Chapter 7--Conclusion: Economics and Public Policy
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CONCLUSION:
ECONOMICS AND PUBLIC POLICY
1. Economics: Its Nature
and Its Uses
Economics
provides us with true laws, of the type if A, then B, then C, etc. Some
of these laws are true all the time, i.e., A always holds (the law of
diminishing marginal utility, time preference, etc.). Others require A
to be established as true before the consequents can be affirmed in
practice. The person who identifies economic laws in practice and uses
them to explain complex economic fact is, then, acting as an economic
historian rather than as an economic theorist. He is an historian when
he seeks the casual explanation of past facts; he is a forecaster when
he attempts to predict future facts. In either case, he uses absolutely
true laws, but must determine when any particular law applies to a
given situation.Furthermore, the laws are
necessarily qualitative rather than quantitative,
and hence, when the forecaster attempts to make quantitative
predictions, he is going beyond the knowledge provided by economic
science.
It has not often been realized that the functions of the economist on
the free market differ sharply from those of the economist on the
hampered market. What can the economist do on the purely free market?
He can explain the workings of the market economy
(a vital task, especially since the untutored person tends to regard
the market economy as sheer chaos), but he can do little else.
Contrary to the pretensions of many economists, he is of little aid to
the businessman. He cannot forecast future consumer demands and future
costs as well as the businessman; if he could, then he
would be the businessman. The entrepreneur is where he is precisely
because of his superior forecasting ability on the market. The
pretensions of econometricians and other
“model-builders” that they can precisely forecast
the economy will always founder on the simple but devastating query:
“If you can forecast so well, why are you not doing so on the
stock market, where accurate forecasting reaps such rich
rewards?”
It is beside the point to
dismiss such a query—as many have done—by calling
it “anti-intellectual”; for this is precisely the
acid test of the would-be economic oracle.
In recent years, new mathematico-statistical disciplines have
developed—such as “operations research”
and “linear programming”—which have
professed to help the businessman make his concrete decisions. If these
claims are valid, then such disciplines are not economics
at all, but a sort of management technology. Fortunately, operations
research has developed into a frankly separate discipline with its own
professional society and journal; we hope that all other such movements
will do the same. The economist is not a business
technologist.
The economist’s role in a free society, then, is purely
educational. But when government—or any other agency using
violence—intervenes in the market, the
“usefulness” of the economist expands. The reason
is that no one knows, for example, what future consumer
demands in some line will be. Here, in the realm of the free market,
the economist must give way to the entrepreneurial forecaster. But government
actions are very different, because the problem now is precisely what
the consequences of governmental acts will be. In
short, the economist may be able to tell what the effects of an
increased demand for butter will be; but this is of little practical
use, since the businessman is primarily interested, not in this chain
of consequences—which he knows well enough for his
purposes—but in whether or not such an
increase will take place. For a governmental decision, on the other
hand, the “whether” is precisely what the citizenry
must decide. So here the economist, with his knowledge of the various
alternative consequences, comes into his own. Furthermore, the
consequences of a governmental act, being indirect, are much more
difficult to analyze than the consequences of an increase in consumer
demand for a product. Longer chains of praxeological reasoning are
required, particularly for the needs of the decision-makers. The
consumer’s decision to purchase butter and the
entrepreneur’s decision about entering into the butter
business do not require praxeological reasoning, but rather insight
into the concrete data. The judging and evaluation of a governmental
act (e.g., an income tax), however, require long chains of
praxeological reasoning. Hence, for two reasons—because the
initial data are here supplied to him and because the consequences must
be analytically explored—the economist is far more
“useful” as a political economist than as a
business adviser or technologist. In a hampered market economy, indeed,
the economist often becomes useful to the businessman—where
chains of economic reasoning become important, e.g., in analyzing the
effects of credit expansion or an income tax and, in many cases, in
spreading this knowledge to the outside world.
The political economist, in fact, is indispensable to any citizen who
frames ethical judgments in politics. Economics can never by itself
supply ethical dicta, but it does furnish existential laws that cannot
be ignored by anyone framing ethical conclusions—just as no
one can rationally decide whether product X is a good or a bad food
until its consequences on the human body are ascertained and taken into
account.
2.
Implicit Moralizing: The Failures of Welfare Economics
As we have reiterated, economics cannot by itself establish ethical
judgments, and it can and should be developed in a Wertfrei manner.
This is true whether we adopt the modern disjunction between fact and
value, or whether we adhere to the classical philosophical tradition
that there can be a “science of ethics.” For even
if there can be, economics may not by itself establish it. Yet
economics, especially of the modern “welfare”
variety, is filled with implicit moralizing—with unanalyzed
ad hoc ethical statements that are either silently or under elaborate
camouflage slipped into the deductive system. Elsewhere we have
analyzed many of these attempts, e.g., the “old”
and the “new” welfare economics.
Interpersonal utility
comparisons, the “compensation principle,” the
“social welfare function,” are typical examples. We
have also seen the absurdity of the search for criteria of
“just” taxation before the justice of taxation
itself has been proven. Other instances of illegitimate moralizing are
the doctrine that product differentiation harms consumers by raising
prices and restricting production (a doctrine based on the false
assumptions that consumers do not want these differences, and that cost
curves remain the same); the spurious “proof” that,
given the total tax bill, the income tax is
“better” for consumers than excise taxes;
and the mythical
distinction between “social cost” and
“private cost.”
Neither can economists legitimately adopt the popular method of
maintaining ethical neutrality while pronouncing on policy, that is,
taking not their own but the
“community’s” values, or those they
attribute to the community, and simply advising others how to attain
these ends. An ethical judgment is an ethical judgment, no matter who
or how many people make it. It does not relieve the economist of the
responsibility for having made ethical judgments to plead that he has
borrowed them from others. The economist who calls for egalitarian
measures because “The people want more equality,”
is no longer strictly an economist. He has abandoned ethical
neutrality, and he abandons it not a whit more if he calls for equality
simply because he wants it so. Value judgments
remain only value judgments; they receive no special sanctification by
virtue of the number of their adherents. And uncritically adhering to
all the prevailing ethical judgments is simply to engage in apologetics
for the status quo.
I do not at all mean to deprecate value judgments; men do and must
always make them. But I do say that the injection of value judgments
takes us beyond the bounds of economics per se and
into another realm—the realm of rational ethics or personal
whim, depending on one’s philosophic convictions.
The economist, of course, is a technician who explains the consequences
of various actions. But he cannot advise a man on
the best route to achieve certain ends without committing
himself to those ends. An economist hired by a businessman
implicitly commits himself to the ethical valuation that increasing
that businessman’s profits is good (although, as we have
seen, the economist’s role in business would be negligible on
the free market). An economist advising the government on the most
efficient way of rapidly influencing the money market is thereby committing
himself to the desirability of government manipulation of
that market. The economist cannot function as an adviser without
committing himself to the desirability of the ends of his clients.
The utilitarian economist tries to escape this policy dilemma by
assuming that everyone’s ends are really the
same—at least ultimately. If everyone’s ends are
the same, then an economist, by showing that Policy A cannot lead to
Goal G, is justified in saying that A is a “bad”
policy, since everyone values A in order to achieve
G. Thus, if two groups argue over price controls, the utilitarian tends
to assume that the proven consequences of maximum price
controls—shortages, disruptions, etc.—will make the
policy bad from the point of view of the advocates
of the legislation. Yet the advocates may favor price controls anyway,
for other reasons—love of power, the building of a political
machine and its consequent patronage, desire to injure the masses, etc.
It is certainly overly sanguine to assume that everyone’s
ends are the same, and therefore the utilitarian shortcut to policy
conclusions is also inadequate.
3.
Economics and Social Ethics
If the economist qua economist must be Wertfrei, does this leave him
any room for significant pronouncements on questions of public policy?
Superficially, it would seem not, but this entire work has been
testimony to the contrary. Briefly, the Wertfrei economist can do two
things: (1) he can engage in a praxeological critique of inconsistent
and meaningless ethical programs (as we have tried to show in the
preceding chapter); and (2) he can explicate analytically all the
myriad consequences of different political systems and different
methods of government intervention. In the former task, we have seen
that many prominent ethical critiques of the market are inconsistent or
meaningless, whereas attempts to prove the same errors in regard to the
ethical underpinnings of a free society are shown to be fallacious.
In the latter role, the economist has an enormous part to play. He can
analyze the consequences of the free market and of various systems of
coerced and hampered exchange. One of the conclusions of this analysis
is that the purely free market maximizes social utility, because every
participant in the market benefits from his voluntary participation. On
the free market, every man gains; one man’s gain, in fact, is
precisely the consequence of his bringing about the
gain of others. When an exchange is coerced, on the other
hand—when criminals or governments intervene—one
group gains at the expense of others. On the free
market, everyone earns according to his productive value in satisfying
consumer desires. Under statist distribution, everyone earns in
proportion to the amount he can plunder from the producers. The market
is an interpersonal relation of peace and harmony; statism is a
relation of war and caste conflict. Not only do earnings on the free
market correspond to productivity, but freedom also permits a
continually enlarged market, with a wider division of labor, investment
to satisfy future wants, and increased living standards. Moreover, the
market permits the ingenious device of capitalist calculation,
a calculation necessary to the efficient and productive allocation of
the factors of production. Socialism cannot calculate and hence must
either shift to a market economy or revert to a barbaric standard of
living after its plunder of the preexisting capital structure has been
exhausted. And every intermixture of government ownership or
interference in the market distorts the allocation of resources and
introduces islands of calculational chaos into the economy. Government
taxation and grants of monopolistic privilege (which take many subtle
forms) all hamper market adjustments and lower general living
standards. Government inflation not only must injure half the
population for the benefit of the other half, but may also lead to a
business-cycle depression or collapse of the currency.
We cannot outline here the entire analysis of this volume. Suffice it
to say that in addition to the praxeological truth
that (1) under a regime of freedom, everyone gains, whereas (2) under
statism, some gain (X) at the expense of others (Y), we can say
something else. For, in all these cases, X is not a
pure gainer. The indirect long-run consequences of his statist
privilege will redound to what he would generally consider his disadvantage—the
lowering of living standards, capital consumption, etc. X’s
exploitation gain, in short, is clear and obvious to everyone. His future
loss, however, can be comprehended only by praxeological
reasoning. A prime function of the economist is to make this clear to
all the potential X’s of the world. I would not join with
some utilitarian economists in saying that this settles the matter and
that, since we are all agreed on ultimate ends, X will be bound to
change his position and support a free society. It is certainly
conceivable that X’s high time preferences, or his love of
power or plunder, will lead him to the path of statist exploitation
even when he knows all the consequences. In short, the man who is about
to plunder is already familiar with the direct, immediate consequences.
When praxeology informs him of the longer-run consequences, this
information may often count in the scales against the action. But it
may also not be enough to tip the scales.
Furthermore, some may prefer these long-run consequences. Thus, the OPA
director who finds that maximum price controls lead to shortages may
(1) say that shortages are bad, and resign; (2) say that shortages are
bad, but give more weight to other considerations, e.g., love of power
or plunder, or his high time preference; or (3) believe that shortages
are good, either out of hatred for others or from
an ascetic ethic. And from the standpoint of praxeology, any of these
positions may well be adopted without saying him nay.
4.
The Market Principle and the Hegemonic Principle
Praxeological analysis of comparative politico-economic systems can be
starkly summed up in the following table:
The reader will undoubtedly ask: How can all the various systems be
reduced to such a simple two-valued schema? Does not this grossly
distort the rich complexity of political systems? On the contrary, this
dichotomy is a crucial one. No one disputes the fact that,
historically, political systems have differed in degree—that
they have never been pure examples of the market or of the hegemonic
principle. But these mixtures can be analyzed only by breaking them
down into their components, their varying blends of the two polar
principles. On Crusoe’s and Friday’s island, there
are basically two types of interpersonal relations or exchanges: the
free or voluntary, and the coerced or hegemonic. There is no
other type of social relation. Every time a free, peaceful
unit-act of exchange occurs, the market principle has been put into
operation; every time a man coerces an exchange by the threat of
violence, the hegemonic principle has been put to work. All the
shadings of society are mixtures of these two primary elements. The
more the market principle prevails in a society, therefore, the greater
will be that society’s freedom and its prosperity. The more
the hegemonic principle abounds, the greater will be the extent of
slavery and poverty.
There is a further reason for the aptness of this polar analysis. For
it is a peculiarity of hegemony that every coercive intervention in
human affairs brings about further problems that call for the choice;
repeal the initial intervention or add another one. It is this feature
that makes any “mixed economy” inherently unstable,
tending always toward one or the other polar opposite—pure
freedom or total statism. It does not suffice to reply that the world
has always been in the middle anyway, so why worry? The point is that
no zone in the middle is stable, because of its own self-created
problems (its own “inner contradictions,” as a
Marxist would say). And the result of these problems is to push the
society inexorably in one direction or the other. The problems, in
fact, are recognized by everyone, regardless of his value system or the
means he proposes for meeting the situation.
What happens if socialism is established? Stability is not reached
there, either, because of the poverty, calculational chaos, etc., which
socialism brings about. Socialism may continue a long time if, as under
a primitive caste system, the people believe that the system is
divinely ordained, or if partial and incomplete socialism in one or a
few countries can rely on the foreign market for calculation. Does all
this mean that the purely free economy is the only stable system?
Praxeologically, yes; psychologically, the issue is in doubt. The
unhampered market is free of self-created economic problems; it
furnishes the greatest abundance consistent with man’s
command over nature at any given time. But those who yearn for power
over their fellows, or who wish to plunder others, as well as those who
fail to comprehend the praxeological stability of the free market, may
well push the society back on the hegemonic road.
To return to the cumulative nature of intervention, we may cite as a
classic example the modern American farm program. In 1929, the
government began to support artificially the prices of some farm
commodities above their market price. This, of course, brought about
unsold surpluses of these commodities, surpluses aggravated by the fact
that farmers shifted production out of other lines to enter the now
guaranteed high-price fields. Thus, the consumer paid four ways: once
in taxes to subsidize the farmers, a second time in the higher prices
of farm products, a third time in the wasted surpluses, and a fourth
time in the deprivation of forgone products in the unsupported lines of
production. But the farm surplus was a problem, recognized as such by
people with all manner of value systems. What to do about it? The farm
program could have been repealed, but such a course would hardly have
been compatible with the statist doctrines that had brought about the
support program in the first place. So, the next step was to clamp
maximum production controls on the farmers who produced the supported
products. The controls had to be set up as quotas for each farm,
grounded on production in some past base-period, which of course cast
farm production in a rapidly obsolescing mold. The quota system
bolstered the inefficient farmers and shackled the efficient ones.
Paid, in effect, not to produce certain products
(and, ironically, these have invariably been what the government
considers the “essential” products), the farmers
naturally shifted to producing other products. The lower prices of the
nonsupported products set up the same clamor for support there. The
next plan, again a consequence of statist logic at work, was to avoid
these embarrassing shifts of production by creating a “soil
bank,” whereby the government paid the farmer to make sure
that the land remained completely idle. This policy
deprived the consumers of even the substitute farm products. The result
of the soil bank was readily predictable. Farmers put into the soil
bank their poorest lands and tilled the remaining ones more
intensively, thus greatly increasing their output on the better lands
and continuing the surplus problem as much as ever. The main difference
was that the farmers then received government checks for not producing
anything.
The cumulative logic of intervention is demonstrated in many other
areas. For instance, government subsidization of poverty increases
poverty and unemployment and encourages the beneficiaries to multiply
their offspring, thus further intensifying the problem that the
government set out to cure. Government outlawing of narcotics addiction
greatly raises the price of narcotics, driving addicts to crime to
obtain the money.
There is no need to multiply examples; they can be found in all phases
of government intervention. The point is that the free-market economy
forms a kind of natural order, so that any
interventionary disruption creates not only disorder but the necessity
for repeal or for cumulative disorder in attempting to combat it. In
short, Proudhon wrote wisely when he called “Liberty the
Mother, not the Daughter, of Order.” Hegemonic intervention
substitutes chaos for that order.
Such are the laws that praxeology presents to the human race. They are
a binary set of consequences: the workings of the market principle and
of the hegemonic principle. The former breeds harmony, freedom,
prosperity, and order; the latter produces conflict, coercion, poverty,
and chaos. Such are the consequences between which mankind must choose.
In effect, it must choose between the “society of
contract” and the “society of status.” At
this point, the praxeologist as such retires from the scene; the
citizen—the ethicist—must now choose according to
the set of values or ethical principles he holds dear.
Murray N. Rothbard,
“Praxeology: Reply to Mr. Schuller,” American
Economic Review, December, 1951, pp. 943–46.
On the pitfalls of economic
forecasting see John Jewkes, “The
Economist and Economic Change” in Economics and
Public Policy (Washington, D.C.: The Brookings Institution,
1955), pp. 81–99; P.T. Bauer, Economic Analysis and
Policy in Underdeveloped Countries (Durham, N.C.: Duke
University Press, 1957), pp. 28–32; and A.G. Abramson,
“Permanent Optimistic Bias—A New Problem for
Forecasters,” Commercial and Financial Chronicle,
February 20, 1958, p. 12.
Professor Mises has shown the
fallacy of the very popular term “model-building,”
which has (with so many other scientific fallacies) been taken over
misleadingly by analogy from the physical sciences—in this
case, engineering. The engineering model furnishes the exact
quantitative dimensions—in proportionate
miniature—of the real world. No economic
“model” can do anything of the kind. For a bleak
picture of the record of economic forecasting, see
Victor Zarnowitz, An Appraisal of Short-Term Economic
Forecasts (New York: Columbia University Press, 1967).
Since writing the above, the
author has come across a similar point in Rutledge Vining, Economics
in the United States of America (Paris: UNESCO, 1956), pp.
31ff.
Rothbard, “Toward a
Reconstruction of Utility and Welfare Economics,” pp. 243ff.
See Richard
Goode, “Direct versus Indirect Taxes: Welfare
Implications,” Public Finance/Finance Publique
(XI, 1, 1956), pp. 95–98; David Walker, “The
Direct-Indirect Tax Problem: Fifteen Years of Controversy,” Public
Finance/Finance Publique (X, 2, 1955), pp. 153–76.
For a critique of
“realism” as a ground for status quo
apologetics by social scientists, see Clarence E.
Philbrook, “‘Realism’ in Policy
Espousal,” American Economic Review,
December, 1953, pp. 846–59.
It is probably true, of course,
that general knowledge of these consequences of price control would
considerably reduce social support for this measure. But this is a
politico-psychological, not a praxeological, statement.
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