Title: Economics in Three Lessons; One Hundred Economic Laws By Hunter Lewis (Axios, Edinburg, Virginia, 403 pages).
In an age of clouded thinking, in which mainstream media misses the point of flawed economic policies based on the idea that more government controls are good, here is a call for sound economic thinking.
This book, it is actually two books, is a fabulous analysis of why government interventions in the economy so often fail. It is a plea by a successful money manager for much less government interference. Lewis’ free market ideas would be much better for all of us save crony capitalists and political special interests that feed at the government trough.
Lewis, in the tradition of Henry Hazlitt classic “Economics in One Lesson,” explains what is wrong with our economy, as well as the economies of so many advanced social welfare states: Governments try to do all sorts of things beyond their expertise. Responding to pressure groups, Lewis reminds us, they fail again and again. That’s because many people rarely think about the long-term consequences of their actions.
The Heart of a Strong Economy
Lewis begins by explaining the essential problem: government meddling with the economy. These statist interventions prevent honest prices through various subventions and various special interest rules. This hurts all of us. Yet these so-called government reforms, on the surface, are often advertised as helping the economy. But the ability to understand why these dirigiste policies are wrong is the difference between clear and clouded economic thinking; between short term and long-term thinking.
The Good and the Bad Economist
“The bad economist,” Lewis writes in an echo of the great 19th century economic journalist Frederic Bastiat, “sees only what immediately strikes the eye; the good economist also looks beyond. The bad economist sees only the direct consequences of a proposed course; the good economist also looks at the longer and indirect consequences.”
What are the consequences of governments interfering with the price mechanism?
They are all bad. Honest prices, the author explains, are the lifeblood of any successful economy. The price system, when allowed to function, is a remarkable mechanism. Every day it directs buyers and sellers to the most efficient transactions. But when prices are distorted, they misdirect buyers and sellers.
So, here in New York, where we have had rent controls for generations, even after most cities have removed them, we have a perennial shortage of affordable housing. “Rent controls,” an economist once remarked, “do more to destroy a city’s housing stock than bombing.” Yet the government goes on meddling with the housing market in what is a classic case of the self-destructive short-term thinking.
Why have governments left and right repeatedly made this mistake?
Governments, from the Roman Empire to President Richard Nixon and to contemporary times, cannot resist the temptation to play God. They take over economies because they believe they can create Utopia. So governments can’t keep their hands off this remarkable thing called the price mechanism. It is something that was not invented by any government but came about spontaneously as did many institutions that make our lives much better such as money.
The Austrian economist Carl Menger, one of the founders of the marginal utility school, wrote of how money wasn’t invented by a special bank but was created through the decentralized transactions of millions of people. The Scottish economist and moral philosopher Adam Smith before Menger, had also written about the miracles of the market; that they developed without any government planning. The market, wrote economist and philosopher F.A. Hayek, has tended to be devalued because no one invented it.
Still, governments can’t help tinkering with it. The problem is a little tinkering leads to failure which results in still more tinkering.
Government Failure Creates…More Failure
Instead of taking failure as a warning to stop interfering with free economies, governments rarely come to the correct conclusion to interfere less; to leave things alone.
They interfere some more. Government economic policies are like a well-meaning bystander who you ask for directions. He wants to help you in the worst way, but he can’t admit that he doesn’t know the road that you need.
So he sends you off in the wrong direction even though he, like countless incompetent government bureaucrats, means well. Example: President Nixon thought that wage and price controls, along with easy money policies, would cure the economy’s inflationary problems in the 1970s. They didn’t. These policies gave the nation a decade or so of disastrous stagflation.
For the millions of people who lost their jobs in the 1970s and the many businesses that went under owing to high interest, the heritage of Nixonomics was, “Well, we meant well even though we sent you straight down the path of economic disaster.”
A Critic of Crony Capitalism
Lewis also warns that bad economic policies don’t just happen. There are many men and women looking to use the government’s considerable economic policies for their own benefits. Governments, through various schemes including those offered by crony capitalists who have gotten some government bureau to do their bidding, don’t allow “honest prices.”
They rig prices. This is a practice that misleads market participants and leads to market crashes. But in the meantime, a number of well politically connected firms make big bucks. (An aside, I will never forget the well-meaning capitalist who ran a movie/tv studio in the Bronx and was getting tons of tax credits from the state under the guise of job creation. In a story I did for the New York Post Sunday business section some years ago, I asked him if he was right that the taxpayers should be subsidizing his business. I also asked about the majority of businesses in the state that didn’t get tax credits. He told me he “encouraged” others to go to Albany and also ask for credits. What happens, I thought, if every entrepreneur, instead of just trying to be the best and attract the most customers, saw the path to success as obtaining more and more dinero from the taxpayers?).
Lewis reminds the reader that it is just this kind of politically oriented, not market driven, process that often produces wealth in the wrong ways.
“Many of the American, European, Chinese and Russian mega rich of the 1990s and 2000s got their vast new wealth through government favors or connections or by understanding how government worked,” Lewis writes.
Crony capitalism, Lewis tells us, is part of a process through which the government tries to rig the government for someone’s benefit while the rest of us pay the bill. For instance, cheap money directly benefits some elements of society and hurts the rest of us. Indeed, we all; ultimately pay for the results of these politically oriented economic policies. Indeed, often these statist policies produce unexpected results.
For example, the government’s central bank imposed cheap money policies to pump up the economy for many years before the crash of 2008. The Federal Reserve Bank, at the prompting of members of Congress and the housing industry along with numerous presidents both left and right, kept money prices, interest rates, cheap. They prevented honest prices.
So millions of Americans got homes they couldn’t afford. It all blew up. Yet it was the market, not the policies that distorted the market, that was wrongfully blamed by a mainstream media. The latter is often made up of journalists who are economic illiterates. They never understood, Lewis notes, that these policies of gradual collectivism, “produce the opposite of what was intended.”
But why do governments do these self-destructive things?
The Political Anomaly
My theory is that compounded failure is the anomaly of politics. Often what is great short-term politics turns out to be lousy long-term economics. One example is President Nixon’s wage and price controls just before the 1972 election. Yes, the president was re-elected—indeed he carried every state save Massachusetts. Yes, temporarily these dirigiste policies seemed to work. But after the elections, the nation’s economy was mired in a close to decade of stagflation.
That meant high inflation rates with high unemployment rates, a unique kind of economic disaster that was the result of the government interfering with natural economic forces that inform us through honest prices that, when allowed, direct us to the best results.
But the point for the pols is they get re-elected in the next election, which is what is important for career politicians. That’s even though the long-term consequences of their meddling are usually egregious.
What’s Old Is New
The problems that Lewis so effectively documents in these books are really not new. They can be traced at least far back to the mercantilist policies of the 18th century; to the economic disasters produced under France’s Louis XIV, the sun king who made a wealthy nation poor by trying to manage and regulate every aspect of the economy.
However, the effectiveness of the market, as a Hayek or a Ludwig von Mises would tell us, is precisely because it is decentralized; by freely serving each other we maximize outcomes. That can’t happen when there is a bureaucracy trying to control every aspect of our lives.
Lewis is the latest in a line of brilliant critics of this kind of the state knows all economic thinking. Another great critic was the German/Swiss economist Wilhelm Ropke, an economist like Ludwig von Mises and Hayek driven from his land by the totalitarianism—-the former is what economic nationalism often leads to—of a Hitler. This is what Hayek would call, in a 1944 book, “The Road to Serfdom.”
The Wisdom of Ropke and Lewis
Lewis, citing the genius of the First Amendment to the Constitution that called for a laissez-faire approach to the religion, says the same should be used to ensure a free economy.
“They,” the writers of the original constitution, explicitly told government to stay out of religion. They would have told government to stay out of the free price system economic if they had ever imagined it possible that public officials, financed and encouraged by special interests, would seize control of it. This was an oversight that should be corrected, preferably by Constitutional amendment.”
However, lots needs to be done. There are many aspects of a free economy that need to be restored as Ropke documented back in the 1930s and 1940s.
Ropke, in a series of essays entitled “Against the Tide,” warned that capitalism was under attack and was beyond recognition by alien elements that sought to destroy the price mechanism.
Ropke writes of, “The direct manipulation of prices by the government, price ceilings such as still exist for dwellings, minimum prices for coffee, rubber, wheat or rye, an increasingly more complicated system of protection for domestic producers against foreign competition, regulations on the compulsory utilization of materials, regulations on consumption, “political” wage formation, the growing infiltration of public intervention in the field of production and trade, an endless string of premiums and subventions, the steadily increasing expansion of public expenditure—in short, intervention, collectivism, and economic “planning” all along the line. Can this still be called capitalism? Had we not better give it a new name, such as subventionism, interventionism, or pseudo capitalism?”
It is a hard question that, some 50 years after Ropke, one might ask after reading Lewis’ excellent books.