314: Is Economics Just Common Sense?

Buck: Welcome back to the show, everyone. Today, my guest on Wealth Formula podcast is Matthew Hennessy. Matthew is The Wall Street Journal Op Ed editor, and he’s the author of Visible Hand: A Wealth of Notions on the Miracle of the Market. He also has another book called The Zero Hour for Gen X, which was in 2018. We’re not going to talk about that today. But we are going to talk a little bit about the most recent book. Matthew, welcome to Wealth Formula podcast.

Matthew: Thank you. Thank you for having me.

Buck: So you know what, let’s start out with this question because I think the overall sense that I get is you wrote a book, you’re not an economist. But I think the overall writing message of what I’m getting from you is you don’t need to be an economist. A lot of this stuff is sort of common sense. Is that fair?

Matthew: Yeah, it’s a good place to start. That’s definitely fair. I’m not an economist. I’m a journalist. I’m an editor. I work all day with words and not so much with numbers, although occasionally numbers. But as you probably know, it’s pretty easy in this country and maybe in every country to get through high school without ever having taken an elementary course in economics. And a lot of people can get through College pretty easily doing the same thing. I certainly was one of them. I never had anybody sit me down and say, one of the things you need to know in order to be an educated person is how the economic world works. So I reached the age of maturity. I was almost 30 or so before I sort of tuned into this kind of stuff. And I felt a little bit betrayed by my education because so much of what I found when I started studying economics was absolutely essential to understanding everything that I was seeing happening all around me. So I thought I’ll write a book that’s aimed for that people who may have managed to avoid economics while they were pursuing other things, which is an entirely understandable approach to life. But you’ve got some gaps to fill, or you might be a young person who hasn’t yet encountered this at all. And so I’ll give you a primer on basic economics as well as some funny stories, a few laughs here and there.

Buck: Yeah. Then I think that sounds great. I’m curious. As you mentioned, a lot of people never even get to the point where they even bother. Why is it important, in your view, for anyone to if you’re a surgeon or maybe you’re a dentist or whatever, what was your moment of feeling like you should be educated a little bit on this and maybe why more people ought to be?

Matthew: Well, the main thing is I think that there are several misperceptions you have to deal with. Number one is thinking that economics is just about money. I think a lot of people think, well, economics, that’s the business of business. That’s the stuff that goes into making a living. And I’m a little bit grossed out by it. And I don’t particularly find myself interested in people who spend all their time thinking about it. So that’s not really an area for me. It turns out that’s not true at all. Economics isn’t about money, and money comes into it, of course, but it’s not accounting, it’s not financial planning. It’s not even financial markets. It’s simply about choice. It’s the science of choice. Now, your average educated person, the surgeon that you mentioned, I’m sure couldn’t figure some of this stuff out themselves. But there are also misperceptions about markets, what they are and how they work and where they come from. It’s my contention that the free market that we live and exist in this country certainly is at play everywhere, whether the political authorities acknowledge it or not. It’s a kind of an observable reality with invisible forces that work, much like the invisible forces of gravity. You can’t defuse them or work around them. You have to work within them. And to the extent that people try to do that kind of stuff, they make a lot of problems for themselves. So if you want to understand politics, obviously you have to understand economics. If you want to understand something about the culture we live in, you have to understand something about the free market system. So I deal with a lot of those kind of misperceptions. I dispense with some basic misunderstandings of the market. And I’m not going to lie. I work for the editorial page of the Wall Street Journal, so I’m doing a little cheerleading as well.

Buck: So let’s talk a little bit about some of the things in the book. You talk about financializing of our economy and how it’s convoluted economics. Can you explain a little what you mean by that?

Matthew: Well, it’s a derivative of what I was just saying, the complexification of things. I think a lot of people grew up thinking that economics is the stock market. Economics is securities and bond prices and interest rates. And I’m not surprised that a lot of people just want to keep their books and have their books and their poetry to protect them. It’s like there’s a certain cast of mind that wants to keep all that stuff really far away from. I know that when I was a kid and when I was watching the news, anytime they started talking about the Dow Jones industrial average, it was like, time to go get a glass of water. Like, I’m out here. I don’t even know what that means. And I just have to keep reiterating I’m not an economist. And my contention is that a lot of academic economists tend to complexify things. So if you turn on your average financial television show, you’re going to get a lot of high atmosphere stuff that is not accessible to most of us walking around here with our feet on the ground.

Buck: Let’s talk a little bit about overcredentialing. Are you kind of getting back to the same thing, which is like, okay, why is overcrowding in impeding economic policy?

Matthew: I have nothing wrong with people who have advanced degrees in economics. I mean, obviously in any discipline, you’re going to have sort of different layers of strata of expertise out there at the frontier. You’re going to need people who understand abstract concepts and who can theorize and who can build new structures that no one will understand for decades or for centuries. But the rest of us are busy living in the here and now. So I just have a tendency, unlike a lot of other disciplines, the interaction or the interplay between the general public and the expertise class when it comes to economics, the Gulf is pretty wide. The average person can’t follow necessarily the debate about inflation beyond what they see in front of them, beyond what they know intuitively. And so I’m trying to appeal to those instincts in my book and sort of remind people that a lot of this stuff is complexify to the point of gibberish and that you’re smart enough to understand most of it intuitively. In fact, you’re probably already a better economist than you realize.

Buck: Yeah, I think it’s interesting. I don’t think it’s just economics that happens. It happens. I think it just makes me think of all the things in medicine and surgery, all the words we use, and sometimes it sounds a lot more complicated than it is. But let me ask you this, though, in terms of people who are credentialed. Let’s take Janet Yellen, for example, who make and defend economic policies that produce results opposite of maybe what’s intended. What’s that all about?

Matthew: Well, anyone who’s making policy has the capacity to screw it up. There is no such thing as a surefire policy in the realm of economics or any other field of endeavor. I’m sure she’s doing the best she can. Let’s just put it that way.

Buck: Why would it help Americans to embrace the economic reality that you can’t have everything you want?

Matthew: Well, this is the basis of it all. This is the essence of life in the world that we live in, which is a world of limits, in a world of scarcity. Life is about trade offs. That’s the kind of the mantra at the heart of my book. You can’t have everything that you want, and the sooner that you sort of get hip to this as a person, the likelier it is that you’re going to have a smooth ride in this life. So many people embrace or accept the promises made by people like Janet Yellen and others that you can have. I don’t want to single her out. Politicians are very fond of promising all sorts of free lunches, none of which or most of which don’t exist. The root of the whole thing is that if you want something, if you’re going to get something of value, you almost always going to have to give up something that you value in order to get it. A lot of times that’s money. But sometimes it’s time you can think of a dozen different ways that you have to give something up that you value. In a pre monetary economy, you’d have to barter for the things that you wanted. So those are the sort of the forces that I excavate and discuss in the book. I defy anyone who’s listening here to tell me that they can have everything that they want. It’s just not possible.

Buck: You talk a little bit about Gunning money or printing money, and you talk about a little bit about how it limits economic growth. You want to comment on that?

Matthew: Well, I have a short passage in the book about the problem of inflation. We’re all sort of living through it in real time. Watching the various definitions of what inflation is gets bandied about. A very wise man once said, it’s always everywhere a monetary phenomenon. So the basic sort of definition of inflation is rising prices that doesn’t quite cover the whole thing. It’s really better to understand it as a reduction in the amount of goods and services of the purchasing power of your money. So a very important concept in economics, understanding purchasing power, understanding how currency can be debased and how monetary policy matters for our everyday lives, but very far from the sort of simple, basic economics that I promise not to get too deep into the weeds with in my book. So we do cover it, but we don’t linger on it. This would be another example of people being better economists than they know. We have a tendency to economize, which is an interesting word, derivative of the main thing when we’re living our regular lives at the grocery store or at the deciding which gas pump to go to. So we don’t necessarily need a PhD in order to make those choices.

Buck: You also talk a little bit about free markets and the confusion, maybe critics of free markets confusing greed with ambition. Will you talk a little bit about that for us?

Matthew: Yeah. I mean, if you’re my age or roughly about your age, you remember Gordon Gekko. And greed is good. The sort of the caricature of the greedy Wall Street guy who’s trying to get as much as he can and with everyone else. And while he’s doing it, he justifies it along perverted economic, free market economic grounds that what’s good for him is good for everybody. It’s a kind of perversion of Adam Smith’s notion of the invisible hand and the social benefit that’s derived from individuals pursuing their self interest. All of which is true, but it’s a caricature. So most people of the sort that I was mentioning at the beginning absorb this caricature and they integrate it into their lives without ever stopping to think whether there’s actual truth at the root of it. So my contention is not that greed is good. I don’t think it is. I think it’s an unhealthy expression of a normal human impulse. It’s an abundance of a normal human impulse that’s probably not healthy, but ambition is very good and very natural. And by ambition I mean the ambition to care for yourself, to care for your family, provide for the people who depend on you, and to reach your full potential as a human in whatever way that you define it. The free market system. I try to avoid calling it a system because I don’t think it is a system for reasons that I mentioned in the book. But free markets allow people to do that. They allow them to reach their full potential. They allow an Avenue for human expression and human fulfillment, that other economic systems that are, in fact, systems in the sense that they were created specifically, almost as if in a workshop and overlaid onto societies. Those other systems don’t allow for ambition to reach its full potential or to find its full flowering. So, yeah, I don’t think greed is good, although it’s an obvious fact of life. I think ambition is entirely wonderful, and we should encourage it.

Buck: Sometimes a little bit subjective. Somebody might be ambitious, but another might view that as greed, and that’s a very tricky thing. And I think it probably has something to do with why there are such anti market sentiments in general. Do you think that that’s true?

Matthew: Yeah, it’s certainly a part of it. I mean, people have ideological commitments that require that. They say nasty things about markets, whether they’re on the far left or on the far right. I think most of it Springs from ignorance about the alternatives, of which there are zero good ones. And we’ve run those experiments a number of times, enough times to know that the free market, for all its faults, and it does have fault. It does produce outcomes that sometimes we may not like. It beats the pants off of unfree markets. And anyone who suggests otherwise either has never experienced life in an unfree market or is dreaming of a world that doesn’t exist. Yeah. So it’s entirely fair to criticize the free market, if only because we believe that the marketplace extends to ideas as well as to goods and services. So anybody wants to bring an argument against free markets, they’re welcome, too. And experience shows that people often aren’t shy about it.

Buck: Free markets, obviously, we have a shrinking middle class. Do we need a large middle class to exist otherwise? Is there another way we can fix income inequality?

Matthew: No, we can’t fix income inequality. We don’t need to we don’t need anything in the free market. The free market produces outcomes. People in the course of a single lifetime, as we know, can move from one so called class to another. Let’s call them you can call them income brackets or percentiles in a free market. In a democracy, in a world where people are free to make decisions and to pursue their interests, they will rise and fall according to their talents and the level of their hard work and their luck and opportunity that presents itself to them. So, no, I don’t think we need to do anything about inequality. I think it’s our edge heading in the economic conversation.

Buck: So your book, obviously, it’s been described. I think Larry Kudlow calls it basically an Econ 101 book. And he says Econ 101 should always be this much fun. Right. And so the book is really, you know, it’s essential stuff supply, demand, incentives, trade off, scarcity, innovation, work and leisure. And you’ve designed it to a teenager could potentially read it and understand. So that’s a great opportunity, I think, for especially our audience. I’m curious on your you mentioned that you really didn’t go down this road until you were 30 or so, having learned what you have and having this sort of new body of information, regardless of whether how much is common sense or not per se, how has it changed your view on the world or of anything in your everyday life?

Matthew: Well, it’s pretty momentous. I mean, as I was saying earlier, if you live your life thinking that you can have it all, that you don’t have to make trade offs, you’re going to get a lot of friction when you’re making decisions about who you’re going to be, how you’re going to invest in yourself, what you’re going to do, and what you aren’t going to do. So for me personally, it’s made all the difference. I think like an economist, I’m not an economist, but I look at the world. I try to bring that lens to it to understand that I live in an environment of scarcity. There are limits I have to make trade offs. The choices that I make are often made at the margins. That is to say, it’s not an all or nothing proposition. Most of the time, it’s often a question of a little bit more or a little bit less. You don’t typically make these kind of economic calculations explicitly when you’re deciding whether to go to College or whether to change careers or to put a little money away for your kids to save for their education, to go on a vacation. Often it’s kind of done implicitly. You just make it based on what your gut tells you. But not everybody’s gut gives them good advice. So it’s important to have a little bit of a framework laying over. You mentioned that a teenager could understand this stuff, and I certainly agree. I didn’t pitch the book at teenagers. It’s not written at a level that’s designed we should give teenagers a little more credit than they probably would prefer, that we gave them some more credit than they often get. It’s written in an accessible style. Let’s just say that my whole purpose here is to try to make it less boring, because I think that even if let’s just say you’re one of those people that stayed away from Econ 101 or whatever, and they made you take it as a kind of a requirement, I don’t know what school this would be that would make you do that. But let’s just say you did. Almost certainly on the first or the second day, they’re going to be hitting you with a Y axis and an X axis and derived demand and derived supply. And the points move this and a lot of people just shut down. They just can’t learn in that environment. Their brains are just not built to absorb information that way. So I’m coming at it from a different perspective. Some people are music, some people are words, and I like to try to put them together and make it sing. It’s not for teenagers, except that it’s for everyone. And we include teenagers in everyone.

Buck: Well, fantastic. Again, the book is Visible Hand: Wealth of Notions on the Miracle of the Market. I presume we can get this pretty much anywhere. Amazon and the usual suspects in terms of bookstores.

Matthew: Yeah, it’s funny that Amazon and then it’s like that’s kind of how that market has arranged itself. But yeah, it’s available everywhere. Barnes and Noble, Target, smaller bookstores as well, if you happen to have one. If they don’t have it, you should ask them to get it.

Buck: Is there an audiobook yet? In fact, there is an audiobook. That’s why most people seem to consume things these days anyway.

Matthew: Well, for a rah rah kind of red, white and blue defensive capitalism, it’s kind of humorous. They got a very distinguished sounding British gentleman to read it. I’m an Irish American, so I have complicated thoughts about the whole thing. But I suppose somebody somewhere knows what they’re doing.

Buck: I guess they do. That’s funny. Okay. Well, hey, Matthew, thanks so much for being on Wealth Formula Podcast. I’m very curious about this book. Might grab a copy trying to figure out ways to sort of explain economics to beat Bull sometimes, and maybe you have some ways to do it that I haven’t thought about. So thanks again and good luck on the book and hopefully we can have you back soon.

Matthew: Okay. Take care Buck.

Buck: We’ll be right back.