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Economists and Entrepreneurs

November 3, 2014 in Economics

By Peter G. Klein

For once I agree with Paul Krugman, who writes: “success in business does not seem to convey any special insight into economic policy.” Unfortunately, everything in his latest column except that single sentence is completely wrong. What Krugman means is that Ben Bernanke, Janet Yellen, Mervyn King, Mario Draghi, and the other academic Keynesians were right about quantitative easing, bailouts, subsidies, etc. as they bravely “navigated their way through a once-in-three-generations economic crisis” (which, of course, their policies did nothing to create). In doing so, they had to overcome resistance from various unnamed businesspeople who thought that a massive stimulus, bank and industry bailouts, and general suppression of market mechanisms might not be the best idea ever.  The Keynesian professors, Krugman reports, “had the courage to defy all those tycoons demanding that they stop printing money.” Well, that all worked out just great, didn’t it?

Well, even a stopped clock is right twice a day. And Krugman is right that success in entrepreneurship does not make one a good economist (see, for exhibits, George Soros, Warren Buffett, Boone Pickens, and too many others to count). More important, skilled economists may be exceptionally poor entrepreneurs. Krugman attributes the differences between economic thinking and entrepreneurial thinking to the sophomoric Keynesian idea of the “fallacy of composition” — e.g., an entrepreneur thinks he should cut his expenditures in response to falling demand for his product, but if all entrepreneurs do this, then total spending will fall, the economy will go into recession, and the entrepreneur’s profits will fall, etc. The Keynesian economist knows that, contra Adam Smith, what is folly in the conduct of a single household is just right for the economy as a whole.

The truth is quite different — economic analysis and entrepreneurial action are fundamentally different activities, requiring different skills. Economic analysis involves abstract, deductive reasoning, the ability to trace out long-run consequences, a view on the whole as well as the parts. Entrepreneurship, as Mises consistently emphasized, is about anticipating future market conditions, something that no economic model can do.

In fact both the economists and the businessmen are fully aware of the uncertainty of the future. The businessmen realize that the economists do not dispense any reliable information about things to come and that all that they provide is interpretation of statistical data referring to the past. For the capitalists and entrepreneurs the economists’ opinions about the future count …read more

Source: MISES INSTITUTE

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Avatar of admin

by

Economists and Entrepreneurs

November 3, 2014 in Economics

By Peter G. Klein

For once I agree with Paul Krugman, who writes: “success in business does not seem to convey any special insight into economic policy.” Unfortunately, everything in his latest column except that single sentence is completely wrong. What Krugman means is that Ben Bernanke, Janet Yellen, Mervyn King, Mario Draghi, and the other academic Keynesians were right about quantitative easing, bailouts, subsidies, etc. as they bravely “navigated their way through a once-in-three-generations economic crisis” (which, of course, their policies did nothing to create). In doing so, they had to overcome resistance from various unnamed businesspeople who thought that a massive stimulus, bank and industry bailouts, and general suppression of market mechanisms might not be the best idea ever.  The Keynesian professors, Krugman reports, “had the courage to defy all those tycoons demanding that they stop printing money.” Well, that all worked out just great, didn’t it?

Well, even a stopped clock is right twice a day. And Krugman is right that success in entrepreneurship does not make one a good economist (see, for exhibits, George Soros, Warren Buffett, Boone Pickens, and too many others to count). More important, skilled economists may be exceptionally poor entrepreneurs. Krugman attributes the differences between economic thinking and entrepreneurial thinking to the sophomoric Keynesian idea of the “fallacy of composition” — e.g., an entrepreneur thinks he should cut his expenditures in response to falling demand for his product, but if all entrepreneurs do this, then total spending will fall, the economy will go into recession, and the entrepreneur’s profits will fall, etc. The Keynesian economist knows that, contra Adam Smith, what is folly in the conduct of a single household is just right for the economy as a whole.

The truth is quite different — economic analysis and entrepreneurial action are fundamentally different activities, requiring different skills. Economic analysis involves abstract, deductive reasoning, the ability to trace out long-run consequences, a view on the whole as well as the parts. Entrepreneurship, as Mises consistently emphasized, is about anticipating future market conditions, something that no economic model can do.

In fact both the economists and the businessmen are fully aware of the uncertainty of the future. The businessmen realize that the economists do not dispense any reliable information about things to come and that all that they provide is interpretation of statistical data referring to the past. For the capitalists and entrepreneurs the economists’ opinions about the future count …read more

Source: MISES INSTITUTE

Leave a reply

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