In my last post we discussed some implications of past experience for our understanding of the processes of economic growth and wealth-creation. The experience of the past few weeks, however frightening, should not deter us from appreciating just how important everyday human interaction is in the fostering of such development. Understanding what is at the heart of those processes will be necessary for any discussion of what the new normal might look like.

 

Wealth Creation and the Entrepreneur

When a person voluntarily chooses to engage in trading a good or service with another, both gain from the exchange. The attainment of well-being that results, however incremental it may be, is wealth in its most basic form. It is fundamentally a subjective valuation in favor of one state of affairs for another, and it is profoundly dependent on the freedom of association. This may strike even some economists as strange if they make too much of the “naturalness” of trucking and bartering. Reflecting on entrepreneurship and what that entails is the best way to illustrate the problem.

An entrepreneur is one who must be alert to opportunities of betterment. This can take varying forms from recognizing price differentials over time and place (Kirzner) to recognizing potential demand for new means of serving existing wants, or even creating new ones (Schumpeter). In each case though, the entrepreneur must essentially read other human beings, and for this, there are few actual substitutes for direct interaction.

And this holds true for the most basic exchanges—exchanges that are not generally thought of as typically entrepreneurial.

Alertness to what others desire is the first step in realizing what we ourselves might do to facilitate our own improvement. It is the very beginning of the process by which we come to understand the parameters of choice. All of our daily associations train us up to interpret the language, the faces, and the contexts in which we associate with others precisely for obtaining such vital social information.

Eliminate large swaths of this kind of interaction, however, and very simply, you eliminate the informational signals from which the first step is taken in the process of wealth creation. The principle of gains from trade is not merely one of international commerce, it is a principle of personal freedom and betterment. Whatever short-term necessity emergency measures may require, the basic long-run necessity of liberty has to be one of the takeaways of the current crisis.

Sadly, this is not something that experts in the harder sciences notice with any great frequency. Inured to the practices of objective physical measurement, a natural scientist is not apt to put much store in processes that are rooted in subjective states of mind. Interpreting wants  is nothing but subjective, but the consequences for betterment are nonetheless real and tangible.

This point was nicely illustrated in the opening quotation of a book that I cannot recommend highly enough in these times: Not a Zero-Sum Game by a man I was privileged to know and work with for many years, Manuel F. Ayau.

The book briefly retells the story of a now famous challenge posed to Paul Samuelson by the mathematician Stanislaw Ulam, who asked Samuelson to “name one proposition in all of the social sciences which is both true and non-trivial?” Not till many years later, we are told, did Samuelson come up with the answer, comparative advantage.

The Limits of Scientific Expertise

The most telling part of that story is the degree to which those who are trained to think primarily in the highly mathematical languages of the physical and natural sciences, find it difficult to properly appreciate the importance of subjective human valuations in the normal everyday processes of wealth creation. In his remarks upon receiving the Adam Smith Prize in 2005, Ayau pointed to his own personal experience with that challenge, trained as he originally was in the hard science of engineering.

But such processes of free exchange, he pointed out, have very real material consequences to both physical outputs and personal well-being. Only when he realized the power of the principle of gains from trade as it related to efficiencies of cost did he come to appreciate the wider relevance of economics to human well-being. That is the story which Not a Zero-Sum Game tells.

For those whose minds incline to the measurable and the practical, Ayau’s little book is an absolutely essential contribution to why the principle of liberty in society ought to remain a central part of their deliberations as they consider the costs and consequences of this pandemic. If this understanding is not part of our experts’ understanding of the “new normal,” or whatever else may constitute “normal” after this crisis has passed, we will be even less prepared and less able to handle whatever the next pandemic may bring in its train.

After the 1918/19 pandemic, and despite many false steps and setbacks, the world continued to engage socially and economically. With the growth of our economies there came the growth in innovation. One tremendous benefit has been the internet. Human interaction has not entirely ceased even now as we self-isolate. It is being carried on in different ways remotely. This is the direct product of the riches, both intellectual and material, that were created and accumulated over the past one hundred years. One interesting question that this point raises is, is virtual interaction enough?

Freedom of Association and Progress

Some may be tempted to preach a more technocratic future in which human interaction is highly regulated and individual isolation is enforced. Many technical sorts might in fact find this way of thinking quite congenial to their left brained inclinations. I think this would be a mistake.

Setting aside the obvious objection that most of the world’s population has only very limited access to the needed technology to interact virtually, the very foundations of the kind of knowledge necessary to interpret and understand the wants and needs of others would be undermined and distorted, if choice in interaction with others were curtailed.

Any degree of forced limitation beyond immediate emergency requirements, would be to arrest the development of all the social capacities of empathy, sympathy, and understanding. These capacities are only developed when we can exercise them freely and are the basis for those perceptions of the wants and needs of others that comprise the foundations of all improvement. Personal direct association is the most fundamental training ground wherein we learn through close and persistent practice how to interpret one another. It is the basis for all civil understanding. It mollifies and moderates the passions by adding a face to the inevitable differences of opinion that each of us brings to the conversation that is civil society.

There is no true substitute for person to person association. Having a personal connection with another who will inevitably see things differently, compels each of us to consider more seriously the reasons for that difference. It is here that innovation and all useful change has its origin. And this is as true for the hard sciences as well as the arts—for politics as well as economics. Karl Popper called this the Open Society.

Whatever we take from the current pandemic, it ought to underscore many times over the vital importance of maintaining liberty over the long run. What we do now in the face of emergency, must remain a short-term defense. I understand perfectly the turn to scientific and medical expertise, but fear should not blind us to the fact that such expertise has limitations.

In the long term our aim must be to restore, preserve and extend the fundamental freedom of association.

 

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