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Commentary and debate on politics, economics and culture from a libertarian perspective. To Libertarian Alliance Website >

invisible hand

EconomicsPosted by Jan Lester Mon, April 07, 2014 14:57:20

invisible hand This expression has come to be used among *intellectuals as the process by which those engaged in *self-interested trade nevertheless usually benefit others. This is partly because both sides must, ex ante, receive a gain for themselves for a trade to take place, and partly because in *society as a whole resources thereby move to more highly valued uses.

It is interesting that Adam Smith (1723-1790) used this expression only once in his An Inquiry into the Nature and Causes of the Wealth of Nations (1776) (though also once in his The Theory Of Moral Sentiments [1759], and once in his, posthumously published, History of Astronomy, [1795]), and ironic that this was arguing that *protectionism is unnecessary because of the bias toward home produce among merchants. Thus this usage would flout the way the metaphor is generalized today to include the benefits of *free trade instead of buying from the home market. Such occasional inconsistencies as inevitably occur in the writings of *free market *economists cannot themselves undermine the soundness of their general arguments defending the free market (including free trade), and it is an obvious fallacy to think that they can. Or if they are taken as arguments from authority for some point (‘Even Adam Smith said ...’) then that is also a fallacy.

We might say that the opposite of the invisible hand of the market is the manifest jackboot of *politics. This is the typical process by which the, putatively, altruistic intentions of some *political agent might plausibly cause some immediate gain to the objects of his ‘generosity’ but which have the *unintended consequence of trampling on the *liberty of others and disrupting economizing behavior, ultimately to the detriment of all.

A Dictionary of Libertarianism

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unintended consequences

EconomicsPosted by Jan Lester Mon, April 07, 2014 14:55:45

unintended consequences To the extent that the *liberty and *welfare of people concern us, it is an error either to *criticize or to praise any kind of social activity because of the intentions of the parties involved. It is irrelevant to suggest that ‘businessmen are only interested in *profit’ or that ‘*politicians are trying to improve *society’, even if these *stereotypes were universally true. What matters for practical purposes are the *consequences of people’s actions, and these often involve unintended consequences. The analysis of unintended consequences explains how businesses are almost bound to increase social welfare while *politics is almost bound to reduce it, and reduce liberty too. This is one of the most important general insights of classical *liberals and thus also one of the most important general criticisms of anti-*market *statism. The failure to grasp that intentions do not matter is the pons asinorum of all social theory. See *invisible hand.

An early version of this insight was (in)famously expressed by the great cynic Bernard de Mandeville (1670-1733), notably in his The Fable of the Bees: or, Private Vices, Publick Benefits, 1714. However, we might agree with Adam Smith (1723-1790) that *self-interest that benefits oneself and others is therefore better seen as a virtue after all. Self-interest only becomes a vice when it *harms one’s own interests or *proactively imposes on others. We might also agree with Adam Smith, and against de Mandeville, that politicians are not needed to guide the self-interest to the beneficial results. Canadian arch-*‘liberal’ J. K. Galbraith (1908-2006) attempted to parody de Mandeville’s insight with his own expression: “private affluence, public squalor”. He apparently failed to realize that this invites the, correct, inference that we can change all the squalor into affluence by privatizing (better, *depoliticizing) what is in *‘public’ (really, *state) ownership.

See *moral hazard; *perverse incentives.

A Dictionary of Libertarianism

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EconomicsPosted by Jan Lester Mon, April 07, 2014 14:54:09

market In a narrow sense a market refers to goods and services that are freely traded in terms of *money. In a broader sense there need be no money on either side and so barter is a market activity. In the broadest sense of *economics imperialism such *social activities as the *marriage market are also included (referring to the ‘prices’ in terms of looks, income, prospects, etc., that people require before agreeing to get married). The market is not a sinister force that controls us, as Karl Marx (1818-1883) thought, but merely another way of describing voluntary exchange. Markets cannot interfere with the *liberty of the participants without ceasing to be genuine markets. For instance, if the *state fixes a price then that will not be the market price; unless by temporary coincidence. Or there may even be a market between the buyers and sellers of *slaves, but that would not make slavery itself a market phenomenon unless the slaves had sold themselves in the first place (see *specific performance). As voluntary affairs, markets will typically benefit both sides immediately. But they will also benefit society generally as they guide *resources to where they are most *economically productive (see *invisible hand) and make advanced *civilization possible (see *economic calculation).

*Charity is the only *libertarian alternative to markets. The illiberal alternatives include, in the property sphere: *fraud, theft, robbery, *extortion, and vandalism; in the personal sphere: deceit, assault, *rape, *slavery, and murder. Typically, one side loses more than the other gains. To the extent that one objects to the market, one must in effect be advocating one of these or something similar although probably under some *statist euphemism such as, *conscription, *equality, *paternalism, *taxation, *war. See *free market.

A Dictionary of Libertarianism

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EconomicsPosted by Jan Lester Thu, April 03, 2014 11:26:24

economy 1) *Economic efficiency, or an approach toward it. This sense refers to the activities of an individual *person, or individual *organization, with a *hierarchy of goals (although these can be subjective and changeable).

2) The overall state of production and *consumption within some *society, or *country, or other area—possibly the world. This second sense is quite distinct and somewhat dubious. For only *individuals can be said to have a clear hierarchy of goals and so behave economically, or otherwise. For this reason, F. A. Hayek (1899–1992) suggested the term ‘catallaxy’ for the overall voluntary interaction of individuals. However, unless one is a very strict *Paretian, it makes a rough sort of sense to say that some overall society is doing better or worse economically than it was; even though some tacit *interpersonal comparisons of utility are inevitable. It is sometimes worth reminding *collectivists that ‘the economy’ is not the unitary thing that a genuine economy is. But it would probably be a barren form of pedantry to insist on Hayek’s ‘catallaxy’ at all times.

A Dictionary of Libertarianism

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economic(s) imperialism (economics)

EconomicsPosted by Jan Lester Thu, April 03, 2014 11:24:02

economic(s) imperialism (economics) *Economics has been one of the most explanatorily powerful of the *social sciences. Those on the so-called *left- and right-wing (not to mention out-and-out *authoritarians) who would deny this are, given the generally pro-*market conclusions of economics, probably revealing their own anti-*liberal bias. This success might prompt some to conjecture that the various assumptions of economics are more or less *true and, therefore, useful for understanding the social world generally. Given the *aprioristic or near tautological nature of the assumption of *economic rationality, and the apparent robustness of the general *economics methodology, this is hardly surprising. The other social sciences have often been floundering, even foundering, without comparably useful and true theory-guiding assumptions.

Thus the *Austrian view of giving economic analyses of all human activities, which was also a feature of Philip Wicksteed (1844-1927) and other *marginalists, has been increasingly popular in recent decades, not least with Gary Becker (1930- ) and the Chicago school generally. Though modern economics began by focusing on the topic of trade, there is no inherent reason to restrict its methods to this. Economics’ general methodology has now been enlighteningly applied in many other areas of social science (and even beyond: see *economics), not the least being *sociology and psychology (in the form of behavioral economics). This process has been resisted by some people as a form of *intellectual imperialism, in a metaphorical and hyperbolical sense. But problems do not respect *academe’s subject boundaries. No one is obliged to use economics, but its success will mean that those who decline to do so are likely increasingly to find that their own research will not stand up beside it (unless *capture can restrict free intellectual *competition).

A Dictionary of Libertarianism

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economic calculation

EconomicsPosted by Jan Lester Thu, April 03, 2014 11:19:55

economic calculation Perhaps the most important criticism of *state control is that it is incapable of being *economic, even if transmogrified into a *libertarian, *contractual *government. The reason for this is sometimes referred to as the economic calculation problem. This was first expounded at length by Ludwig von Mises (1881-1973) in 1920, later in a book (1922) and translated into English as Socialism (1936).

In the *market, innumerable, polycentric and protean interactions of *supply and *demand produce a *price. The *knowledge of the particular circumstances by which these interactions are caused, could not be gathered by any one central agency. In any case, as Friedrich von Hayek (18991992) explained, many individual circumstances are only tacitly understood and not in an explicitly communicable linguistic form. Thus market price is the only known indication of relative *scarcity. Without the numeraire of *money in the market we would have no way of determining such scarcity for all items. All we would know is that people want more of everything and better quality too. Post-scarcity levels of *wealth are impossible *Utopianism.

Any attempt by the state to override the market, and *charity, is ignoring this implicit knowledge of relative scarcity. To the extent that it ignores prices, the state has absolutely no economic way of deciding what should be produced, when, where, how many, and with what combinations of *factors of production. These would be entirely arbitrary decisions from the point of view of *efficiency (though probably not arbitrary with respect to *corrupt, political *vote-buying). In reality, the market must be largely tolerated by the state as its abolition would mean a complete breakdown of all production, just because there is no known economic way to allocate resources in a mass industrial society without it.

This latter point is often conceded. However, it is usually overlooked that it follows that every single state intervention in the market is itself a prima facie destruction of economic calculation. It means taking resources from their ostensibly most highly valued uses and doing something else with them without any tangible evidence of increasing *welfare, especially long-term. There are only conflicting political intuitions, which are uninformed by economic analysis particularly the *opportunity cost of a market project (although they know their own opportunity costs as *politicians and *bureaucrats).

A Dictionary of Libertarianism

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economic rationality (economic man)

EconomicsPosted by Jan Lester Thu, April 03, 2014 11:16:25

economic rationality (economic man) There are two main conceptions of economic *rationality in the *science of *economics: 1) the lesser known *Austrian School *aprioristic, and 2) the mainstream, contingent approximation. One can see their connection by the fact that they can both be defined as seeing people as ‘*self-interested *utility maximizers’. But they give different interpretations to this expression.

1) The Austrian School of economics holds that people always attempt to follow their self(-perceived) interests (including any *altruistic interests) to achieve the most of what they value (get subjective utility from the thought of doing) at any particular time (however imperfect their calculations and whatever the long-term consequences for their utility). The Austrian view is held to be an a priori *truth that can be applied to analyze the behavior of any agent, qua agent, at any time. It is about real subjective strengths of desire that obviously relate to individual *welfare and *liberty somehow, though exactly how requires some *philosophy to sort out. This conception is more or less unfalsifiable by empirical means, its assumptions being near-universally true, but not thereby tautological.

2) By contrast, the mainstream conception of economic rationality is, roughly, the assumption that people are narrowly self-interested and attempt to maximize their ‘utility’ (mainly as a *revealed preference of observable behavior) in a so-called ‘rational’ way (that is, perfectly calculating in order to maximize such utility over time). This is intended to be a highly simplified approximation to the truth that is, therefore, useful for explaining observed economic activity and giving advice—as long as one realizes its self-imposed limitations. This view is easier to apply, and can be falsified (or people can be accused of failing to be ‘rational’), but it is not comprehensive in its applications to *agents. It mainly has its origins in the psychological *egoism defended by Thomas Hobbes (1588-1679), but it is not uninfluenced by the aprioristic view. More important is that it must tacitly rely upon approximating to the truth of the aprioristic view for its links to liberty and welfare. That is, the analyses and prescriptive applications of the mainstream view concerning what people need to do to get more of what they want, lack *libertarian or welfare force to the extent that its assumptions are explicitly put forward as being severely limited, quite unrealistic, and merely about *objective behavior—as some economists insist, whether to preserve scientific status (e.g., Milton Friedman [1912-2006]) or attack pro-market conclusions (e.g., Amartya Sen [1933- ]).

It is not clear to this writer that either conception of economic rationality needs to oust the other from economics, as extreme proponents of each view advocate, for they serve different purposes. The Austrian view will lead to ‘a priori’ theoretical conclusions while the mainstream view will lead to empirically testable predictions. Austrian conclusions, because of their subjective aspect, and mainstream predictions, because of their empirical aspect, cannot completely coincide; though they might often have the same practical import.

A Dictionary of Libertarianism

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economic efficiency

EconomicsPosted by Jan Lester Thu, April 03, 2014 11:12:14

economic efficiency George Bernard Shaw (1856-1950) wrote that “Economy is the art of making the most of life” (Maxims for Revolutionists). Assuming this means *economic efficiency, it is right. If people complain that there are more important things that override being economic or efficient, then they do not grasp the intended broad sense of this expression. It means minimizing *waste in the pursuit of your goals, which is only another way of saying maximizing your overall goals, or getting more of what you want—even if that involves taking things easy, spending as much *money as possible, being a saint, or living fast and dying young.

Economists usually use ‘economic’ and ‘efficient’ to mean the same, thus ‘economic efficiency’ is a pleonasm unless contrasted with technical efficiency. Technical efficiency is the best method of achieving some goal—or possibly set of goals—smaller than one’s overall goals, irrespective of the *cost of the process. Thus diamonds might be the most technically efficient substance (lasting longest and being the most attractive, say) to have as widgets, but glass might be the most economically efficient (the best trade-off between usefulness and cheapness). Logically, one could view economic efficiency as technical efficiency that takes all goals into account.

What of *environmentalists who say that we should eat soybeans because cows are less efficient sources of protein? If they mean that it is more technically efficient, then they have a point. But as a statement of genuine (overall) economic efficiency it is false, given that one also prefers the taste of meat to soya and can afford the meat—even ignoring the other amino acids and minerals in meat and the dubious phytoestrogens in soya.

It might still be suggested that what is economic for the individual is uneconomic for people considered collectively, due to negative *externalities. That is, global human *welfare would increase if, to stick with the example, we switched to soya; as more people could be better fed. Even allowing for approximate *interpersonal comparisons of utility, and not restricting ourselves to the *Pareto criterion, this is false. It is more economic to allow the *free market to help those in *less developed countries: the market will spontaneously feed the poor better without state-imposed restrictions on the diets of the better off (see *famine). *Libertarian *anarchy is the most economically efficient ‘system’ as well as respecting *liberty and *rights.

A Dictionary of Libertarianism

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