The result was cultural and economic stagnation. Making an innovator a figure of dignity worthy of respect, which she says began to take hold about 400 years ago, has sparked unprecedented economic development and prosperity.

But a smart, creative, ambitious, and committed person is likely to make mistakes. And so a culture that lauds spectacular success also needs to at least tolerate spectacular failure. You can’t have trial without error or profit without loss.

Let me be clear. I’m not saying that people in an innovative society should champion failure. I’m saying they must expect potential innovators to make a lot of mistakes and so have not only the right institutions in place (private property, contract, and so on) but also the right psychological mindset—which is something static societies can’t do.

Change, Uncertainty, and Tolerance

If you think you already know everything, anyone who thinks differently must be wrong. So why tolerate them?

One of the great differences between the modern world and the various dark ages mankind has gone through is how rapidly today our lives change. There’s immeasurably more uncertainty in the era of creative destruction than in times dominated by the “tried and true.”  But the more we realize how much uncertainty there is about what we think we know, the more we ought to be willing to admit that we may be wrong and the other guy may, at least sometimes, be right. And so if we see someone succeed or fail, we think, “That could have been me!” In a sense, an advancing society welcomes mistakes as much as it embraces triumphs, just as a fast car needs brakes as much as it needs an engine.

That’s not just fancy talk. The evidence—prosperity—is all around us.

Sanford Ikeda is an associate professor of economics at Purchase College, SUNY, and the author of The Dynamics of the Mixed Economy: Toward a Theory of Interventionism.

This article was published by The Foundation for Economic Education and may be freely distributed, subject to a Creative Commons Attribution United States License, which requires that credit be given to the author