Copyright 2015 Bob Wayland and Jim Mulcahy The Delightful Science: The Real Nature of Economics Bob Wayland and Jim Mulcahy December 12, 2015 Confidential Draft Manuscript for Review Only 1 Copyright 2015 Bob Wayland and Jim Mulcahy . Table of Contents [with revisions, page numbers may be slightly off] Preface TBD Chapter 1. Economics: the Delightful Science p2 Chapter 2. The Declining Population Growth of U.S. Firms p34 Chapter 3. The Natural Market p62 Chapter 4. Property Rights, Human Rights, Cooperation, and Progress p96 Chapter 5. Paleolithic Economics and the Emergence of Cooperation p118 Chapter 6. To Truck, Batter, and Exchange p129 Chapter 7. The Shrinking Habitat of the Heffalump p157 Chapter 8. The Classical Entrepreneur p177 Chapter 9. The Neoclassical Entrepreneur p190 Chapter 10. Joseph Schumpeter’s Entrepreneurs, the Austrians and Recent Developments p203 Chapter 11. Popular, Academic, and Public Entrepreneurialism p227 Chapter 12. In Search of Supermanager p253 Chapter 13. The Eupsychians Have Landed p268 Chapter 14. Do as I Say, Not as I Pay p284 Confidential Draft Manuscript for Review Only 2 Copyright 2015 Bob Wayland and Jim Mulcahy Chapter 1. Economics: the Delightful Science “Nature has placed mankind under the governance of two sovereign masters, pain and pleasure. It is for them alone to point out what we ought to do, as well as to determine what we shall do. ”1 Jeremy Bentham (1748-1832) “Pleasure and pain are undoubtedly the ultimate objects of the Calculus of Economics. To satisfy our wants to the utmost with the least effort ... in other words, to maximize pleasure, is the problem of Economics” William Stanley Jevons (1835-1882) Most economics books begin with a discourse on the fundamental fact of scarcity and the essential role that prices play in allocating society’s resources. That’s all true of course, but the real essence of economics lies in the pursuit of happiness that motivates people and the enormous increase in human welfare and happiness that results from their efforts when they are free to pursue their interests. Most people don’t associate economics with the pursuit of happiness. In the 20th century economists became defensive in response to attacks on hedonism and began to avoid the use of “pleasure” and “pain” when describing human motivations.2 There were even attempts to remove from economics any link to psychological concepts. This reform had few, if any, analytical benefits but contributed to the estrangement of the discipline from other sciences and from many people. But the older economists such as Bentham and Jevons had it right: economics is, at its heart, the science of happiness. 1 Jeremy Bentham , An Introduction to the Principles of Morals and Legislation, from 1907 reprint of the 1823 edition, published by Clarendon Press, London, p1. An on-line edition is available at: http://www.econlib.org/library/Bentham/bnthPML1.html#Chapter%20I,%20Of%20the%20Principle%20of% 2 See for example, George J. Stigler, “The Development of Utility Theory II,” 1950, The Journal of Political Economy, October 1950, p 384. Stigler uses the language across various editions of Marshall’s Principles to track the evolution of several concepts. Other prominent examples of the effort to remove psychological underpinnings from consumer theory include E. E. Slutsky, Lionel Robbins, and perhaps most ambitiously, Paul Samuelson’s development of revealed preference theory. Confidential Draft Manuscript for Review Only 3 Copyright 2015 Bob Wayland and Jim Mulcahy But before we can convince you that economics is the delightful science and understanding it is a key to achieving greater happiness in life and business we need to disabuse you of some common canards. First, the slur that economics is “the dismal science” is actually a badge of honor bestowed on the discipline by the racist Scottish historian and essayist, Thomas Carlyle (1795-1881).3 In an especially offensive 1849 article, Carlyle mocked political economists, especially John Stuart Mill (1806-1873) who argued that slavery was not only immoral but that as a matter of economic principle and efficiency people should be free to sell their labor as they wished.4 Carlyle’s repugnant essay prompted Mill to fire off a scathing rejoinder that hastened the end of their already eroding friendship.5 Another of Carlyle’s endearments for economics, “pig philosophy,” has thankfully never caught on.6 Carlyle’s smug denunciation of economics has been a handy excuse for generations of critics to justify an airy contempt for and ignorance of the discipline that has done more than any social science to advance the welfare and happiness of people. Modern economics is a child of the English and Scottish Enlightenments (ca. 1650 - ca. 1800). Adam Smith (1723-1790), a Scottish professor of moral philosophy, published The Wealth of Nations in 1776. Wealth changed the way people thought about markets and how wealth was created. Smith called for the liberation of people 3 Carlyle is often classified as a Romantic but he is an awkward fit into any specific school. He was definitely anti- Enlightenment in most respects. Carlyle was influenced by German idealist and romantic writers such as Friedrich Shiller and Johann Wolfgang von Goethe. He admired strong men and heroes, writing biographies of Frederick the Great and Oliver Cromwell. These works, his racial intolerance, and skepticism about democracy endeared him to some 19th and early 20th century German writers (with the notable exception of Friedrich Nietzsche) as well as the Nazi Joseph Goebbels. Carlyle has been accused of inspiring fascist ideology but he was guilty mostly of sharing with the fascists an anti-Enlightenment perspective; in fact he may have been read more closely by Marx and Engels than fascists. 4 Thomas Carlyle, “Occasional Discourse on The Negro Question,” 1849, Fraser’s Magazine. Carlyle’s 1849 article is reprinted in Miscellaneous Essays, London, Chapman and Hall, 1888 Vol. 7, pp79-110. Carlyle later reprinted the essay and, tellingly, edited the title to replace “negro” with what is today referred to as the “n” word. Mill’s response, originally in the form of an anonymous letter to the editor, is John Stuart Mill, "The Negro Question," 1850, Fraser's Magazine for Town and Country, text available on line at several sites including http://www.efm.bris.ac.uk/het/carlyle/occasion.htm 5 The more frequent but erroneous attribution of the term “dismal science” is to Carlyle’s criticism of Malthusianism as “dreary, stolid and dismal” in an earlier 1839 essay, “Chartism,” also reprinted in Miscellaneous Essays. The misleading attribution of the phrase to Carlyle’s rejection of Malthus is still perpetuated in popular sources: for example, the current biographical entry for Malthus in Wikipedia. To be fair, the encyclopedia’s separate entry for the phrase itself is correct if slightly but understandably flawed by using a less objectionable term in the article’s title (as do we above). An interesting and accessible discussion of the 19th century economic debates over slavery is Peter Groenwegen, ”Thomas Carlyle, ‘The Dismal Science,’ and the Contemporary Political Economy of Slavery,” History of Economics Review (Canberra, Australian National University) 34 (Summer 2001), 74—94. There are a number of short, accessible explanations of the misconception on the Internet, for example, Gavin Kennedy, “Carlyle and the Racist Origins of the Idea that Economics was the ‘Dismal Science,’” The Victorian Web, http://www.victorianweb.org/authors/carlyle/kennedy1.html. A number of economists have pointed out the error without much success in changing the public perception. See for example Chapter 28 “Economics – Dismal Science or Dentistry” pp. 206-214, in Herbert Stein, 1995, On the Other Hand: Essays on Economics, Economists and Politics, AEI Press, Washington, D.C. for a discussion of the shallowness of Carlyle’s criticism of economics that is a bit indulgent or at least nonjudgmental of Carlyle’s racism. Stein stresses Carlyle’s dislike of economics with the classical economists emphasis on profit maximization which is true in general but ignores the substance of his specific dispute with Mill over slavery and human rights. 6 Groenwegen, Op cit. Confidential Draft Manuscript for Review Only 4 Copyright 2015 Bob Wayland and Jim Mulcahy from the tyranny of mercantilism, an economic philosophy that restricted opportunity, concentrated income in the hands of a few, and pursued wealth- destroying objectives such as the accumulation of gold and silver. In many respects, the American Revolution was a reaction to the abuses of British mercantilism. The Navigation Acts that required Americans to export some goods only to England and to use only English or colonial ships, were precisely the sorts of mercantilist economic policies that Smith argued against. Published the year of the American Declaration of Independence, Smith’s work was immediately and widely read. Several members of the Constitutional Convention that met in 1787, particularly James Madison, read Smith and incorporated aspects of his thought into the document.7 The newly independent Americans were sensitive to restraints on economic liberty and sought to write economic protections into the Constitution. The Scottish and English Enlightenments were remarkable for the extent to which received wisdom in almost all fields was challenged. In some respects the sciences were less distinct in those days and concepts and discoveries could flow across them and mingle. As Matt Ridley, author of The Rational Optimist: How Prosperity Evolved points out, ideas could have sex and create even more ideas.8 Like other Enlightenment scholars, Smith and his followers sought to discover and investigate natural rules or laws, especially those that governed the interactions among people. The distinction between natural and man-made laws when they conflict is critical; if the dynamics of human behavior governing economic interaction are natural phenomena, the rules of which may be discovered by scientific inquiry, then the intervention of human control must be carefully weighed and justified.