Economics as the Study of Peaceful Human Cooperation and Progress

Editor’s Note: Below is the keynote address delivered by Professor Horwitz on December 17  in Athens, Greece at the Center for Liberal Studies Annual Prometheus Awards Dinner. Dr Horwitz was presented with the Prometheus Award for the promotion of Economic Literacy.

Thank you all, and thank you KEFiM, and especially Alexander, for this most prestigious award. There are a number of things I’d love to get an award for, but I honestly can’t think of one that would make me more happy and proud, and is more important the world of the 21^st century, than one for the promotion of economic literacy. My life’s work (my teaching, my research, my public writing, my work organizing institutions, and even my Facebook posts) is all about trying to improve people’s understanding of economics and demonstrating why understanding economics matters for human peace and progress. So to be recognized for promoting economic literacy is as good as it gets, and I thank you again for honoring me this way.

My talk this evening is titled “Economics as the Study of Peaceful Human Cooperation and Progress.” I want to argue that what an understanding of economics provides us with is a way to see what makes a society of peace, cooperation, and progress possible. The reason to care about economics, and the reason to study it, is not just to understand material well-being, but instead it’s about a much bigger picture: how we cooperate in a world of strangers and diversity, and how we turn that cooperation into better and longer and more peaceful lives for more people.

I want to organize my talk around three of my favorite quotations, each of which adds a piece to the bigger story I want to tell.

The first quotation describes what I think is the goal for any human society, and it’s from the Bible, the Book of Micah chapter 4, verses 3 and 4. It will be a very familiar pair of verses, though the second of these two verses is sometimes left off:

Micah’s vision is of a world of peace, not just among people but among “nations.” It also suggests a world of material comfort, as we each have our own vine and/or fig tree. It is a world where the weapons of negative-sum destruction have been turned into tools of positive-sum production. Finally, it suggests a world of physical security from predation by others, whether private actors or the organization we call government, as “none shall make them afraid.”

This is the liberal vision, but how do we get there? How is it that we can feel the pride and security of ownership and the safety of that ownership being protected in a world of plenty?

One interesting aspect of Micah’s vision is that we all are assumed to have “vines and fig trees.” It’s a vision that, read literally, suggests self-sufficiency. In a world where we are all so similar, it’s not clear what the benefits of exchange would be. And that suggests that there’s not much use for economics. Of course, the better reading is the metaphorical one, where the vines and fig trees represent our capital, both physical and human, that we use to produce, and that we have purchased to consume. In other words, our “vines and fig trees” are just our wealth, which we own and own securely to dispose of as we wish.

But how exactly do we get to this world? And how does economics help?

That brings us to my second quotation, this time from Rabbi Lord Jonathan Sacks from his book, The Dignity of Difference:

First we must recognize that we are not all the same. We are fortunate to live on a planet populated by 7.5 billion people, each of whom has his or her own unique genetic blends, learned skills, and particular preferences and goals. Each of us brings something distinct to the human conversation. The challenge is how to turn those differences into productive cooperation rather than destructive conflict in a world where most of the planet are strangers to one another. That is, neither friends nor kin. The plowshares and pruning-hooks have been the exception, and a very recent one at that.

The answer to this puzzle is exchange. Exchange enables us to overcome our differences by providing a way for us to interact not just despite those differences but because of them. We know from basic economics that value is subjective and that exchange is mutually beneficial. And we know that we get the most out of exchange when we each produce by specializing according to our comparative advantage, that is, the thing each of us does at the least relative cost. These are all ways that our differences work to our benefit. We don’t all have vines and fig trees, but that’s actually a good thing. What each of us does have and can do becomes the basis for making our knowledge available to others through exchange and the price system. The benefits of markets and liberalism are premised on differences: both in terms of how we specialize in production based on our own unique skills and dispositions, and how our varied preferences open up the scope for us to engage in mutually beneficial exchanges of the products of that specialization.

The theory of comparative advantage also tells us that there’s a place in the liberal order for each and every one of us. We all have something we can do at lowest relative cost and thereby produce in ways that benefits others. Even those with limited endowments and skills can find a space to produce value and enjoy the dignity of meaningful work and the comfort of their own vine and fig tree. Contrary to what critics say, free markets do not shut the door on the most vulnerable among us. The door to prosperity is open to everyone. If some are not walking through the entryway it’s because governments have built walls across the threshold in the form of excessive regulation such as minimum wage and occupational licensure laws.

Exchange, of course, requires private property, and private property requires a system of governance to protect the rights of property and contract. The liberal concern with the rule of law, an independent judiciary, and a clear system of rules of acquisition and exchange that are enforced equally, is all about ensuring that we can take maximum advantage of the ways in which property and exchange enable human progress across all of our differences. When these institutional structures are right – when we have the right rules of the game – we can indeed leave behind our swords and spears and make effective use of our plowshares and pruning-hooks not despite our differences, but because of them.

The vision of the prophet needs the wisdom of the Rabbi. But they both need the understanding of the economist.

My third quotation is perhaps my very favorite of the three. It comes from volume 2 of Nobel Prize winning economist F. A. Hayek’s Law, Legislation, and Liberty, where he writes, describing the etymology of the word “catallactics,” or the study of exchange:

How exactly does Rabbi Sacks’ observation about the role of exchange across difference produce Micah’s vision of property, peace, and prosperity? That’s where Hayek’s even deeper conception of economics comes in. And, unsurprisingly, it is Greek at its intellectual foundation!

What has distinguished the best economists of the last 250 years is that they focused on exchange and the rules under which it takes place as the fundamental thing for economists to study. That’s why some wanted to use a form of that word “catallactics” to describe what economics was at its core. And Hayek described the modern market economy as a “catallaxy,” or an “order of exchange,” as opposed to the made or constructed orders of things like the household.

The catallaxy created by exchange is a network of mutually beneficial mutual interdependencies. It binds us in chosen ties of human cooperation and does so with strangers! As we specialize and exchange, and especially as the division of labor becomes more precise as the extent of the market grows, we become increasingly specialized and therefore dependent on people who are neither friend nor kin. Think of all of the unknown people each of us relies on every day to acquire the goods and services we desire. If you are familiar with Leonard Read’s I, Pencil, you already understand this point in an important way.

This is market exchange generating human social cooperation, and the more we cooperate this way, and the more we depend upon others, the less likely we are to want to harm them. The last thing I want to do is to destroy my local grocery store! The existence of markets and and the liberal order reduces the benefits of plunder in comparison to cooperation.

Through this process, exchange brings strangers into each of our communities, and helps transform them from a potential enemy to a friend. We trade across differences all of the time, and there’s no better way of reducing the suspicions and stereotypes about “the other” than to enter into a mutually beneficial exchange relationship with them. Market exchange transforms “the other” into what Paul Seabright calls an “honorary friend” or what I’ve called “honorary kin.”

Nothing symbolizes this better than the “double thank-you” of the marketplace. How often when we conclude an exchange do both parties say “thank you?” That’s symbolic of the mutual benefit, cooperation, and interdependency that markets and liberalism create. It’s a world of peaceful human cooperation and progress captured in the simplest of acts. It is also, I should note, an expression of gratitude to the other party. And gratitude for the bounty that markets and liberalism have given us is in short supply these days.

We live in a world of secular miracles, not the least of which are the drugs that are beating back diseases and extending human lives, including a bunch that have made it possible for me to be here tonight. The poorest of Westerners lives far better than the kings of old, and many of the global poor have access to all the world’s knowledge in their pockets. As George Will has said “it is astonishing that we do not live in a state of perpetual astonishment.”

For me, economic literacy is all about helping people to understand this grand story of human progress by explaining both the underlying processes and institutions that make it happen, and carefully and honestly laying out the amazing results it has produced.

The reality of the last two centuries is that we have beaten our swords into plowshares and our spears into pruning hooks as we’ve learned that the liberal institutions of property, contract, and voluntary exchange are superior to violence and war. An ever increasing share of humanity lives under its own increasingly fertile vines and fig trees. We’ve learned that the positive-sum game of the liberal order is better at producing the world of Micah’s vision than the zero- and negative-sum games of plunder, whether feudal or socialist. Or nationalist. An increased understanding of economics helped make this happen and has sustained it in the face of enemies, old and new.

Unfortunately, we are at a dangerous point of losing this learning these days thanks to the revival of the forces of nationalism and socialism. There are a lot of reasons for this, but I do think that liberals need to engage in some self-reflection about whether our own rhetoric and way of talking about economics and liberalism don’t bear some responsibility for our dilemma. How often do we speak of markets as sources of not just prosperity, but prosperity for the least well off?  How often do we speak of markets as the cause of peace and social cooperation and mutual interdependence? How often to we talk about how markets have humanized us and reduced our propensity to violence, and turned strangers into honorary friends or kin? It’s important to stress the material wealth that markets produce, but the point of even that is enabling us to live lives of peace, cooperation, and security.

Perhaps more focus on economics as the study of peaceful human social cooperation and how markets and liberalism enable us to bridge our differences and leverage our diversity can bring more people who are concerned with peace, prosperity, and progress to appreciate the study of economics and the institutions of the liberal order as a means to those social ends. At the end of the day, economics is all about understanding which social institutions best enable us to beat our swords into plowshares and our spears into pruning-hooks. For me, the point of promoting economic literacy is to spread that understanding far and wide with the hope that more people understanding some economics and its relationship to the institutions of liberalism will, perhaps, get us even closer to a world in which all 7.5 billion of us can all sit under our vines and fig trees, and none shall make us afraid.

(This is the version of this talk as delivered that night. I do want to add one thing, however. I would like to dedicate this talk to all those who I learned economics from, and all of those who were my formal teachers, especially Don Lavoie. It is Don’s spirit that animates this talk, and I hope that he would be proud of me for both this talk and the award that occasioned it. Thank you, Don.)

Steven Horwitz is the Distinguished Professor of Free Enterprise and Director, Institute for the Study of Political Economy at Ball State University.