David R. Henderson  

The Wonder of Economic Freedom

Shy Male Nerds and the Bubble ... Friday Night Video: Klein on L...

Like fellow blogger Alberto Mingardi, I appreciate Jeffrey Tucker's writings on the "marvels of a free market economy." The other person I would put in the same category is Don Boudreaux over at CafeHayek. And another blogger who contributed mightily to that genre but who seems to have abandoned it is Brad DeLong. Indeed, I use his NBER study Cornucopia in an Executive MBA class that I teach.

Partly because of Tucker and Boudreaux, partly based on my own optimistic attitude, and partly based on my own experience, I also appreciate, and like writing about, the wonders of economic freedom.

There are so many margins on which so many products and services are improving. As Don Boudreaux likes to point out, although each one of these improvements is small, when you put them all together they are a huge improvement. And, of course, the main reason for these improvements is the pursuit of profits in a somewhat-free market. In the first day of every class I teach, I hand out my Ten Pillars of Economic Wisdom. Pillar #2 is that incentives matter. Pillar #10 is that competition is a hardy weed, not a delicate flower. Those two go together in this context. As Schumpeter pointed out so eloquently in Capitalism, Socialism, and Democracy:

But in capitalist reality as distinguished from its textbook picture, it is not that kind of competition [price competition] which counts but the competition from the new commodity, the new technology, the new source of supply, the new type of organization (the largest-scale unit of control for instance)-competition which commands a decisive cost or quality advantage and which strikes not at the margins of the profits and the outputs of the existing firms but at their foundations and their very lives. This kind of competition is as much more effective than the other as a bombardment is in comparison with forcing a door, and so much more important that it becomes a matter of comparative indifference whether competition in the ordinary sense functions more or less promptly; the powerful lever that in the long run expands output and brings down prices is in any case made of other stuff.
So, for example, the big competitor to the horse-drawn buggy was not a lower-price horse-drawn buggy; it was the automobile. The big competitor to mail was the fax. The big competitor to the fax was e-mail.

And those are big changes. There are also little changes that matter. I travel a lot and stay in hotels a lot. Almost every hotel I stay in now has a bowed-out shower curtain rod. That's a small improvement that makes a shower much easier. I also watch TV a lot: public policy programs, sports, The Good Wife, and some comedy shows. There was always a tradeoff between watching the show completely and doing chores such as putting the dishes in the sink and dishwasher, feeding our demanding cats, and cleaning the cat box after one cat in particular left a smelly deposit. In the "old days," we could tape the show on the VCR. But then you had to wait until the tape was done before watching. Now we can just pause and clean the kitty litter. Normally, we catch up before the show's end by fast-forwarding through the commercials.

Or think about paying bills. I bought a couple of hundred stamps at Costco early last year. I still have most of them left. This year I switched most of my bill paying over to the Internet. One advantage is that I can time payments with pinpoint accuracy so that when I know a check will be deposited to my account on x date, I can, on day x+1, pay a bill that's due.

And who really thinks that those little changes on all those margins show up in GDP? Most of them probably don't.

Comments and Sharing

COMMENTS (5 to date)
John P. Cochran writes:

Pete Boetkke makes a similar important point about markets and even minimal economic freedom and peoples’ drive to make their lives better under even the most trying of circumstances:

"Markets are like weeds. They are impossible to stamp out. Markets emerge wherever and whenever there exist opportunities for individuals to gain through exchange. But not all markets are equal. Market exchanges in the absence of property t rules take place, but possess characteristics which are not desirable for long-term economic growth.

Markets do not need de jure sanction to exist, but for market activity to serve as the basis for of general economic prosperity in a given society, they must exist within a body of law. … The rules of the game are probably the most significant determinant of economic performance." (Calculation and Coordination: Essays on socialism and transitional political economy, p. 198)

David R. Henderson writes:

@John P. Cochran,

LD Bottorff writes:

Bryan Caplan identified Pessimistic Bias as one of the four biases that confuse our economic thinking. Pessimistic Bias not only blinds us to these improvements, but causes us to downplay their importance. If you have any optimism in you at all, when you reach your sixth decade, you should marvel at how much things have improved. I certainly do.

David R. Henderson writes:

@LD Bottorff,
Indeed. And I’m in my seventh decade.

ThomasH writes:

I agree that capitalism is great (a 7th decade perspective).

I agree that it's a good idea to SAY that capitalism (innovation, creative destruction, etc.) is great.

What is NOT great is to imply that only Libertarians think capitalism (and the liberty that lies behind it) is great.

What is also NOT great is concluding that because capitalism is great, any given proposed regulation/deregulation or tax increase/decrease must be bad/good, QED.

BTW, I stipulate that the attitudes of many people toward regulation and taxation is infected by a failure to understand how capitalism can and does work and how government can and does fail, but Libertarians should not pretend that that failure is the only thing that leads people to disagree with them on some issues.

Comments for this entry have been closed
Return to top