William Irwin's effort to marry a market ethos to existentialism offers lessons about the necessity of grounding free exchange in a moral code.
By his own admission, Matthew Hennessey is an unlikely author of an economics book. He has no experience in business, accounting, or finance. Until fairly recently, he was quite intimidated by the dismal science. Yet he’s managed to become the Wall Street Journal’s deputy op-ed editor, so he likely knows a thing or two about markets. Over the course of 200 entertaining pages, he proves it. Visible Hand is the elementary economics book we’ve been waiting for. I don’t mean it’s an Econ 101 text of the kind college freshmen wearily slog through. It’s something much more important: an everyman’s introduction to how property rights, prices, and profits and losses make the world go ‘round. I hope we can get copies of this book in the hands of every high school senior in the country.
Chapter one dispels the fog of obscurantism that surrounds economics. Hennessey is surely correct that economists make economics too complicated. At its core, it’s all about tradeoffs. “You can’t have everything you want. That’s the heart of economics.” Understanding tradeoffs is crucial to appreciating Adam Smith’s “invisible hand” metaphor. Under capitalism, man’s struggle against scarcity results in a magnificent economic bounty: “The poorest American in 2022 is hundreds of times wealthier in real terms than the wealthiest Americans in 1776. He has greater access to essentials, like good food and quality housing, and enjoys a life expectancy that is essentially double what it was at the founding of the country.” Hennessey explains foundational economic concepts while opening readers’ minds to the Great Enrichment. Not bad for the opening chapter!
The second chapter is a crash course in trade theory. Exchange is central to economics, as Hennessey recognizes. “Voluntary and mutually beneficial exchange” is how markets “satisfy people’s needs and allocate resources fairly, efficiently, and without coercion.” Readers also learn about the universality of economizing behavior. Our decisions “are often motivated by economic concerns–not by money necessarily, but by an intuitive understanding that resources are scarce, trade-offs are necessary, and choices matter.” Just so.
Next, we get an overview of two very important ideas: opportunity cost and diminishing marginal benefits. Hennessey disabuses his readers of the notion that economics is about money. If you reduce economics to dollars, “you’re thinking like an accountant.” Once you realize what matters is “lost opportunity, then you’re starting to think like an economist.” Our choices are structured by our alternatives; our incentives are shaped by the ephemerality of low-hanging fruit. At the end of the chapter, Hennessy offers an amusing example of cost and choice, wryly noting that “Anyone who’s ever been in an exclusive relationship intuitively understands the concept of opportunity cost.”
Chapter four is about preferences, rationality, and thinking at the margin. “Your choices reveal your preferences,” Hennessey writes. Choices emerge from the interaction between what we’d like to do and what we’re able to do. Rationality, which to an economist just means satisfaction-maximizing, is not some robotic algorithm, but a necessary characteristic of goal-oriented behavior. Furthermore, we make our choices at the margin, selecting from specific quantities of additional goods. “The important stuff in life happens at the margins. It’s the borderline, the place of exploration, the place where equilibrium can be found and achieved.” What economists call “marginal analysis” just means thinking about choices in terms of additional costs and benefits, starting from wherever we are. Our baseline allocation of income, expenditures, and time sets the starting point, but it’s how we weigh our future options that counts.
“To make good choices we need good information. In a market system the best piece of information available to anyone trying to make an economic decision is price.” This is music to economists’ ears. Hennessey writes this early in the fifth chapter, which is all about prices. As economists Tyler Cowen and Alex Tabarrok memorably put it, “A price is a signal wrapped in an incentive.” This chapter unpacks that profound insight. Prices are the “visible, tangible expression of forces that are otherwise invisible and intangible, namely supply and demand.” Politicians, always promising free stuff, frequently mess with prices. But this causes calculational chaos in markets. One thing’s for sure: “Free lunches, as nice as they sound, aren’t really ‘free’…Someone always pays.” We even get a discussion of how inflation—a general increase in prices—affects the price system’s ability to generate and transmit information. The chapter concludes by discussing the unintended consequences of two popular yet misguided price controls: rent ceilings and wage floors.
Chapter six is about specialization. Hennessey writes about the domestic and international division of labor. He recognizes that the law of comparative advantage applies just as much within nations as between them. “The way to make the most of your comparative advantage is to specialize. Focus on doing the thing you do best while giving up the least.” The social intelligence of the marketplace generates the information we need to make crucial tradeoffs. Thanks to markets, we can figure out our (opportunity) cost-minimizing lines of production. While Hennessey discusses exceptions—nations that hope to remain free probably shouldn’t outsource tanks and bombs—he deeply appreciates the wonders of free trade.
What about the economics of work? How do we explain why a baseball star makes $20 million per year, while a public school teacher makes only $50,000? “Work, whatever form it takes, is an exchange…That makes going to work an economic transaction, and economic transactions are what markets are made of.” It’s supply and demand, as always. Income inequality is the predictable result of big differences in the value of what laborers produce, as well as how substitutable those laborers are for each other. Instead of moral outrage, we’d do well to focus on the drivers of supply and demand in labor markets. Misguided public policy, not ordinary market mechanics, is the real problem.
The eighth chapter covers business. Many Americans regard the pursuit of profit with suspicion. Large businesses—Wall Street banks and Big Tech firms come to mind—are particular objects of scorn. But the truth is that we need businesses, both large and small. “Business of all sizes serves a social purpose…Their very existence indicates a demand for what they offer.” Hennessey spends most of the chapter on a moving story about his parents’ successful small business. But small isn’t necessarily better. Big firms make our lives better, too. Without understanding how profit-seeking businesses of all sizes create wealth for society, we’ll remain ignorant of capitalism’s strengths. A business profits when it adds value to society’s scarce resources, transforming land, labor, and capital into something more valuable than before. The search for profits is what drives producers to satisfy the wants of consumers. It’s where the rubber hits the road in terms of economic coordination. Businesses sometimes behave badly, but that’s no reason to condemn business in general.
The fiery ninth chapter calls out “anti-marketeers” across the ideological spectrum. Hennessey roasts progressives on the left and “common-good conservatives” on the right. The indictments are tough but fair. Both breeds of statists find market outcomes morally abhorrent and want to upend America’s traditionally (classical-) liberal governance framework. Fat chance, says Hennessey. Utopian projects break apart on the rock of economics: “We live in an environment of scarcity. We can’t always get what we want. People respond to incentives. There’s no such thing as a free lunch. Life is about tradeoffs.”
Both progressive and common-good conservative reforms fail because they rest upon economic ignorance, Hennessey warns. While liberal-democratic capitalism can be messy, there’s simply no “alternative that allows people to follow the course they set for themselves as far as talent and ambition will carry them, regardless of race, color, creed, or family name.” While statists might scoff at these goals, they can’t escape the fact their reforms–industrial and family policy on the right, taxation and income policy on the left—are riddled with economic contradictions.
The concluding chapter is a brief yet passionate defense of Hennessey’s two pillars of economics: There is such a thing as economic law, and everybody should understand its basics. I was pleased Hennessey mentioned Murray Rothbard, whose price theory text is currently required reading in my Ph.D. course. However, I was dismayed at the curt dismissal the prodigious Austrian economist received. Oh well. Rothbard is admittedly an acquired taste.
While Hennessey and I disagree about Rothbard, we heartily agree that “Everyone should be familiar with economic concepts.” We also agree that economic forces, like physical forces, are real: “Gravitation is an invisible force but its effects are visible, just like the price mechanism.” Hennessey’s final sentences are worth quoting in full: “The forces that govern markets can’t be abolished because they were never established. They just are. Always were and always will be. You may wish it wasn’t so. You may want to live in a world free from the laws of economics, but life is not determined by what you want.” There’s no better way to sum up why economics matters.
Hennessey’s book is a superb introduction to the economic way of thinking. It also speaks to ongoing public debates. I particularly enjoyed Hennessey’s critique of common-good conservatives, the “nouveau dirigistes [who] combine socially conservative views with economically statist preferences.” I have strong sympathies with common-good capitalism and Catholic social teaching, yet I ultimately side with Hennessy on these questions. Instead of flirting with heavy-handed government, the American right should return to its classical-liberal roots. “Classical liberalism…describes a political philosophy characterized by an emphasis on liberty, limited government, and individual rights.” This is what made the United States great, and can do so again.
Freedom is an essential component of the American governing ethos. “Yet to the common-good conservatives, individual liberty is not a foundational American principle or an indispensable element of our national identity but merely an accelerant of the social decay they abhor.”
“They call people like me ‘market fundamentalists,’” Hennessey writes, “as if recognizing that economic liberty is essential to human flourishing means you worship mammon rather than God. Whatever. They are very good at calling people names.” As a self-identified “zombie Reaganite,” I say bring it on.
I do have a few quibbles with the book. First, Hennessey’s take on the positive-normative distinction is problematic. He writes, “What the price is and what it should be are not just two different questions; they’re two different types of questions. One has a real answer; the other is up to you.” This implies that is-statements are factual, while ought-statements are merely articulate preferences. But the overwhelming majority of people are moral realists. We regard both descriptive and prescriptive statements as factual. It’s fine to insist that economics, as a social science, can’t speak to ethics. When we suggest that ought-statements are somehow less real than is-statements, that looks like the sort of supercilious attitude that makes the public suspicious of economics in the first place.
Second, I take issue with certain claims from Hennessey’s brief foray into macroeconomics. Writing about central banking, Hennessey claims, “Responsible central bankers…set an inflation target and fiddle with the tools and policy levers at their disposal to try to get as close to the target as they can over time.” But this is by no means certain. There are good reasons to prefer that central bankers not fiddle at all. In my opinion, central bankers shouldn’t get to choose the rules that bind them. One ought not be a judge in one’s own cause. As for the content of the rule, it’s not clear inflation targeting is the best we can do. The arguments for aggregate demand (nominal GDP) targeting are very strong. Perhaps Hennessey disagrees, which is fine. But he presents as a consensus something that’s very much up for debate.
These are minor disagreements, and however they are settled, Hennessey’s achievement stands. He believes economics is for everyone, and he backs it up with his pen. For this, he deserves high praise. Economics is indeed universal: While it might not say everything about something, it says something about everything. Thanks to Hennessey, many more people will know it.