By Chris Calton*
It is a common fallacy, particularly (but not exclusively) among the conservative right, that if a person is successful in business, he or she must have the requisite knowledge to make wise decisions regarding economic policy. This, unfortunately, is dangerously naive.
In his Theory of Money and Credit, Ludwig von Mises argued that
There are no grounds for ascribing authoritative significance to the opinions of business men; for economics, these opinions are nothing more than material, to be worked upon and evaluated. When the business man tries to explain anything he becomes as much a “theorist” as anybody else; there is no reason for giving a preference to the theories of the practical merchant or farmer.1
In reality, the role of the entrepreneur and the role of the economist are wholly different. For the entrepreneur to be successful, he or she must forecast the future with a degree of accuracy. Calculations and production made in the present are only profitable if they are made with proper estimations about the future.
But these predictions often have to do with nothing more than estimating market demand. For established industries, these estimations are easier to make, but competition is also much tighter, so significant success in these industries is the product of finding a more efficient manner of production. For new industries, this estimate is a demand that exists in the abstract, by providing a product that solves a problem that was previously unsolvable. Henry Ford famously quipped that if he had asked what people wanted, they would have said faster horses.
Entrepreneurial foresight is a valuable skill to be sure. It does not, however, indicate any real understanding of economics. The reason that the right is particularly prone to the fallacy that the businessman is likely to be more economically knowledgeable is because they equate something that is good for business with something being good for the economy as a whole (this can be recognized as the “Fallacy of Composition”).
It is possible that a policy will be good for a given business and the economy both, but it is equally possible that a policy will favor a specific business while harming the overall economy. Furthermore, running the economy like a business is likely to be particularly detrimental.
When running a business, the entrepreneur is fighting for a finite percentage of the overall market share. This is, of course, why we have competition, and thus why we see quality driven up and prices driven down in a free market environment.
But many businessmen politicians view the United States economy in this same competitive manner. The goal is to “beat” the other country (we’ll just randomly call the other country China). We need to beat them at GDP or at exports or whatever other metric people are fixated on. But this is all fallacious thinking. Because the growth of a competing company occurs at the expense of the original entrepreneur, many businessmen politicians are terrified at the growth of another country.
In economics, this becomes the zero-sum fallacy. Unlike market share — which is a percentage of a given market — economic growth is potentially infinite. When China grows, for example, we are not worse off. In fact, we are likely to be better off because we trade with them. If they produce more, consumers in our country obtain things more cheaply. It’s literally a win-win situation.
But when businessmen become politicians they often continue to think like businessmen. We must compete with these countries, and to protect American industries, we need trade barriers. Trade barriers will hurt China, without question, so the businessman is likely to believe it will help the United States. But in the global economy, we either see co-benefit or co-detriment. Enacting policies to dampen the economic growth of other countries only serves to hurt everybody involved.
In our increasingly socialized economy, we have to worry about more than just the entrepreneur who naively believes that economics and business are the same field. Today, many of the wealthiest businessmen are what we refer to as “rent-seekers,” being businessmen who seek wealth through political favors; they lobby for special privileges that will help their business in some way, with no regard to whether it is good or bad for the consumer or the economy.
This can present itself in seemingly contrary ways. When FDR signed the National Industrial Recovery Act, he allowed the executives of the biggest business in every industry to write their own regulations. Among these were things like wage floors, which would put smaller competitors out of business, and the large businesses made up for the higher labor costs with the benefits of a larger market share.
Licensing laws and regulations, trade restrictions like tariffs and import quotas, and eminent domain are commonly employed by rent-seeking enterprises, but always at the expense of everybody else. Is this the kind of person you would want deciding economic policy?
Mises was already observing these problems as early as 1912. He said
Nowadays there are many, who, busied with the otiose accumulation of material, have lost their understanding for the specifically “economic” in the statement and solution of problems. It is high time to remember that economics is something other than the work of the reporter whose business it is to ask X the banker and Y the commercial magnate what they think of the economic situation.2
More than a century later, and the average person still hasn’t learned this lesson.
About the author:
*Chris Calton is a 2018 Mises Institute Research Fellow and an economic historian. He is writer and host of the Historical Controversies podcast.
This article was published by the MISES Institute.
1. Ludwig Von Mises, The Theory of Money and Credit, new ed., trans. Harold E. Batson (New York: Skyhorse Publishing, 2013), 168-169.
2. Ibid. The word “economic” in quotations is italicized in the original.
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