Madsen Pirie Simplifies Economics by Destroying Myths

Dr. Madsen Pirie is a fascinating man. As his website explains, he is the President of the Adam Smith institute (more on that to come), he has numerous degrees, including an MPhil from Cambridge, and he has lectured at Hillsdale College in Michigan. In addition, he has been a food blogger, a budding rocket scientist, and he has had books of children's science fiction published. He likes to remain busy. His most recent book, published in the UK by Harriman House, is called Economics Made Simple, aimed at simplifying economic concepts and destroying myths. Benzinga spoke to Pirie to find out what he wanted to achieve with the book. Can you give us a brief background of yourself?
I'm the President of the Adam Smith Institute, which is a ‘free market think tank'. A ‘public policy research foundation' is a long way of saying it, but ‘think tank' is more poetic. I was one of the founders way back in '77, and I have been its President. As such, we have promoted an agenda that favors enterprise initiatives and market solutions, rather than one which looks to answer current problems. So we do policy research from that angle. I have actually written several books on economics, as well as on philosophy and logic, that being one of my other interests. I was a Professor of Philosophy at Hillsdale College in Michigan. So this is not your first book?
I wrote books on privatization, which was very big in the 1980's, and on things like free ports. I've written quite a few books on public policy economics. The Adam Smith Institute had quite a lot to do with the privatization program that happened in the early ‘80s when Margaret Thatcher was Prime Minister. Who is the new book for?
It's aimed at the intelligent layman who everyday reads economic news and a lot of it is couched in jargon. Any look at academic economics and it's all mathematics and equations. It's completely impenetrable to the intelligent outsider, and indeed some argue that is deliberate. They suffer from physics envy. They wish that their subject could be treated as scientifically as subjects like physics or astronomy. Of course, it can't. Its fundamental units are human beings who have minds of their own, they change those minds, and they are self-motivated. An atom or a star doesn't suddenly change its mind. Economics will never be a science like the physical sciences, so all of these equations and so on simplify in order to create models but in simplifying they're leaving out quite a lot of what is important about economics. My book starts with very ordinary language and explains how economics works, why people trade, how they try to maximize their advantage, and it builds from there to the world of investment, banking, governments and taxation. It's all a progression. We work up from simple concepts. There are still at work in the more advanced economic concepts. There is a common myth that, when an exchange takes place, someone gets the better of the deal. The book explains that is simply not the case. There are two parties to an exchange and they do it because they would rather have what the other one has. Each person gains. It's a win-win. Each person has more value than they had before because each person has something they'd rather have. This is how wealth is created. On another point, many people don't see what the middle man adds in value. The goods arrive and then they mark it up and then they leave and people wonder what they do. Throughout history, there's been a lurking resentment towards the middle man. In fact, the book explains that the value they add is an invisible one called convenience. They provide the goods in the quantities and varieties in the places that we find it convenient to pick them up, and they charge for that and they're expert at it. It's quite a valuable service. Similarly, there is widespread criticism and almost hatred of speculators, who are assumed to be just gamblers adding nothing to the process. The books explains that what speculators do is add some value, and that value is even less visible than convenience. It's the management of risk. A farmer might want to sell in the spring his crops for the autumn. A speculator might buy that future, gambling if you like that it will be worth more when it comes to harvest. What the farmer wants is the certainty. Let the speculator carry the risk. He's the expert and he can live with that. The farmer wants the certainty of a guaranteed price that will enable him to buy seed and stock for next year. So the speculator, far from being a simple gambler, is adding something of value to the exchange, which is risk management. At time, the book feels like a defense of capitalism. Is that something you feel is necessary during these turbulent times?
I do feel that the supporters of capitalism need to be more vocal. They've tended to be too apologetic of recent times. Capitalism is probably the greatest force for good that humanity's ever produced. It's achieved more to lift people out of misery, poverty and starvation, it's created the wealth that's enabled us to pursue education, to conquer disease, to do cultural and artistic activities. All of this was done by capitalism, so it's got a lot going for it you know. Of course, there are varieties of capitalism we don't like, crony capitalism and monopoly capitalism, but it's nice to go back to basics and explain what it is. Capitalism is the use of wealth to create more wealth. Foregoing a present consumption in order to create more wealth later. That's what it means. Do you trade?
No. I invest but I don't trade. I'm very pleased that 15 months ago UI bought some gold. That turned out to be rather a neat thing to do. I don't regard that as trading, I still hold it. Finally, there is a great, if controversial, line in your book which reads “Poverty is the default condition – it is what happens when you do nothing.” Can you explain that?
People ask what the cause of poverty is. The United Nations would probably give you $600 million to do a four year study with lots of professors producing a weighty term explaining the cause of poverty. Of course, there aren't any causes of poverty. The unusual thing is wealth. Humanity has known poverty for 3 million years. You don't study the causes of poverty in order to eliminate it, because there aren't any. You study wealth and its creation in order to be able to reproduce it.