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Jewish World Review Dec. 18, 2002 / 13 Teves, 5763

Bill Steigerwald

Bill Steigerwald
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Free markets king in Sweden, at least for a day: Ten minutes with . Donald Boudreaux | It's not every day you get a call from Sweden from a giddy free-market economist.

But Tuesday was a very big deal for Donald Boudreaux, the head of George Mason University's world-renowned Department of Economics. Earlier that afternoon, in Stockholm, one of Boudreaux's equally free-market-happy colleagues at GMU, Vernon Smith, had picked up a 2002 Nobel prize in economics at the gala Nobel awards dinner.

That alone was thrilling for Boudreaux, who with several others had been invited along on the trip by Smith, the founding father of something called "experimental economics."

But he was also still gassed by the sweet irony of seeing Smith stand up in the presence of the king of Sweden and a ballroom of dignitaries and offer a toast - in the capital city of the world's premier socialist welfare state - to markets and liberty and private property:

Q: This is a fairly encouraging trend that the Nobel people are giving awards to the kind of economists you and I would probably be very happy about.

A: I have to begin my answer by pointing out that Vernon is our second Nobel Prize winner at George Mason. Jim Buchanan, who won in 1986, was our first. We're obviously very proud as an institution to have that, because we are the most notable free-market economics department in the world.

The Nobel committee has been pretty good over the years in recognizing the work of the top free-market economists. F.A. Hayek got it in 1974. Milton Friedman of course got it in 1976. Buchanan got it in '86. Ronald Coase in '91. Gary Becker in '92. Doug North in '93.

So there's no real shortage of free-market economists. The encouraging thing is that the Nobel committee is not, and really has never been, averse to recognizing the work of the top market economists.

Q: For all the lay people out there, can you give me a description of Smith's "experimental economics." What kind of thing does he do?

A: He's the founder. He ran his first experiments 50 years ago. But there's no really simple answer. The simplest way to say it is, Vernon sets up laboratories - controlled economies.

He gives money to the subjects in the laboratories and as soon as he gives it to them, it becomes theirs. They can walk out of the room with it. They can do whatever they want with it. It's theirs to win or lose.

He creates these very creative experiments that are designed to test the assumptions and the conclusions of economics. What he's found is that markets are even more robust and adept at giving consumers value than even free-market textbooks portrayed.

For example, if you look at a typical textbook, it says for markets to work efficiently there need to be many, many sellers and many, many buyers. They never really specify - hundreds, maybe thousands. They need to be perfectly informed.

And Vernon finds that you only need as few as four sellers and you have no problem with monopoly. It's rare that markets are prone to monopoly. You don't need a lot of buyers. You don't need a lot of sellers.

People don't have to know much about anything other than their own preferences. They don't have to know what the conditions of the market are. The natural competition of sellers, even when you have a few of them, is sufficient to make markets work pretty darn efficiently.

Q: I remember watching my kids come home with neighborhood kids at Halloween and they would all dump gigantic piles of every possible kind of chocolate bar and candy on the floor. They'd organize them all and they'd start trading. With no adults interfering, these kids - young kids - developed a market in candy bars, spontaneously.

A: In fact, that's one of the simplest experiments that experimental economists run. It's called "the market game." They give out simple things - bags full of candy and toothpaste - and watch people exchange them and watch how everyone is made better off.


Q: I originally called your office at George Mason to ask you about the sacking of Treasury Secretary Paul O'Neill. Was O'Neill too honest for his own good?

A: That's my impression. I don't speak as an expert. Most of the things he said I thought were pretty sensible. He was just honest. And unfortunately, it's all too true that in so many cases, honesty and good economics are not consistent with good politics. That's a shame.

It may well be that firing O'Neill is good politics, but that in no way implies that it's good economics or good for the economy.

Q: What is the Treasury secretary's main job?

A: The ideal Treasury secretary is someone who constantly sends out messages - to citizens, to the business community, to investors, to members of his party and the opposing parties, to everyone - that taxes will be kept low, that the money supply should remain stable and that there should be no monkeying with foreign exchange rates. That's all a good Treasury secretary should do.

Q: Is President Bush in general pursuing the right economic policy at home?

A: I know that his insistence on tax cuts is the right way to go. I agree with that. He claims to be in favor of free trade. I hope that's true. If he is in fact in favor of free trade, that's the right way to go. But I'm leery, though, that he really believes that, given what he did with the steel tariffs.

Q: Is there one big important thing that's crying out for Bush to do?

A: I'd like, on the domestic front, to see him being even more vigorous in promoting tax cuts. I would like to see him be more vigorous in endorsing free international trade. He's done these things. But again, from my standpoint, they are rather tepid and lukewarm.

I guess I question his commitment to significant movements in those directions. I would like to see him speak out more forcefully against government regulation. It's a fairly simple formula, I guess. It's not complex: It's stable money, freer trade, less regulation, lower taxes.

Q: If it's so simple, why

A: It's economically simple. It's politically difficult. The problem with politics is you have these interest groups clamoring for favors and handouts. If you're clamoring for favors and handouts, then these very simple rules stand in the way. You have to always leave yourself room to maneuver and make exceptions. You can't state a simple rule and allow yourself the wiggle room to make exceptions to it.

Q: Back to Mr. Smith. You said that he gave a little toast today, and that it was terrific?

A: Yes. I don't remember the exact words. But at the end of dinner with all the Nobel laureates and many past laureates from all the disciplines and the king of Sweden and his family and lots of dignitaries, Vernon was introduced and he raised his glass.

He toasted F.A. Hayek, who was one of the most important economists to teach us that markets are important. He toasted free markets. He toasted private property. He toasted the rule of law. He toasted those who speak out against income redistribution. He got pretty good applause.

I don't know if people drank too much and didn't understand what he said, or if he persuaded them. But it was a very courageous and very eloquent toast to those principles that really distinguish the best of America from the rest of the world.

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JWR contributor Bill Steigerwald is an associate editor and columnist at the Pittsburgh Tribune-Review. Comment by clicking here.

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© 2002, Bill Steigerwald