 Okay, so it's my great pleasure to introduce the FAA Hayek Memorial Lecture sponsored by the estate of Stephen Hogg The speaker is the eminent Paul H. Rubin who is the Samuel Candler Dobbs professor of economics at Emory University past president of the Southern Economic Association and former editor of managerial and decision economics He is associated with technology policy Institute the American Enterprise Institute and the independent Institute Dr. Rubin has been a senior fellow at president Reagan's Council of Economic Advisers and has held senior positions at the U.S. Consumer Product Safety Commission and the Federal Trade Commission He has taught economics at Emory University of Georgia University of York VPI University of New York, excuse me a VPI and George Washington University Law School Dr. Rubin has written or edited 11 books and published over 250 articles and chapters on economics law regulation and Evolution in professional journals. He frequently contributes to the Wall Street Journal and consults on the economics of legal issues Dr. Rubin received his BA from the University of Cincinnati in 1963 and his PhD from Purdue University in 1970 The topic that he'll be addressing us on is how we talk about economics and why it matters and I want to hear this Thank You Joe and thank you for inviting me I'm glad to be here. I'm particularly happy to do the Hayek lecture anyone would be proud to do a Hayek lecture, but In particular Hayek was an early pioneer in many of course in huge numbers of things, but he was also one of the few scholars of his generation to understand that our evolved Preferences our evolved behaviors our minds Evolved in ways that affect Our decision-making today He was writing in the era of what's been called the standard social science model Or what Pinker is called the era of the blank slate when social scientists thought the humans were born as blank slates and they can learn anything and behave in any way and Hayek was was one of the first Earliest people to realize that that was not was not true. I have a quote there Which is really the basis of much of what I'm going to say That our minds were adapted to a very different Environment than the one in which we now live and that that has profound implications For economic policy and for many other for many other things. So I'm very happy to give the Hayek lecture Question I address in this paper and one I've addressed and over my career really one that's puzzled me Like many people of my demographic which is to say Jews. I started off as a as Walter said started the Walter block in the last session said started off as a not quite a socialist but pretty close a non-believer in markets and Early in my career and graduate in undergraduate school and then in graduate school I became a free market person and then like many converts. I asked myself the question. How could I have believed that stuff before and Why do many other people still believe it? And that's the issue that I'm I'm addressing today the fact that there are as we know huge numbers of people who don't believe in markets It's a puzzle to everyone in this room because we all know that markets Generate huge incomes and longer lives and happier people and yet we have the Pope out there preaching against markets. We had a recent election where Bernie Sanders and and mr. Trump neither one of them were strong pro-market candidates Obviously, although mr. Trump has actually turned out to be More of a market guy, and then we might have hoped I'm actually Fairly optimistic about some of his some of his policies But as a candidate, he was certainly not a pro-market guy nor was Bernie Sanders and yet they won they won the election Brian Kaplan's book some of you may know the myth of the rational voter has a whole section on what he calls anti-market bias very common among people And of course there are many socialist governments that are elected the government in Venezuela, which is destroying the country Was it wasn't elected government has been for some years. There's attempts to throw it out But originally it wasn't elected Socialist socialist or communist government. I lived for a while in New York where we elected a Mayor who was originally a Sandinista also not a Pro-market guy and in a city full of smart smart people So there and you know, I don't need to convince people here that there's strong pro-market bias what I call them poor phobia fear of markets Exists exists Everywhere and it's a puzzle because markets do work so well and we know that markets do work well So my talk is organized in four parts First I'm going to talk about people's intuitive understanding or lack of understanding of economics the second point I'm going to discuss is is competition and I'm going to make the point that I think we economists over emphasize competition in the economy and I Think that I'm going to make the point that I think that We over emphasize the role of competition in our discussion of the economy and Fine, and then I'm going to talk about a new concept in psychology But when I think should be much more applied in economics called pathological altruism and finally I'm going to talk about The morality of the marketplace how moral is the is the marketplace and why do how do people perceive it? so the first point is that I want to make is is really high-ex point that Economics is not intuitive that people are naturally born or early on in their lives develop what I call folk economics Set up beliefs about the economy that is not Based on the way the economy really works. Why is that? Well, the point is that people do not have any intuitive understanding of economics. I use the example of Speech everybody grows up knowing how to talk right a normal child in a normal environment We'll learn how to talk Without any special effort on the part of his parents, but we don't all learn to read We have to be taught to read reading is not a natural Inborn ability understanding of economics is like reading We have to be taught to understand economics. We're not born with an intuitive understanding of economics we're born with it an intuitive misunderstanding of economics if you like in certain predictable kinds of ways Why well our brains evolved in small groups groups where there was some trade between individuals maybe a little bit of group trade, but there was Not much else in the way of a developed economy there was very little technical change for thousands and tens of thousands of years people were born in the same and Died in the same environment in which they were born some of the anthropologists talk about rapid technological changes happening over a Several thousand year period so there was no stone axe one followed six months later by stone axe to write Stone axe two was several thousand years after stone axe one There was very little capital Because people moved around a lot and you couldn't have a lot of capital when people moved around a lot there was Very little specialization Adam Smith's Specialization is limited by the extent of the market applied even then so if you had a group of 50 people and there was a really good stone axe maker He would only make axes a few days a year because that was the only demand for his product And he would have to do other things the other the rest of the year and And there was conflict the people don't like to talk about it They like to think of the noble peaceful savage, but in fact conflict is a very important part of human history and prehistory And the groups next door you had to always watch out for them because they were maybe you would trade with them Maybe you would trade wives with them, but maybe they would attack you when you sleep and kill you so there was there was always conflict and Anthropologists who don't like to think about it. They like to think that the world was always peaceful until capitalism came along Nonetheless, they many of them realize that in fact We're just a nasty species and we need to be tamed There was some exchange there was a little bit of exchange For example, if I had a good hunt this week I might give you some of the meat and the expectation that you would have a good hunt next week or Maybe I am a good stone axe maker. So I would trade you an axe for a Rabbit or a fox or something of the sort So there was some exchange, but there wasn't all that much exchange Nonetheless, we do have and people have documented this We do have in our heads a pretty good cheater detection mechanism So we're pretty good at detecting people who are cheating on a social agreement For example, I might have a bad hunt and you might give me some meat But if I have a bad hunt week after week after week, you might figure out that I'm actually not doing much hunting at all I'm out there sleeping under a tree and you would view me as a cheater and begin not to Share your share your food with me that that mechanism still survives, of course But we do have a strong cheater detection mechanism, but that's more of an exchange mechanism than it is a understanding of economics mechanism So so that was the world in which our brains evolved and they did not evolve to consider trade with China Or millions if they didn't evolve to consider societies of 300 million people And and and many of these things we've learned but we have to learn them They're not natural and economics is one of the things that we have to have to learn so one of the major implications of The way our brains evolved is that much of our thinking is zero-sum We think in terms of zero-sum. We think in terms of Equal exchanges and it's not just that our brains evolved that way It's also true that we can understand much of the world that way I use the analogy of flat earth thinking For most of the decisions we make most of the time we can think of the earth as being flat, right? Unless you're a jet pilot Flying great circles around the earth but if you're just a person living in the world you can think the earth is flat and Not much will happen to you. Nothing will happen to you. You can use your GPS or your maps and get around and There's no cost to being a believer in a flat earth because most decisions Can be made on the basis of a flat earth Same thing is true of zero-sum thinking many many times Most of what goes on can be you can think of it as zero-sum Susie gets the cookie John doesn't get the cookie or I get the job. You don't get the job or If we spend more on guns we spend less on butter Because in the short run many resources are fixed and in the short run the world is zero-sum And again for many many of the decisions That we can make that we make in our day-to-day lives We don't go far wrong if we if we use zero-sum thinking which is our evolved mechanism of thinking anyway Populism is pretty much zero-sum thinking it's just you know more jobs for me less jobs for you Trump is when he was running was running is pretty much a populist and pretty much a zero-sum Sort of guy. We've got to get rid of immigrants. There'll be more jobs for the rest of us We have to stop trading with China so we can make more stuff ourselves Wrong, but natural thinking any part of the reason he did well is that it's and and Sanders was not much different he had a different sort of zero-sum thinking but again not much different and So so we have this module in our brains and Marxism very popular for a long time still popular among our Colleagues who aren't economists on campus is a natural outgrowth of zero-sum thinking from each according to his Ability to which according to his needs Assumes that the pie is fixed right we don't does the incentives don't matter the pie is fixed We can distribute it however we want the labor theory of value goes back to our history of As a species with very little capital and so what was created low and behold labor created things We had say an axe maybe a hut, but not too much in the way of capital goods So we could think that labor was the way that things were created So so the popularity of Marxism as a mark simply wrote down a system that was close to consistent with our Evolved way of thinking about the world and you know, he thought he was being scientific But he was really being pre-scientific. He was really Given giving a voice to folk economics giving a voice to the kind of economics that we have if we're not trained in economics, which is what folk economics is and Because it was so consistent with the way people believed and what they revolve preferences. It's been very popular It's intuitively very popular, but Of course, we all know it's it's wrong. We know that both From our theories, we know it's wrong and from the greatest social science experiment ever conducted Leading to the collapse of the Soviet Union. We know that Marxism is not a Doesn't work and yet people still believe it and part of the reason they believe it is because it is so so intuitively plausible So what are some implications Well, if we believe in a flat earth, it doesn't matter, right? Unless we're a jet pilot doesn't matter if we believe in a flat earth We can live our lives that way but if we believe in zero some thinking it does matter not because it affects our day-to-day lives, but because We live in a democracy where Preferences of voters or beliefs of voters influence politicians It's not clear whether people who believe the same way that we People who believe in folk economics become politicians are people who want to become politicians must act as if they believed in folk economics Mr. Trump seems to be maybe of the second sort. He acted as if he was a folk economist, but maybe now he's not But at any rate because we live in a democracy Folk folk economics the belief the economic beliefs of citizens is very important Because citizens will vote for politicians who will then adopt policies based on folk economics What are some other implications? Well incentives don't matter much if things are fixed incentives don't matter You know you can raise way you can raise minimum wages for example with no effect because the number of poor workers is fixed Or go back to from each according to his ability. You can tax tax people that now if they produce is fixed We think about income inequality, which was a big deal a few years ago If incomes are fixed if national GDP is fixed and some people are rich and other people must be poor Because again GDP is a fixed a fixed pie. That's an implication of zero some thinking of folk economics Prices prices served to allocate things that are exeti existing. They don't serve to to create new things so if there's a Hurricane we should set fix the price of goods because they're fixed and there's no effect of fixing the price You know the number the amount of snow shovels or not snow shovels shovels or ladders is given There's no no sense letting people increase the price. That's just price gouging. The supply is fixed and more generally price controls we've gotten away from them in the US fortunately, but different times they've been very popular and Part of the reason they're popular is people don't understand the incentive effects of price controls they think of prices as allocating a fixed amount rather than of prices as leading to more or less production of particular goods obviously Imports again imports cost jobs in a zero-sum world the amount to be consumed is fixed if there's imports There's less jobs for people It's also true that that when we talk about Imports it also brings in another module as I said there was a lot of conflict between people and the in the environment The evolutionary stage so not only are we taking away our jobs We're giving them to those guys and those guys may well be our enemies and we don't like them because they're not us And so that's a second reason why? Tariffs and other impediments to trade can be very very popular politically because again They fit with two parts of the the evolved folk economic module that That people are people are carrying around in their heads Um immigration same kind of thing taxes we when we talk about when Not we we kind of us not us, but when others talk about taxes Tax reform the issue is are the rich paying more or the poor paying more. How can we make taxes fairer? there's very little popular discussion of The effect of taxes on incentives that if we make taxes lower people will produce more Sometimes comes into the debate, but it's not the natural part of people's thinking about that people's natural thinking is Taxes allocated as a government has a budget. We have to fund that budget Let's do it fairly and again things are more or less viewed as fixed Now as I said at the beginning We can learn differently, you know, we're smart humans are smart and we can learn that all of these things are not true Everyone in this room has learned that all of these things are not true and we can try to teach it to our students But it has to be taught it's not something that people who are not taught are going to Going to understand we saw again in the recent election millions of Graduates were rallying around Bernie Sanders. They simply did not understand really any of the things that I'm saying now You know because he was sort of going in the opposite direction and yet they believed him They believe that his policies would have been better than Then a set of pro-market policies. So it's not that it's not that we're stuck on these these false beliefs But we have to be taught not to have them I think in teaching economics. I think we really start one step too far forward I think Economics principles books, which I'll talk about in a few minutes would do better if they started one step back If they started with telling students the world is not zero some there are real gains from trade things You know, we get to gains from trade if we're lucky in the last chapter just before the final when we do international trade, but I think if we started one step farther back I think it would really help us because I think students come to class with a zero-sum mindset and We don't always address that mindset as as carefully as we should but all of these policies All of these beliefs can be harmful Because they lead to people supporting policies that are harmful. I think economists are partly to blame for this And because because of the language that we use this is where the how do we talk about economics comes In I think we emphasize Competition way too much in our our analysis of the economy. I get a study at when I say I of course that means a graduate student did a did a did a study of Common textbooks and we found that Competition is mentioned eight times as often as cooperation in the textbooks And it's a little worse than that because often when cooperation is mentioned. It's in terms of oligopolists colluding So cooperation is mostly norg and when it's not it becomes a bad thing So so competition is stressed Adam Smith of course talked about competition, but he also talked about the pin factory, which is cooperation The the analogy of competition comes from sports if you read Stigler's famous paper on the history of the term It turns out that the the analogy comes from sports Competition is the term from sports in sports. There are winners and losers Sports are zero sum and so when we talk about the competitive economy we remember we start off with a Zero-sum mindset about the world then economists come and talk about competitive economy and People say aha. There's winners and losers in the economy They're competing dog eat dog Capitalism is an evil system because it's forcing people to compete and Creating winners and losers. So the emphasis on competition Reinforces our zero-sum thinking that comes from our folk economic from our folk economic Beliefs, of course, there is competition. I don't want to I don't want to downplay the role of competition Competition is very important in an economy But what is what is competition what are firms competing for? They're competing for the right to cooperate They're competing for the right to sell you stuff and selling you stuff is a cooperative act a transaction the fundamental unit of economics is a cooperative act and so when people are competing they are competing for the right to cooperate so when Amazon and Walmart compete what they're competing for is the right to cooperate with with other people They're not competing to put each other out of business Although that may be a byproduct, but what they're competing for really is the right to Co-operate what what function does competition have? Competition chooses the best cooperators. So whoever wins in the competitive race. That's another way of saying That that party is the best Cooperator they won because they do the best job of cooperating Rather than because they're the best they're the best competitor but they're they but the purpose of it being the best competitor is to Co-operate with if you if you're buying it's to cooperate with sellers if you're selling it's to cooperate with with buyers In a way, it's strange that economists do emphasize competition to the extent that we do For a few reasons first of all go back to our model of pure competition the one that we love No competition and pure competition right the essence of pure competition is every seller ignores every other seller Because all sellers are so small that none of them can affect the market no competition There is there is we talked about the competitive model and yet in the competitive model There is no competition the only assumption is that people people are free to trade with each other and trade is as I said a cooperative act So so we call our model pure competition and it confuses laypeople because when they think of competition they think of Ford and General Motors and Toyota, but But but in our model of competition, there's none of those guys They're only little guys who are Trading and trading small amounts and and ignoring each other So it's in a way strange that we call the model the our model pure competition Because it is not competitive Competition itself is is not the goal of an economy either as I said competition is to sort out the best Cooperator, but what's the goal of an economy? Well the extent that the economy instead of a goal its goal is to maximize consumer surplus Where does that come from that comes from buying and selling or from exchange? That's where that's where Consumer surplus comes from competition again is good because it enables us to sort out the best cooperators the best people to buy and sell from but It doesn't it isn't essentially the goal. It's a tool to make the cooperative economy work better It's not the goal of the economy itself Moreover competition is ubiquitous. It's everywhere a market economy is not set There's not distinguish itself from a traditional economy or a Marxist economy by the fact there's competition There's always competition humans are competitive They're winning the Darwinism tells us that and there's always some sort of competition So there's not it's not that market economies are unique by having competition It's they're just an example of every economy is so you say this is a competitive economy The Russian economy is also competitive people were competing for different things in different ways But they were competing just as we're competing in our economy If you look at the discipline of marketing Marketing actually does a pretty good job You know economists were snobs. We don't like to think about marketing But marketing actually does a better job of describing the cooperation between buyers and sellers and the goal of sellers in finding out How they can best cooperate with buyers? So marketing actually does does a pretty good job of looking at that Moreover cooperation is I claim much more important important than Competition in an economy the basic unit of of of economics is a transaction transaction is a cooperative act Both buyers and sellers gain from cooperation They must agree to cooperate or there's no transaction and they must both expect to gain or again, they will not Transact with each other more of a competition cooperation is vastly more common than is Competition think of yourself as an economist You you compete when you're in the job market your first time you're competing with a dozen maybe two dozen other economists As you go through your career, you're competing for maybe better jobs Maybe prizes the Nobel Prize the Clark Award You're competing for space in journals But in all those cases you're competing with a relatively small subset of people and in fact you're cooperating with all other Economists, how are you cooperating with them? Well? You couldn't do your work if other economists hadn't done their work starting with Adam Smith. Maybe you could not Write papers if there were not things to say in fact the the current measure of the productivity of a scholar is Citations and the citation is essentially a measure of Cooperation when you cite someone's paper you are cooperating with that person you are using the information that they provided in order to advance your own particular argument so a citation is an example of Cooperation but more generally all economists are cooperating cooperating to generate the the literature the knowledge that we have of Economics and of course once you take an economist outside of the role of Economist we're cooperating with everybody we go to the store we cooperate with merchants we Cooperate every product we buy is a huge wave of cooperation So so in economic and we have a series of cooperation specialization gains from trade division of labor Going back to the pin factor all of these are specific examples of cooperation, but It's my claim that we have not Emphasized those enough in our research and in our talking and that we have overemphasized the role of competition Which brings us back to our zero-sum way of thinking rather than realizing that the economy is cooperative In a sense you can think of the markets markets as creating huge waves of competition I'm sorry huge waves of cooperation We're crying we're cooperating with people all over the world people who are dead who produce things that we use We're cooperating with people who aren't born yet who will use things that we produce so so you can the economy in my view is the largest engine of Cooperation that has ever been conceived. I won't say invented because no one invented it, but the largest engine of Cooperation that has ever occurred in the history of the world and it's it's very it's usually cooperative And yet we call it competitive, and I think we are losing something by doing that I want to be careful when I say cooperation. I don't want you to think of me as some sort of soft new age guy Oh, that's all love each other You you can be as as Hard-edged as you want. I like the example of Scrooge from Charles Dickens anti-market screed a Christmas Carol Scrooge was the meanest guy in markets ever described What did he do that was so mean? He lent money to people right every act that he did lending money In fact was a cooperative act and by being Scrooge like by lending on harsh terms. He was able to lend money to people who needed it the most Later he became so often we don't care about him, but at the beginning At the beginning he was a very sound economic man He was you know the caricature and yet he was very cooperative and the reason your rational selfish economic person We can make him man women. We know we're kinder, but your rational selfish economic man is Is cooperative is not because he's kind and good it's because we must cooperate in order to maximize our own utility We compete as well, but cooperation is a very important part of what we do So what are the but again as I've said Emphasis on competition reinforces zero-sum thinking it reinforces the thinking that there are winners and losers Sports poker those are games of competition politics is pretty much competition Although there's coalitions forms in politics, but an election is one winner and one loser. Those are competition and People tend to think mostly as competition as bad economists don't we like competition, but most people think a Competition except in sports is a bad thing because they think well There's winners and losers in competition if there's losers they suffer. They're harmed. They feel sorry for them On the other hand cooperation is win-win both parties can win from cooperation So my point is that by emphasizing competition Economists are enforcing or reinforcing this zero-sum or win-lose way of thinking and It means makes people think less well of the capitalist or of the market economy when they think of it as an economy of Winners and losers. I'd like to use the example of Walmart so Walmart moves to town and a bunch of mom-and-pop stores go out of business What happened? Well, there are two ways of describing what happened the conventional way is to say Walmart out-competed them and drove them out of business and all the mom-and-pop stores lost and Walmart one isn't that a shame Walmart's big in their little and yet Walmart out-competed them and drove them out of business The other metaphor is to say Walmart out Co-operated them Walmart offered goods and services to people at better prices and terms than the mom-and-pop stores they did a better job of cooperating with their customers and That's why the other stores went out of business. We can tell either story. They're both true But one story has a very different psychological connotation than the other the cooperative story Focuses on what Walmart did right the competitive story Focuses on what Walmart did did wrong and I think economists not only in our in our Teaching but in our writing when we write op-eds or when we write We're called by the news to comment on something. I think if we keep this cooperative notion in mind we can do a better job of Convincing people that markets are good rather than Having them go away with the idea that markets are not good Income inequality again, you can say well poor people are out-competed in the marketplace And that's why they're poor or you can say poor people don't have much to sell and they can't cooperate very well Because they don't have much to sell And let's help them figure out a better way to cooperate Then otherwise what's a successful firm the successful firm is the best co-operator not the best competitor Of course special interest firms special interests sometimes reinforce that competitive way of thinking if you're An import competing firm and you want to tariff you will stress the competitive nature of international trade And it's easy to do again because people tend to believe that way I Have some enough time left. I want to talk a little bit about what I call it What's called pathological altruism which is a notion that the psychologists have just invented, but I think economists Should make much more use of it Pathological altruist is a person who? Seerly engages in what it tends to be altruistic, but actually harms the person. They're trying to help a Couple of examples that the psychologist give when when you see someone else is sad and you think it's your fault Then you can then that's maybe pathological altruism Inequality again can feeling sorry for the poor can be an example of pathological altruism And many kinds of regulation are exactly that a minimum wage If again, you can think of it as confusion if you you think that people are poor Because they're outcompeted then you try to change the terms of competition minimum wage If you think people are poor because they don't have opportunities to cooperate Then you want to increase their opportunities to cooperate and a minimum wage reduces their opportunities to cooperate Takes away Possibilities that they might have so to the extent that we diagnose Social problems as due to excessive competition when they're really due to failures of cooperation Then we can end up making making things worse because we're we're ewing them through a competitive lens rather than a cooperative lens Some examples Minimum wage tariffs price controls Bruce yandell has talked about bootleggers and Baptists a coalition between Bootleggers who want to sell want to sell illegal liquor on Sundays and Baptists who want people not to drink on Sundays and they form a coalition to prevent the sale of liquor on Sundays There are many many examples of that of where an interest group will coerce someone into supporting their position And in fact the person who's appointing is often hurting the very people that it wants to helps Environmentalists and solar power firms drug companies and safety advocates say that's not an import drugs from Canada the European discussion of franken foods foods that are created by Genetic manipulation the Europeans weren't very good at it the Americans were and so the European food producers Convinced the European consumers that these were bad. They were franken foods. They should be banned from Europe You know safety advocates and food producers performing a Pathologically altruistic act together Finally this is in this has implications for how we view the market if we think of the market as Competitive then we think that it's it's harmful people are doing bad things Some people say well markets, you know, they have their their downside They're really bad things, but they produce goods and services So we have to tolerate them because they do these good things even though they're fundamentally immoral force If we think of the market as cooperative then we don't need to think that way then we can think well The market is cooperative. It's a good way to do things and it's doing it's doing good things We don't have to apologize because the market itself is cooperative and it is Producing goods and services people that succeed in the market It's not that they're the most ruthless most ruthless competitors people that succeed in the market succeed because they are doing the very best job of Co-operating with others and we don't have to worry about them. There's a whole notion now of giving back That strikes me as perverted Bill Gates Produced huge amounts of wealth by producing Microsoft He's choosing to give some of that wealth away and that's fine But it's not that he's giving back because he did bad things by producing Microsoft by by creating Microsoft He did a really good thing and you know if he chooses to give away his wealth That's fine, but he doesn't have to give back because he hasn't done anything wrong in the first place He's done something very very useful. He's been a hugely beneficial and efficient Co-operator in the marketplace. So if we think of if we think of the market as being cooperative Rather than as being competitive Then we have a whole different view of the market and I think if we economists could Could change our terms of discourse a bit and emphasize the cooperative nature of markets I think we could do something to reduce the dislike of markets that way that way observe This is based on some papers I've written over the years and as I say it's in the process of becoming a book I'll take questions. I guess I still have time for questions