Doctor Jonathan Newman is an economist and a fellow at the Mises Institute. He is the author of two children's books, The Broken Window and Ludwig the Builder, which are available on Amazon. This transcript has been edited for length and clarity.
Federal Newswire: Can you speak on your idea of the process of trying to reshape human nature?
Newman: Every economist starts with some fundamental assumptions. At the Mises Institute, we champion Austrian economics. We take people as they are; we take real human beings.
In the economic theory that is developed by people like Murray Rothbard…people are limited...They come up with this homo economicus idea that we can model human behavior with mathematical equations. Whenever there's anything that happens in markets that seems like it goes against that, it means that markets have failed. They have this sort of perfect idea of what man is, and what he ought to be. Then, they reason out from that starting point.
From the Left, it seems like they're taking a Marxist sort of approach, that people exist in different classes; that there's this one class that is privileged, that has all of the economic power and all of the political power. We ought to come up with policies that will punish them and redistribute their wealth to a different class that deserves all of that wealth redistribution.
Those are the three main ways that I see, at least the prominent schools of thought today, are thinking about what humans are and how they act.
Federal Newswire: Is a lack of objectivity in economics harmful?
Newman: Whenever you're putting together any sort of aggregate statistic, it's going to be biased by what you include and what you don't include into that statistic. [If it] includes all sorts of things that political leaders think are important, or things that might be important to some people, but not to others.., what you're doing is you're homogenizing everybody. You're saying that everybody has these sorts of goals, or when you put together GDP for the whole country, it means that you're sort of taking everybody as a lump sum. You're putting everybody into this one big blob.
In the reality of economics and markets, we're individuals, we have our own preferences. We face different prices. So, the prices that I face when I go to the grocery store are different from the prices that other people in Alabama even face in their own communities. Sometimes, even within the community, there are different grocery stores with different prices.
The idea is that we're all individuals. We all have our own preferences. We all have our own circumstances. Whenever you're going to put together these sorts of statistics, you're going to lose some of that reality. You're going to lose individualism. You're going to lose the subjectivism. You're going to lose what real people face in markets every day.
Federal Newswire: How much is economics an exercise in psychology and understanding what motivates people?
Newman: In Austrian economics, we treat everybody as an individual. We take people's preferences as a given. It's not something that we're going to try to speculate about. It's actually not even a part of economics to discuss what specifically motivates people. We just take those motivations as a given when they are motivated. So, if that's your starting point for economics, you're going to come to radically different conclusions at the end of the day.
Economics is starting with some assumptions. So, if you start with the assumption that people are different, they have different circumstances, different preferences, it's going to lead you to put together this body of economic thought, the cause and effect. If you impose these price controls, then it's going to result in these sorts of effects. That leads to a policy conclusion. So if we want a free and prosperous society, if we want higher standards of living, then these are the policies.
In Austrian economics, the conclusion that we come to is laissez faire, let the people be free to make their own choices. If you have that sort of trajectory starting with real humans and individuality, then that leads to free markets, [and] free people. But, if you have a different set of starting assumptions, the homo economicus or viewing people in classes, that's going to lead you to different policy conclusions, we need to regulate, we need to use price controls, [for example].
Federal Newswire: What are your views on the impact of government regulations?
Newman: There's really nothing that's not regulated by the U.S government these days. Every single thing that we use, everything that we do, there's something where the government has manipulated it, changed it, caused people to do something other than what they would have done. All of this is a huge burden.
If you stick the government's finger into the economic pie, so to speak, then it's going to destroy the pie. It's going to mess it up. It's going to make it different than it otherwise would have been. The lesson of laissez faire of free markets is that the market is totally fine at regulating itself.
The reason why is because consumers care about the products that they consume. If there's something about a product that is wrong or if there's something about the way the product is being produced that consumers don't like, they respond by purchasing something else, [and] by decreasing the profits of the company or the industry that's doing the thing that the consumers don't like.
There's already a perfect and very responsive regulation that's already built into the market process, primarily through profit and loss. Whenever the government is going to get in the way, it's going to distort that process, make it slower, [and] make it not work entirely sometimes. It's going to cause industry and companies to deliver products that consumers don't like as much.
Federal Newswire: Is this what your book The Broken Window is about?
Newman: It's all about recognizing opportunity costs. It's about recognizing the fact that when we break stuff, that can redirect spending and business activity into one direction, but it comes at a cost. It means that the shopkeeper or the baker whose window was broken now has less resources for himself. He would have spent the money on a new pair of shoes or a suit, depending on which version that you read, as opposed to just merely repairing the window. The opportunity cost is what matters. What that community lost when the window was broken, was what the baker would have done if his window [wasn’t broken].
Federal Newswire: Why do you believe that forgiving student loans drives up the cost of education?
Newman: There's a great paper–I can't remember the authors–but they basically looked at decades of history in higher education. What they found out is that any sort of federal student aid, anything that the government does to try to encourage people to go get a college degree just causes tuition to increase. It's obvious, anybody who understands economics understands that if you increase the demand for something, then the price is going to go up. Anything that you do to try to artificially stimulate demand into one particular thing, for one particular product, all you're going to do is either distort the process or just cause higher prices.
