Liberty and Leadership
TFAS has reached 53,000 students and professionals through their academic programs, fellowships and seminars. Representing more than 140 countries, TFAS alumni are courageous leaders throughout the world – forging careers in politics, government, public policy, business, philanthropy, law and the media. Join TFAS President, Roger Ream, as he reconnects with these outstanding alumni to share experiences, swap career stories, and find out what makes their leadership journey unique. The Liberty and Leadership podcast is produced at Podville Media in Washington, D.C. If you have a comment or question for the show, please drop us an email at podcast@TFAS.org.
Liberty and Leadership
Economics Beyond the Classroom with Dr. Rosolino Candela
How can people apply economics to daily life? This week, join host Roger Ream for an engaging conversation on economics and the transformative power of education with Dr. Rosolino Candela, a senior fellow at the Mercatus Center at George Mason University. Dr. Candela emphasizes the importance of meeting students where they are by making complex economic concepts accessible and relevant. He delves into the enduring relevance of several economists such as Friedrich Hayek, illustrating their economic theories with captivating real-world examples. From the significance of price mechanisms to the unintended consequences of public policy, Candela provides a rich, nuanced understanding of how economic principles apply to real-world issues.
Dr. Rosolino Candela teaches Economies in Transition for TFAS U.S. Programs in Washington, D.C. He is a senior research fellow and associate director of academic and student programs, as well as a senior fellow of the F.A. Hayek Program for Advanced Study in Philosophy, Politics and Economics at the Mercatus Center at George Mason University. Previously, Dr. Candela taught economics at Brown University, where he also was a postdoctoral research associate in the Political Theory Project. He received his Ph.D. in economics from George Mason University, his master’s degree in economics and international political economy and development from Fordham University and his Bachelor of Arts in history and philosophy from St. John’s University.
The Liberty + Leadership Podcast is hosted by TFAS president Roger Ream and produced by Podville Media. If you have a comment or question for the show, please email us at podcast@TFAS.org. To support TFAS and its mission, please visit TFAS.org/support.
Welcome to the Liberty and Leadership Podcast, a conversation with TFAS alumni, faculty and friends who are making an impact. Today. I'm your host, roger Ream. I'm pleased to welcome to the show today an economist of distinction, dr Rosalino Candela. Dr Candela teaches economics for TFAS and is also a program director of academic and student programs and a senior fellow at the FA IAC program in advanced study in philosophy, politics and economics at George Mason University's Mercatus Center. Don't let that long, fancy title fool you. Dr Candela is full of insights about how economics is taught and what key economic concepts every American should understand. We will be discussing those subjects and more today. Dr Candela, hereafter referred to as Rosalino, is the co-author of the Socialist Calculation Debate Theory, history and Contemporary Relevance and Great Minds of the Market, and he's contributed to numerous book chapters, journal articles and reviews. In his research he incorporates Austrian economics and public choice to understand the emergence and enforcement of property rights and their implication for economic development. Rosalino, thank you for joining the show today, roger. It's a pleasure to be here.
Speaker 2:Thank you for having me.
Speaker 1:There is a video circulating of Jared Bernstein, the chair of the Council of Economic Advisors, to the president, and he's struggling to explain government borrowing and fiscal policy and the printing of money. He's asked why does government borrow money when it can just print it? And he's struggling to explain government borrowing and fiscal policy and the printing of money. He's asked why does government borrow money when it can just print it? And he's stumped to come up with an answer. It's embarrassing to watch him unsuccessfully try to explain the basics of government fiscal policy. Why is there so much ignorance about economics, even among top elite people who should know the subject?
Speaker 2:Well, I think primarily it's driven by the fact that, if we even just think about the term economics and what it means, economics, if you trace it back to the original Greek, or koinomia, means household management. So it presumes somehow, and oftentimes I've seen this, being an undergraduate myself and the way that I hear about individuals who have taken economics, is that they assume that somehow economics is primarily about an allocation problem. Right, if you're in a household, you're a father or a mother, you're allocating resources to your children right.
Speaker 1:We learned that from Paul Samuelson. Right. How do we distribute to whom?
Speaker 2:Right, but that is a subset of a more fundamental and important question that drives economics, which is both counterintuitive and, at the same time, a very powerful tool, which is how do we realize cooperation without command?
Speaker 2:Now, if you think about this, if you look at traffic out in the highway up close and personal, it may seem chaotic, but if you look from a bird's eye view, it's beautiful. It looks like it had been planned, but in fact there's what the great Austrian economist FA Hayek referred to as a spontaneous order which is governed by a set of rules. But what the rules do is not dictate what people should do. It just guides them in their interaction. So what I think is most important about the economic way of thinking that is missing is that number one. It's not about planning or distribution, it's about studying the rules of the game and the interactions that emerge within a set of rules. But that, along with the fact that so much of undergraduate teaching is driven by mathematical formalization and is associated with accounting or finance, that central message about how do we realize cooperation without command, which is linked to why countries are rich and poor, that takes a back burner in many elementary courses.
Speaker 1:I have a friend whose son went to graduate school at Penn and he tells me that they got no price theory there. You know, you and I have talked about the importance of teaching price theory, but I'm reminded of Paul Hain making a comment. Paul Hain was an economist at University of Washington, very influential in the development of our high school programs and teaching the economic way of thinking, and somewhere Hain observed that too often introductory economics is taught as if it's the first course a student will take on their way to a PhD, rather than it being the last course they're probably ever going to take in economics. And there's a chance to give them all an economic way of thinking if it's taught in an improved way. So how would you suggest that we teach economics and what is the importance of price theory in all this?
Speaker 2:Well, it's funny you ask that question because, whatever level I'm teaching, if I'm teaching undergraduates, if I'm teaching master's level students or if I am holding a seminar with the PhD students in the program that I'm directing, this is one of the first questions I ask them. I ask them what a price is. Many of them will be stumped, and I define it as an exchange ratio the terms in which two goods are exchanged. Now, if you stop and think about that, what does that imply? In order to have the terms of exchange being set, what do people need? They need the ability to exchange in the first place.
Speaker 2:That's just another way of talking about property rights. In order for prices to emerge, you need private property rights, you need individuals to have ownership in their goods and services and, more importantly, they have to bear the consequences of their actions in order for prices to communicate relative scarcity. And that's what price theory is all about. The economic way of thinking studied from a price theoretic perspective teaches us that prices are like traffic signals that guide production and consumption decision making. They're not a set of marching orders, as the notion of economics being an allocation problem would suggest.
Speaker 1:You would not accept as an answer from a grad student, if you asked what prices are, is just say it's the point where supply and demand come together.
Speaker 2:That is the outcome of pricing, but it's not what a price is. Fundamentally, what a price is, it's the terms in which two goods are exchanged. Now, what you have referred to is an equilibrium price, but we never live in a world of equilibrium. That is an important tool to understand the tendency towards which markets converge to, but fundamentally, we live in a world in which pricing is necessary, but not a sufficient condition. You need private property, you need profit and loss signals, you need freedom of contract under the rule of law. So what price theory teaches us and the term is actually a bit of a misnomer, because what it teaches us is that prices, as well as all of these other institutional arrangements that I've talked about, are required in order to guide people in their production and consumption decision-making. Let me give an example just to illustrate this point.
Speaker 2:So I was very fortunate that I had taught at Brown University for a year, roger. It was one of the coldest winters I ever experienced. I rented out this house from this very nice lady and I'll never forget my wife will tell you this story. I looked at the heating bill when I received it, roger. It would have looked like it was 90 degrees in that room, there was sweat. It was literally 10 degrees below zero and there was sweat pouring down my forehead looking at this bill.
Speaker 2:Now, what's the point I'm trying to make here Is that what price theory teaches us is that market pricing communicates tacit and dispersed knowledge amongst buyers and sellers. What do I mean by that? Why was I sweating is because the fact that heating oil became more scarce. The price went up. The demand for heating oil went up. I responded to that scarcity in what way? I shut off a valve in a room. I closed off the door. I started wearing an extra sweater when I was inside the house, but the prices did not command me to do that. They weren't a set of marching orders dictating what I should do. That was just me, one single individual acting on my own tacit knowledge about how to respond to the scarcity. But when you incorporate the millions, if not billions, of actions of individuals responding in the same way, that is what's driving market pricing, and the beauty of it is that nobody is planning it. There's no central planner from on high dictating how these prices should be set and how people should respond to them.
Speaker 1:It's people voluntarily responding to incentives. Exactly, you talk about the concept of property rights and you tie that very closely to price theory. It seems like property rights are not a topic that's often discussed in economics classes. I've talked to your colleague, peter Betke, about this. He stressed the importance in our programs in Prague of teaching students from former Soviet Union and Eastern Central European countries. This was some years ago, but about the importance of property rights. How does that tie in here? I mean, you've kind of explained it to some extent. Is property rights neglected too much in economics?
Speaker 2:I think absolutely. It is literally the cornerstone of understanding how different economic systems work. Now, you and I are extremely fortunate. For all the problems that the United States may have, it is a. Compared to the rest of the world, it is a well-functioning economic system. But precisely because it's a well-functioning system, we take for granted the underlying institutional framework that allows individuals to cooperate without command in the way that I've just talked about and live and enjoy the high standards of living that you and I enjoy today, for example, property rights.
Speaker 2:Now let me give an example. I have relatives on my wife's side that live in Lebanon. Now, literally because of the collapse of the financial system in that country, they are literally having difficulty getting money out of their bank account. They can't get their money out because they're frozen by the government. We don't think of it as a property right, but the way to think about property rights is not a transfer of title per se. What it fundamentally is, it's a social relationship. It's a relationship that defines our expected ability to exchange goods and services, so that when I go to a bank and I deposit money there, there's a relationship that's being defined. There's an expectation that when I go and I have a demand deposit, I will get my money back. To the extent that I can't do that, property rights stifle my ability to make choices.
Speaker 2:Let me give two more concrete examples to illustrate the importance of property rights, because one thing I have not talked about is the importance of the rule of law. You can't have private property rights without the rule of law, and without private property rights and the rule of law, you can't have extensive capital investment. That is the lifeblood of increasing productivity and higher wages. You're a basketball player, roger. Okay, I'm sure you aspired one day when you were younger to be Larry Bird, or maybe Wilt Chamberlain, or so on and so forth. Now, if you're a youngster, you're planning 10 to 20 years out based on a set of rules about how to be the best player right Now.
Speaker 2:Imagine if those rules were changed arbitrarily from season to season or from minute to minute, or that the referee could simply just make arbitrary calls. You would have no idea what kind of investments you would have to make in order to become an improved player. And think about that in terms of an economy. If you don't have the rule of law and there are arbitrary regulations, that will stifle extensive investments, both in physical capital factories, machinery and so on and so forth as well as human capital, technological know-how, education and so on and so forth. When we look at the world and we see why countries are rich and poor, we say, oh, the reason why one country is richer rather than it's poor is because the poorer country lacks capital. Although that answer is correct, it's incomplete, because capital investments are a byproduct of secure property rights. If you have secure property rights, people will be incentivized, not only the individuals living in that country, but foreign individuals will be incentivized, given the security in the return of their investment, to bring capital to that country.
Speaker 1:Which explains the success of China in many ways, owes the extension of property rights to the agricultural community, to people. They could then reap the benefits of their work because they own their property rather than working on large collectives.
Speaker 2:And it's just amazing, if you just give people just a bit of economic freedom, just a bit, the potential for economic growth, as we've seen, is expulsive. I remember I'm dating myself now when it was a big deal to get the Encyclopedia Britannica this is before Wikipedia. To get the Encyclopedia Britannica this is before Wikipedia. I received the Encyclopedia Britannica when the Soviet Union was still the Soviet Union and I remember turning to the page on China and the page showed people in rush hour traffic on bicycle Roger. That was 1990. Things have changed dramatically. They have a long way to go, but the cities are not like that as they once were.
Speaker 1:So you would make a strong argument and I would agree with it. I think that economics it's important that it become political economy, that things like the rule of law, property rights, those institutions are just vital to the success of an economic system. But they're often neglected in the way we teach economics right.
Speaker 2:Exactly. That is the foundation for understanding why certain countries are rich and poor, and the beauty of it is that it treats human beings as they are.
Speaker 1:Rosalino, you obviously have a lot of enthusiasm for this subject. Explain to me how you got interested in economics to begin with.
Speaker 2:Oh, roger. Well, that's a long story, but I'll try to keep it as brief as possible. I did not grow up in either a family or a neighborhood where there are any economists. My first question that you might say that was related to the economic way of thinking, which, again, I did not realize was an economic question was one about why countries were rich and poor. So one of the questions I always had in my mind as you know and from my name the listeners will note that I was raised in an immigrant household and whenever we could we would travel to Italy. But one thing I noticed as a youngster is that we were traveling more often to Italy than my family was traveling to the US to see us. But they're just as hardworking, same religious background, same cultural background, same work ethic. Why is it that, living in the US, my father had more disposable income than individuals in Italy? Nothing about. My dad has been a barber since he was nine years old. The technology, the way he cuts air, has not changed one bit. I'm not even sure if he knows how to use a computer, but yet his income has risen. So that was, you might say, the first question. But in terms of becoming an economist.
Speaker 2:When I went to college, I did not even know what it meant to be an academic. I went to a local Catholic university called St John's University, eight miles from where I grew up. I went there because it was the school that was closest to my house that basically paid the most in terms of a scholarship. It nearly paid my way. I got to tell you, roger, I am extremely fortunate to have had a professor there. He literally changed my life. I met my wife because of him but I can get to that in a moment, if we have time.
Speaker 2:Named Douglas Rasmussen oh sure, professor Rasmussen. Because it was a Catholic university, we were required three courses in philosophy and three courses in theology. So everyone had to take an ethics course. My first course was in the philosophy of human nature and I was hooked by those questions about the nature of free will and so on and so forth. But taking his 7.30 in the morning ethics class, even that early in the morning, he grabbed me In the spring of that semester. I took a course in political philosophy. At the time, what was in the final stage before being printed was his 2005 book called Norms of Liberty, which was a book that had a big impact on my life, and in particular there's a chapter in that book called the Natural Right to Private Property, that human beings, by virtue of their human nature, by the fact that we have free will, we require property rights in order to have the freedom to exercise choices, and that there is this underlying ethical justification. But a part of that book was about explaining why countries are rich and poor based on property rights. And a light bulb hit my head, and because of Professor Rasmussen, he started giving me a crash course in economics.
Speaker 2:I first read Henry Hazlitt's Economics in One Lesson, friedrich Bastiat's the Law, and I began reading the work of the Austrian economist Israel Kersner, and there was a paper that I read and he gave me a physical copy of it called I hope I get the title right Some Ethical Implications from the Socialist Calculation Debate. It's a 1988 article in the journal Social Philosophy and Policy. I always remember the journal and the year, but never the title. And from there I was introduced to the socialist calculation debate and the arguments put forth by both Ludwig von Mises and FA Hayek about the impossibility of economic calculation under socialism. And you've written on that subsequently. Yes, yes, but a minor contribution. Following on them and from that article there were so many references to Austrian economics, of Hayek's individualism and economic order, mises' human action, don Lavoie's rivalry in central planning. So in many ways Kirzner was my gateway drug to Austrian economics, which is interesting because all of the antidotes I usually hear it's Murray Rothbard. That's the gateway drug to Austrian economics, at least to American Austrians.
Speaker 1:As I recall, you wrote a journal article, a piece in the Independent Review, on Kirzner Correct In the last year. Yeah, it was a great tribute to him and he deserves a Nobel Prize for the work he did on entrepreneurship.
Speaker 2:No question about it.
Speaker 1:When you teach a class, I'm curious how you approach it. There are obviously several ways to approach it. One is to kindle a fire in the minds of the students to get them excited about these topics we're talking about. But then there's also the approach where you're just trying to fill them with knowledge and present information to them. How do you approach a classroom when you teach economics? Is it mostly trying to convey information, or is it?
Speaker 2:trying to tried to teach a course as if it's a student's first and last class. Now, in many cases, I'm teaching individuals that are master students, so they've already had some economics or even PhD students, but when I'm teaching for TFAS, for example, I'm making that assumption. It might be their first and last course, so I want them to come away with the fundamentals. The fundamentals may exalt an individual to the heights of genius and help us to explain not just how markets work, but how individuals organize their everyday activity. We talked a little bit about property rights. Let me link this to a concrete example in order to illustrate to students how this can be applied to understanding their everyday life. I'm sure you like the movie as much as I do the Arnold Schwarzenegger movie of twins. I don't know if you know the backstory behind this. As a matter of fact, arnold Schwarzenegger made more money off of that movie than Terminator or other movies he made. It was his biggest payday, and the reason why is the following, and this is how I illustrate the idea of property rights. Recall that I talked about property rights being a social relationship defining expectations about how people interact.
Speaker 2:Back in the 80s, as you know, schwarzenegger was this big action star. He was not known as a comedian, so he had difficulty to convince the studio that he would be great in a comedy. They thought it'd be a flop. They thought that they would have to take a big loss. But Ivan Reitman, the director, wanted him. So what he said to the studio is look, I understand the risk that you're taking, don't pay me any money, nothing. What he was basically saying to the studio. He defined the property rights, the contract, in such a way that if the movie was a flop, well, they're not going to pay him, but if he's right, he would take a big chunk of the back end in terms of profits.
Speaker 2:In economics we refer to this concept as residual claimancy. So whenever you're producing something, who gets paid first? The workers, the capital owners, the landowners? Who's the last person to get paid? The entrepreneur? They collect what's left over. After all, the costs of production are paid. That residual is either a profit or a loss. But Schwarzenegger defined the property rights in such a way that he exercised his entrepreneurial insight to say this is going to be an uncertain outcome, but I'm betting on myself that I'm right. So I'm going to become the residual claimant. Now notice what I just did. I'm utilizing economic theory to illustrate concrete examples about the real world. That's what I simply try to do. I try to be engaging but also teach the fundamentals of economics.
Speaker 1:Can you gauge whether students get excited about this? I know stories, of course, of students who we inspire to either pursue economics as a graduate degree, take more economics when they get back to their undergraduate education, or transfer or enroll at GMU for their graduate degree. Clara Jace is an example of someone who got really excited about economics. We taught, went to GMU, got her PhD. You served on her dissertation committee and I saw just recently that she won an Acton Institute Award that's right as their Michael Novak fellow. So that's all very exciting. I love that when I see that about our students. But how do you gauge it, kind of in the classroom at the time they're taking the courses?
Speaker 2:Well, it was hard during COVID with the masks, but you can tell specifically when they see the twinkling in their eye or they're engaged. But where I really see it is when they come up to me after class. Specifically when I'm teaching the TFAS summer course Economies in Transition, they come up to me after class and say will be in our PhD program this coming year and he will be one of our.
Speaker 2:Rekadis PhD fellows, the fact that I can have this impact just by teaching one course is extremely gratifying, but you have to meet them where they are. My wife always says that I'm a little outdated with my movie examples, but my point is not to try to be a clown in class, but it's to engage them so that they understand the power of these tools, so that we can talk about more pressing issues like why countries are rich and poor. Do we need antitrust policy? Can AI actually engage in central planning? I use, you might say, the examples to hook them, to draw them, to see how these questions are relevant not just to being fun and clever, but being serious.
Speaker 1:Tyler Cowen recently published a book. It's an online book, so listeners can access it for free. It's called Goat. Who is the greatest economist of all time, and why does it matter? He has some semi-finalists, but his finalists include Hayek, who we've talked about, adam Smith, thomas Malthus, john Stuart Mill, john Maynard Keynes and Milton Friedman. I won't give away the answer of who he picks as the greatest, but it seems like Hayek is getting renewed attention. Not that he's ever disappeared, but he won his Nobel Prize in the early 70s and his book Constitutional Liberty Road to Serfdom some of his very important journal articles he wrote that are profound are all being talked about again, and it seems like his relevance is still great today, which is wonderful. But you direct a Hayek program. What can you say about Hayek beyond what we've already discussed in terms of his importance in economics?
Speaker 2:First of all, hayek was not just an economist, which is why he was a great economist. He wrote about psychology, political science, about law, and even touched on history and so on and so forth. His central contribution to economics, the one that economists know the best, while there's one what's regarded as a more popular book I consider it a technical book as well the Road to Serfdom, his 1944 book. But in terms of his contributions to technical economics, it would be his 1945 paper in the American Economic Review called the Use of Knowledge in Society, and it's there that Hayek talks about prices as being a telecommunication mechanism. I gave you an example before about me being at Brown and sweating because of getting that expensive bill.
Speaker 2:The way that Hayek communicates that point is he gives what I call the tin example. He talks about a market for tin and that suppose, for example, there's someone using tin as an input into producing some good or service and the price goes up. We may not know whether the price goes up because the supply has contracted or the demand has increased. All that the individual knows is that tin has become more scarce and they respond by using less of it, and what the price mechanism does is that it communicates this tacit and dispersed knowledge that's in the minds of individuals but is communicated through prices. The way in which I talk about Hayek in my classes is that what the price mechanism does is that itally planned economy is impossible in the sense of being able to allocate resources to their most valued uses, because it lacks prices.
Speaker 2:Because it lacks prices, you and I are talking through a microphone. Imagine the old days when we used telephones with a cord. Severing that telephone cord is like severing the price mechanism. What happens is consumers are not able to communicate their demands for goods and services without being able to communicate those demands in the same way that if we cut the telephone cord. How do we know how to allocate resources in a manner that's consistent with consumers' preferences? Let me give a very concrete example to illustrate the point that I want to make, and this is one of the benefits of having children. My son, my older son, loves Toy Story, like most kids.
Speaker 2:And I can't tell you how many versions of Buzz Lightyear and Woody that he has. Now, if you notice one thing if you go back to 1995, who are the voices of Woody and Buzz Lightyear? Tom Hanks and Tim Allen. But who are the voices of the dolls today? It's still Tim Allen, but it's not Tom Hanks anymore. In fact it's his brother. It's a very close substitute. Now notice where I'm going with this. What has happened to Tom Hanks' career since 1995? The demands on his services of being an actor, his voice and all of his entertainment skills. They're increasing competing demands on his time and effort. He's being bid away consistently to a more valued use to consumers. Because of that, a substitute has arisen His brother, his brother. But we don't know that. I wasn't aware of it. I wasn't aware of it until because of my children. But this is what the price mechanism does it coordinates our behavior.
Speaker 1:It moves resources to their highest valued use in the economy.
Speaker 2:But without command. Yeah, no one commanded it. At the end of the day, people are still buying these dolls.
Speaker 1:You've spent several years evaluating our high school programs for us to gauge the effectiveness of them. Can you speak to that process for doing so and what you've observed in evaluating those courses that we offer for high school students in?
Speaker 2:evaluating those courses that we offer for high school students.
Speaker 2:One thing that I find very gratifying from looking at these evaluations is that many of the individuals who are high school teachers, who may have not had proficiency in economics, they come away from that experience knowing the nuts and bolts of how a market economy works, that it's not exploitative, that it's not exploitative, that it's not zero sum, that it's a positive sum, a peaceful and a productive system, but, more importantly, with respect to the individuals who are teaching, the programs they provide, you might say, the pedagogical tools.
Speaker 2:They illustrate to these high school teachers how to engage students in a way that grabs them, in the same way that I try to grab students with examples to then turn their attention to more pressing issues. One of the examples that is so important in these programs is the economic analysis of the Soviet Union. Now, roger, you and I have a living memory of the Soviet Union, but for the youngsters nowadays, a whole generation now lives without a living memory of the Soviet Union and the Cold War and the economic deprivation, not to mention the tyranny that existed under those systems, and this is why the high school programs are important. It's not only vital to illustrating how market economies work, but also to providing history and context about the deplorable consequences of deviating from the institutional arrangements necessary to make markets work.
Speaker 1:We have a new arrangement with the Fraser Institute in Canada. They've developed a realities of socialism project. They've asked us to turn into high school curriculum. We've just started holding teacher programs. We call it socialism, myths and realities to help teachers understand how to convey to the rising generation what socialism is.
Speaker 1:Sweden is not the example of the socialist country, right. We look at Poland's experience under communism. We look at Estonia. We do look at Sweden and other countries as examples of different types of systems. But teachers have told us that they need better understanding themselves so they can explain it to the students in their classroom, right. So we're really excited about this. We're finding the programs we're doing are oversold. Teachers want to come learn about myths and realities about socialism. So that's exciting, and your story as well.
Speaker 1:We did have East and West Germany standing in contrast, and while we have North and South Korea today as a great example and one we use, we have Venezuela to show an example. It's not as resonant with young people today as it was for us growing up in the Cold War. I think these differences, that's right. You also being at George Mason, public choice has been an important school there, led by Jim Buchanan, who won a Nobel Prize who you quoted earlier. Do you fit public choice into some of this, into your classes, into the classes with TFAS students, so they can help understand how the tools of economics can apply to looking at the way government operates?
Speaker 2:Oh, absolutely. I mean it's central to any introductory course to economic analysis, even if you're not going to use the word public choice. But let's define what we mean by public choice. It has many different definitions. We can talk about it as the economic analysis of non-market decision-making, or what James Buchanan referred to as politics without romance. But, given the definition of economics that I had provided the study of human action under alternative institutional arrangements public choice fits right in there. Because what public choice does? It just takes political actors as they are, like in the market, and we don't assume that political actors are any more benevolent or malevolent than market actors are. They are just responding to the rules of the game under which they operate. But public choice is also important to illustrate the unintended consequences of public policy. Important to illustrate the unintended consequences of public policy. One of the ways in which I illustrate this in terms of Bastiat's, what he refers to as the seen and the unseen, because what economics is all about are secondary, unintended consequences, both good and bad. So I usually give an example that Gordon Tulloch, one of the co-founders of public choice, along with James Buchanan, it's known today colloquially as the Tulloch, one of the co-founders of Public Choice. Along with James Buchanan, it's known today colloquially as the Tullock Spike.
Speaker 2:In 1987, if I remember correctly, the Secretary of Transportation, elizabeth Dole, mandated airbags in automobiles. Now, what we have noticed since then is that, although airbags prevent fatalities, we have seen that in terms of accidents they have increased and the amount of injuries associated with accidents they have not gone down. This is also known amongst economists as the Peltzman effect, named after Sam Peltzman, who first conducted this study. But how does this relate to Tulloch, and I'll get to this in a moment. Why is this happening? Why do we see this phenomenon happening based on public choice? It's the same reason, roger, why we see more concussions in American football as opposed to rugby the American football players. They're wearing helmets, but because they're wearing the helmets they might just hit a little bit harder and in a way that, on the margin, because they feel secure with the helmet, they can take a little bit more risk. But if everyone is doing that, inevitably someone is going to get hurt badly, whereas in rugby they're not wearing the helmet, so they have to be a bit more cautious over their heads. Same thing with airbags it's not because you and I have an airbag that we're going to start driving 70 miles in a 20 mile per hour speed limit, but just on the margin, which is what economics is about Marginal benefit, marginal cost. The marginal benefit of driving a little bit faster is greater than the marginal cost, and so everyone now drives a little bit faster. There are more accidents Now.
Speaker 2:Tulloch proposed a solution to this. He said we don't need airbags. If you want to have people drive safer and eliminate the accidents, put a spike in the steering wheel. He meant this as a joke, he wasn't serious about this. But why did he suggest this? Because if you were driving recklessly and then you are tailgating and all of a sudden you step on the brakes, what's going to happen? The spike is going to go through your heart.
Speaker 1:So you're not going to start tailgating, you're not going to start, you're going to keep a safe distance.
Speaker 2:You're going to keep a safe distance and you're going to drive at a moderate speed. But what he's illustrating here is how it's different sets of rules generate different types of responses and incentives with respect to public choice. Now here's another example that I illustrate utilizing public choice analysis. Again a very mundane, concrete example that grabs the students but illustrates the point about what public choice economists refer to as rent-seeking and rational ignorance. I asked them if they've ever had a Coca-Cola or a Fanta. Oh, by the way, I usually, because of this example, I almost always very kindly get some Fanta from one of the students, but they're not rent seeking. I'll get back to that in a moment. But I asked them if they've ever had a Coke outside of the United States. Some students will raise their hand and they'll tell me that it tastes differently. And I asked them do they know why it tastes differently? And some asked them do they know why it tastes differently? And some of them might have had some economics before will say oh well, the Coca-Cola outside the United States is sweetened with actual-Cola, uses corn syrup as a substitute. But what's being driven by that? It's the fact that there are tariffs on imports of sugar in the United States and there's an effective lobby that has continued this under Republican as well as Democratic administrations.
Speaker 2:As I said, I love Fanta, absolutely love it. It's my favorite soft drink. Am I upset that I can't get fanta the way that I can get it, let's say, in europe? No, am I gonna do anything about it? Probably not. I have not done anything about it. I mean, I'm a little ticked off by it, but I'm not going to talk to my congressman or woman in order to push for the tariff to get eliminated, because the cost of me doing so exceeds the benefit. I know about this because I'm an economist. But if you ask most individuals, they may not even be aware that there are tariffs on imports of sugar. They might not even know why Coca-Cola or Fanta tastes differently. Not because they're stupid, but because the marginal cost of gathering that information about that policy and its origins it's going to exceed the benefits.
Speaker 1:Yeah, I think that's Ellen Meltzer who said. The benefits of government action are highly concentrated on specific groups, the sugar producers, and the costs are very diffused among millions of taxpayers often.
Speaker 2:So who's going to pay attention to it? The well-organized and special interest groups of taxpayers. Often so. Who's going to pay attention to it? The well-organized and special interest groups, and this is one of the central components of public choice. What it illustrates is that the logic of the political process is to concentrate benefits on the well-organized and well-informed special interest groups and to disperse the costs onto the masses of the ill-informed population. The nature of the market process is exactly the different. An entrepreneur concentrates costs upon him or herself to deliver a wide spread of benefits to the masses of the population.
Speaker 1:I'm glad you mentioned that Buchanan phrase of politics without romance. I think many of the students that come to TFAS programs are drawn to Washington for internships and the courses we offer. They probably have some romantic sense there that Washington is the place to be where you can make a difference in the world, and they come with that romantic feeling and hopefully by giving them the tools of economics, as you do and Professor Bradley and Professor Don Boudreau and others do in our courses, we're giving them tools to better look at the world and better pursue the goal of making the world a better place. So we're grateful for all you do for us, rosalino, in your teaching. I think we're out of time but I want to have you back because we have to talk about how you met your wife through Professor Rasmussen. We have to talk about rent-seeking and Fanta soft drinks and a number of other things that I hope to talk about with you in the future. But this has been great. Thanks for the important work you do with the students who attend our programs. We're so grateful.
Speaker 2:It's a pleasure and thank you for having me as well as being a part of the TFAS programs.
Speaker 1:Thank you for listening to the Liberty and Leadership podcast. If you have a comment or question, please drop us an email at podcast at tfasorg, and be sure to subscribe to the show on your favorite podcast app and leave a five-star review. Liberty and Leadership is produced at Podville Media. I'm your host, roger Ream, and until next time, show courage in things, large and small.
