Greater Opportunity Through Innovative Change


The economics profession is sometimes held up to ridicule or satirized because some of its practitioners have fooled themselves into believing they are scientists. One example is Arkansas' ongoing fiscal crisis, now in its third year, which has led to five downward revisions in state revenue forecasts. Huckabee administration officials have blamed entrepreneurs and corporations, creating scapegoats when a reappraisal of their false faith in "economics as science" is warranted. Entrepreneurs--not government economists who claim to use "scientific methods"--are the real forecasters in a market-based economic system. These job creators will continue to seek opportunity, and avoid calamity.

There are iron laws of economics but the profession is not a science as some Little Rock government economists insist. Governments create shortages or surpluses of consumer goods when they meddle with the price system, and capital investment flees to low-tax areas when tax rates become too high as is the case in Arkansas. Some government officials and pundits mock economic laws but they still must face the consequences. It was not a conservative or libertarian but the late liberal economist John Maynard Keynes who famously observed:

"The ideas of economists and political philosophers, both when they are right and when they are wrong, are more powerful than is commonly understood. Indeed the world is ruled by little else. Practical men, who believe themselves to be quite exempt from any intellectual influences, are usually the slaves of some defunct economist. Madmen in authority, who hear voices in the air, are distilling their frenzy from some economic scribbler of a few years back.(1)

Economists are not scientists but their ideas have powerful consequences for the 2.7 million citizens of Arkansas.

The Entrepreneur's Powerful Economic Argument

One example of Keynes' observation is trade, long championed by economists. Support for trade rests on powerful ideas developed centuries ago by economists, including a successful Englishman who epitomized the notion of entrepreneur as forecaster in a market system.

Trade occurs between peoples because they can specialize, increase the productivity of their resources, and realize a greater total output. The division of labor is an economic law. Every individual has a special skill or talent. One can observe this process in everyday life. The specialization emerging from the division of labor allows individuals-and entire peoples-to take advantage of differences in abilities and skills.

The Scottish economist Adam Smith, in his book, "Wealth of Nations." (1776) stressed the importance of division of labor and specialization. Smith attacked the fear of trade by comparing nations and households. He argued every household finds it worthwhile to produce some of its needs, and to buy goods from others with its products. Smith the economist argued the same principle of absolute advantage applies to nations:

"It is the maxim of every prudent master of a family, never to attempt to make at home what it will cost him more to make than to buy ... What is prudence in the conduct of every private family, can scarcely be a folly in that of a kingdom. If a foreign country can supply us with a commodity cheaper than we ourselves can make it, better buy it of them with some part of the produce of our own industry, employed in a way in which we have some advantage."(2)

But it was David Ricardo (1772-1823), a successful British entrepreneur, who built on Smith's foundation by developing the subtle idea of comparative advantage. Comparative advantage is the foundation for economists' belief in trade.. According to Ricardo, a nation is better off if it trades for lower-cost products than if it produces them domestically. Ricardo argued a nation specializes in goods where its comparative cost is lower. He later served in the British Parliament.

Arkansas Is Competing In A Global Economy

A viewpoint prevalent around the state Capitol, sometimes amplified by pundits, can be summarized as the 'We're only competing with ourselves' argument. This view appears in arguments against higher academic standards in K-12 public education and proposals to lower Arkansas' tax rates on capital, among the highest in the region. Why use standardized, norm-referenced national tests, or attract capital investment from other states when Arkansas is competing with itself?

Arkansas is not competing with itself. It is competing in a global economy, and the competition will become fiercer. Entrepreneurs will continue to take appropriate action if Arkansas' K-12 system continues to produce students unable to read or perform mathematics. Proponents of the 'We're only competing with ourselves' view seem unaware they lost the argument nearly 200 years ago. The reality is that trade between peoples has increased-and will continue to grow-due to the economists' advocacy and David Ricardo's powerful idea of comparative advantage.

--Greg Kaza


(1) Keynes, John Maynard, "The General Theory of Employment, Interest and Money." 1936.

(2) Smith, Adam, "Wealth Of Nations." 1776