History and microeconomics

In an exchange of ideas with a group of New England bloggers last week, I suggested that a study of microeconomics was an important adjunct to the study of history.  I realized afterward that in the brief discussion that followed I never got around to saying why I think it's important.  So, here's why.  In a sentence, economics is the study of an important and central aspect of human behavior.

The Austrian economist Ludwig von Mises began his comprehensive treatise on economics with the sentence, "Human action is purposeful behavior."  Human Action is the name of that treatise, first published by Yale University in 1949.  It represents a set of theories that became known as the Austrian School of Economics, and it's the basis of much of our microeconomic study today.  Consider this from the first chapter of Human Action.

"A man does not ravish every female that stirs his senses; he does not devour every piece of food that entices him; he does not knock down every fellow he would like to kill.  He arranges his wishes and desires into a scale, he chooses; in short, he acts."

There are two important facets.  First, people are motivated to fulfill their wishes.  They, we, will often forego satisfaction of burning impulses in order to attain more important goals.  If our goals are important enough, we will overcome substantial obstacles to achieve them. 

Second, in that instant when a person makes a choice, no matter how big or small, all options are on the table arranged in a scale of importance from which an individual, may pick only one.  You might think it's possible to make two choices, but in reality it is the same decision process repeated in the context of a revised set of priorities. 

It may be helpful to consider the concept of marginal utility.  A steak dinner might be very high in the order of importance to a hungry person sitting down to dinner in a restaurant.  Having had the steak, the same person will be unlikely to choose it again when the menu is presented later on.  Dessert maybe.  The point is, there will be a different set of circumstances each time a choice is made, small though it may be.

Von Mises stressed that each individual brings a unique set of values to the decision.  Attempts to impose values from outside are most often futile and counter productive, because of the high degree of motivation in people to attain their goals.  From the microeconomic standpoint, the imposition of outside values by government is the topic of interest.  It happens when individual goals are in conflict with government's aims.  In more repressive systems conflict is more frequent and severe, and more likely to result in suppression of the individual.  But even in systems that are not considered repressive, there are still mistaken efforts to override individual choices for what is perceived to be the greater good.

Having gotten a flavor of microeconomic theory in college in the mid 1960s, I had the great good fortune to be treated to a demonstration of this, played out in real life and on the nightly news with the oil crisis of the 1970s.  Wisdom from Washington had it that gasoline prices should be kept low so there could be a plentiful supply of it at an affordable price.  They made a law setting a maximum price for gasoline.  Nowadays there is a greater awareness of what this does because we could see what happened then.

Producers looking at a low return had to rethink how much in resources they could afford to devote to supplying gasoline.  It's quite possible they would have reached the point where they wouldn't be able to produce any.  For consumers the picture was quite different.  Gasoline was very affordable because the price was low.  With demand high and incentive to supply low, a classic shortage occurred.  Gas stations ran out of gas.  Cars lined up for miles to fill up.  Politicians castigated the evil greedy oil companies.  There were stories of conspiracies.  Tankers were said to be waiting off shore for prices to go up again, while people fought with each other in the gas lines.  There was even the brief appearance of a gasoline black market.

All of this because people want what they want when they want it.  When Ronald Reagan won the election in 1980, price controls were removed, gas lines disappeared, and an economic expansion began.  The American automotive industry, that had been producing great heavy cars with V-8 engines, began a belated and painful conversion to the production of lighter and more fuel efficient models.  Car makers were suddenly faced with a revised picture of consumer demand, which changed when the price of gasoline doubled.

Those who favored the gasoline price controls, and who railed at Mobil and Texaco, were people who favored government contrived solutions over reliance on market forces.  Since the appearance of that shortage seemed so predictable to me at the time, I began to take a dim view of government solutions.  A very dim view.  At the root of it, and what is so objectionable about it, is the obvious failure to account for human action.  We see it over and over again.

Even though people are driven to achieve their goals and will work endlessly to achieve them, the typical government "solution" seems intended to foster dependencies and put those goals out of reach.  The "windfall profits" tax is another typical government solution.  Intended to right economic injustices, in reality it only curbs production, impeding economic growth and preventing the creation of jobs. 

A principle of microeconomics is that people think at the margin.  Are we at the point where we have to hire another widget maker if we want to make that one more widget?  It may not be worth it.  In disregard of this fact of human behavior, the government solutions crowd continue to insist upon a graduated income tax which imposes a high marginal cost at an arbitrary point on the income scale.  It's just one more barrier to economic growth.

The conflict between Marxism and Capitalism, that today is still at the root of our political conflict, makes the study of microeconomics even more important as a foundation for the study of modern history and politics.  Our leftists today rail at the evils of capitalism and seek to overcome what they perceive are its injustices.  They claim to promote social justice, sustainability, and freedom, and they would accomplish this by imposing strict economic regulations -- regulations that they intend will thwart capitalism and eliminate its injustices. 

Microeconomics is the study of human behavior in the context of economic decision making in a capitalist system.  As a course of study it explains why capitalism and freedom are so inextricably linked, and it explains why the capitalist economic engine outperforms socialism every time.  It explains why price supports and price ceilings don't work and why the Kennedy, Reagan, and Bush tax cuts do work.

Our founding fathers conceived a system where government rules by consent of the people.  Inherent in that is the recognition that an economic transaction depends on the consent of the parties to it.  It is sometimes, but most often not helpful for government to override the wishes of those parties.  A central aim of our government has been and should continue to be to provide a fair and level field for economic transactions to take place.

Comments

[Richard Landes]

interesting post. when you made the remark at the meeting, i was thinking something along the line of what i say to my students: every day everyone alive needs to eat and find shelter. every society has to provide the opportunity for everyone to fulfill at least minimally those needs. but this is more complex and sophisticated.

on one level, what you're arguing is that human choices are much too complex to try and control. on the other hand, can't govt. influence those choices? for example, SUVs are monsters; they guzzle gas, they dwarf sane cars; they wear the road down faster. can't the govt. tax them heavily to discourage that choice?

[Tom Bowler]

You're absolutely right. What I'm arguing, and what von Mises taught, is that those choices are way too complex to be controlled in a way that benefits anybody but the select few. There's some truth to the old saying that he who governs best governs least, because of those inevitable unintended consequences.

You made the point in that discussion about the importance of having information to be able to make decisions, but I think you were speaking of information from media sources -- about the accurate reporting of events. Of course we both know what a huge importance that is, but in economic terms, prices are a source of information. Prices convey the results of millions of those economic decisions that are way too complex for anybody to control.

And yes, government influences those decisions, through tax incentives mostly. The SUV argument is a great example, because there is always somebody talking about putting a luxury tax on them. But the point I would make is that you should question the wisdom of it. Maybe it's a good idea, but I'd argue that it's not as simple a question as you might think.

It makes for a wonderful stand off. On the one hand information from the mainstream media is aimed at convincing everyone that the world as we know it is about to end -- SUVs are pumping out the CO2 and heating up the atmosphere. On the other, we have information from the markets which are constantly adjusting to consumer demands, and which don't bother to ask whether or not the world is ending but somehow seem to take it into consideration. For example, we already have hybrid SUVs in the showroom, and it's not unreasonable to expect we'll have hydrogen fuel cell powered SUVs in the future.

The cynical side of me is willing to bet, when we finally get our hydrogen SUVs (that will do zero to sixty in three seconds flat) somebody will dream up some new threat to human existence, and they'll be telling us there is some particular thing we're doing that we have to stop doing or the world will end. I suppose if I thought about it for a while I could think of one of these tax incentives that is broadly beneficial, but except for charitable contributions, I can't. Because the grandiose plans always seem to benefit the connected, they deserve a lot of scrutiny. Microeconomics is an example of that scrutiny.

[Sissy Willis]

Totally awesome, Tom. Too bad microeconomics isn't a core requirement at our so-called institutions of higher learning, but the competition is stiff, what all those identity-group squeaky wheels.

You might be interested in this not-unrelated post of mine from last year -- Bloggers are "cracking, popping, drilling and peeling their victims open" -- where I noted:

Leftists have become soft and flabby in their thinking over the last 20, 30 or more years because their fellow travelers in the mainstream media -- supposed to be keeping them honest -- have been giving them a free ride, even as thinkers of the right, not enjoying such reflexive support, have been honing our debating and intellectual survival skills. That leaves the left soft and lazy and the right battle ready. Enter the bloggers, stage right. As paleontologist Dr. Vermeij might say, "It isn't going to be pretty." Googling the good doctor, we were thrilled to see his field studies of animal evolution had led him to very much the same place Thomas Sowell has come to in his studies of economics. Re Vermeij's new book, Nature: An Economic History, from the Princeton University Press:

From humans to hermit crabs to deep water plankton, all living things compete for locally limiting resources. This universal truth unites three bodies of thought -- economics, evolution and history -- that have developed largely in mutual isolation. Here, Geerat Vermeij undertakes a groundbreaking and provocative exploration of the facts and theories of biology, economics and geology to show how processes common to all economic systems -- competition, cooperation, adaptation and feedback -- govern evolution as surely as they do the human economy, and how historical patterns in both human and nonhuman evolution follow from this principle.

The leftist utopian dream was doomed from the start because it denied the economic logic of nature and human nature. The long-repressed voices of opposition in a free society, now ringing loud and clear through talk radio, cable TV and -- of course -- the blogosphere, will force the left to rethink its arguments or go extinct.

[Solomon]

I had economics as a Business undergrad, but sadly remember it mostly as some very boring charts, graphs and formulae, not this more interesting take away material. Well done, and a very good intro/overview of the Libertarian position isn't it?

[Tom Bowler]

Thanks, Sissy. And thanks for the link to that post of yours. One of the lessons of microeconomics that can be applied to non-economic situations is that people tend to act in what they believe is their self interest. This leads me into my half baked theory on the evolving relationship between liberal politicians and the liberal media.

Totalitarian regimes present and past notoriously exerted control over the press, but since there is no such control in America, the press turns out to be a good place for the totalitarian personalities among us to go where they can have some control over the rest of us. The relationship that has evolved between the media and governing class is one in which aspiring politicians are winnowed out for failing to hew to the media approved positions, while those who get elected are generally those who see that it's in their self interest to say agreeable things about the media's pet issues. Some are true believers, but others are just willing to mold their positions to whatever will get them into office.

That may partly explain the pathetic state of the Democratic party. As you said in your post, they've gotten a free ride, but on top of that look at the "natural selection" that gets them into office to begin with. Fortunately, along comes the blogosphere to screw up their evolutionary process.

Sol, you must be remembering your macroeconomics course which was the invention of John Maynard Keynes, hero of 1950s and 60s (and I guess even present day) liberals because of his theory that government spending was a wonderful tool for spurring the economy. Macro deals with all those wonderful things government can do for the good of the economy. I had a macroeconomics instructor that thought price controls were a good thing. Sheesh!

[Sissy Willis]

Hey, Tom . . . I was just reviewing the wonderful blogs of our Sub Rosa group in preparation for tonight's gathering, and as I reread this truly outstanding post of yours, my forgetful mind was saying "I must send Tom a link to my Bloggers are cracking, popping, drilling and peeling their victims open post. :)

[Tom Bowler]

Thanks Sissy. Please do send the link. I'm sorry I missed our gathering last Thursday, and I'll do my very best to be in attendance at the next one. I anticipate lively discussion with great group of people.