Editor's Note: Beyond Econ. 101
This month's cover story, "The 4 Boneheaded Biases of Stupid Voters" (page 24), offers a provocative explanation for why so much of our country's economic policy is screwed up: Voters are basically idiots when it comes to understanding basic economic truths. We clamor for bad policies, ranging from trade barriers to minimum-wage hikes to price supports.
"The general public's views on economics," writes Bryan Caplan, a George Mason University economist and author of the highly praised The Myth of the Rational Voter: Why Democracies Choose Bad Policies, "not only are different from those of professional economists but are less accurate, and in predictable ways." The desultory outcome of such mistaken beliefs: We underestimate the benefits of markets, open borders, and conserving labor through technological advances. We also turn a blind eye to material progress. As a result, we overestimate "both the need for the government to solve…purported problems and the likely efficacy of its solutions."
In building his case, Caplan cites Joseph Schumpeter (1883–1950), the great defender of markets and the "creative destruction" they entail both in business and in the larger society. Best remembered for Capitalism, Socialism, and Democracy, Schumpeter fully understood anti-market bias, writing, "The public mind has by now so thoroughly grown out of humor with [capitalism] as to make condemnation of capitalism and all its works almost a requirement of the etiquette of discussion."
Schumpeter is the subject of another fantastic piece in this issue. In "Creative Destruction vs. the New Industrial State" (page 58), Contributing Editor Deirdre McCloskey looks at a magisterial new biography of Schumpeter, Thomas K. McCraw's Prophet of Innovation, in conjunction with the 40th-anniversary edition of John Kenneth Galbraith's The New Industrial State, a highly influential book that essentially called for corporate socialism. Schumpeter and Galbraith (1908–2006), who overlapped briefly on Harvard's economics faculty, are almost perfect mirror images, with the former lionizing the entrepreneur and praising the constant "mutations" wrought by the market and the latter celebrating corporate structures that supposedly tamed the business cycle and guaranteed stability. Although Galbraith was younger than Schumpeter, notes McCloskey, it's Galbraith's faith in the longevity of corporate behemoths such as General Motors, U.S. Steel, and AT&T that seems positively quaint in today's world.
Schumpeter believed market orders were doomed to failure, partly because of the widespread wealth they produced and partly because of the social volatility at their core ("Overalls to overalls in three generations," he wrote, underscoring the quickness with which fortunes and status were gained and lost). Such a system, he feared, didn't produce the champions needed to defend it.
Almost 60 years after Schumpeter's death, a basic belief in the efficacy (if not yet the fairness) of free markets is widespread. Yet as Bryan Caplan reminds us, we've still got a lot to learn.