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Libertarian Economics

from Peter Radford

Economics is contextual. At its inception this context was the struggle for power as entrepreneurial and landowner citizens tried to wriggle free of the impress of ages old monarchical rule. As political freedoms steadily grew and different societies obtained an ability to critique their rulers and as they managed to change the institutional set up in which their economies were embedded the study of economics became a coherent field of enquiry.

This early economics was almost invariably an attempt to demonstrate why it was that monarchs ought to interfere less in the workings of the economy. Such interference was seen as arbitrary and inefficient, whereas the operation of the entrepreneurs and landowners was seen as obeying ‘natural laws’ that would, inevitably, produce better outcomes than those obtaining under state rule.

The market versus state conflict was thus built into classical economic thought from the beginning. Indeed much of the original impetus for economic theorizing was precisely to ‘prove’ the efficacy of markets.

Thus economics has within it a deep tradition of articulating one side of an argument. It is a tradition that resonates strongly today. That one side of the argument is easily detected in the views of libertarian economists – there are very many – who seem to begin their work with an end in mind. That end being a proof of market efficacy.

This is why classical economics and its modern variants are willing to adopt a variety of assumptions that appear to drive towards only one conclusion. It is why so many economists find it difficult to find a role for government in their models. It is certainly why in recent decades the old Keynesian governmental role is so commonly ridiculed.

In many ways modern economics has a predictable air to it: the outcome that markets are so efficacious is based not on empirical work, but on a careful choice of starting assumptions designed to allow that outcome to emerge ‘naturally’. Friedman was hinting at this when he argued that nonsensical assumptions were of no consequence as long as the outcome was ‘correct’.

Modern microeconomics is an example: it is carefully prepared and cleverly constructed to ensure that market outcomes – when markets are left to their own devices – arrive at social outcomes that cannot be bettered. That in order to do this economists have had to resort to adopting a model of human behavior not found in the real world is little mentioned. And when awkward realities do intrude they are usually ignored – as, for instance, with the celebrated questions asked by Ronald Coase and the existence of the firm.

This bias in economics reached its apogee with the notion that modern macroeconomics ought to be constructed atop micro foundations. This would thus assure the market solution would flow through to models of entire economies and thus squeeze the state out. This was necessary in order to undo the work of Keynes who had the temerity to see a permanent role for government and who thus was an apostate in the eyes of the libertarians.

The libertarian worldview thus infects economics thoroughly. And it also means that much of economics is not scientific in the sense that it tries to understand aspects of reality, but is rather ideological in that it tries to advocate a particular way of organizing society.

So libertarian economics is idealistic. It posits a world as it ought to be. It argues a great deal of ‘if only the markets were free’ and has no interest in opening up space for other institutions to play mediatory roles. It is an analog to Marxist thought which has its own teleological drive and idealistic outcomes. Neither are studies of reality. They are critiques. Both are stories with happy endings if only we all submit to their rules.

A critical missing context in both libertarian and Marxist economics is the emergence subsequent to their origins of modern democracy. The modern state that libertarians so decry is a parallel expression of the very ‘agents’ that they model as being so tirelessly self-interested and rational in their economic lives. Yet when these ‘agents’ change coats and become ‘citizens’ they make fools of themselves and vote for all sorts of state activity the libertarians detest.

How can this be?

How can people-as-agents contradict people-as-citizens? Especially when both sets of people are identical.

The problem is, I argue, that libertarians live in the past. They imagine a wonderland of simple production, simple relationships, and simple rules. Causes and effects are easily connected in such a world. They can be easily modeled. Tracing an efficacious curve in such a world is relatively easy. And, yes, the libertarian vision fits quite well with it.

But it is not a modern world. Modes of production have changed. Logistics are different. Distances have collapsed due to better communication. The division of labor has separated us all from our more self-sustaining past. And we are now self-governing. The state, to paraphrase Louis XIV, is us. So the libertarian world is outdated and it is especially not a democratic world where people have two ways to mediate economic outcomes: one through their transacting relationships, another through the ballot box.

Keynes, in his confrontation with Hayek in the 1930’s, recognized this. His response was to attempt to build a theory that accommodated democratic wishes: you cannot have extreme adjustments and massive unemployment without threatening political unrest. So, in order to protect the market driven engine of growth we have to mitigate its apparent occasional extreme outcomes. Our best option for such mitigation is through then state. The mass of the people in their democratic role will demand this mitigation. After all few will benefit from the extreme rewards on offer in a free market, but many can, and do, suffer the extreme penalties from those occasional breakdowns that history tells us markets go through periodically.

Hayek, in contrast was so beset with fears of repressive state interference – his childhood had been spent watching the decline of the Hapsburg lineage and the emergence of fascism – that he found himself forced to argue that even well intentioned state intervention was less efficacious than the most extreme market outcome.

Hayek’s classic work on the role of knowledge in the economy is his attempt to demonstrate this latter point. Since knowledge is so dispersed, and since it is only revealed locally, no central player can accumulate sufficient knowledge to out perform the outcomes generated by a decentralized marketplace. Lange’s counterargument that this exact same set of conditions can be used to justify a socialist economy has, unfortunately, been lost or ignored in the decades since.

My point here is simply this: economics began its life as either a defense or a critique of the emerging industrial economy. It was adjusted in the 1930’s to account for democracy. But this adjustment was rejected by libertarians whose worldview was offended by any economic outcome being subjected to political input. As the libertarian view regained dominance in economics it implied that the profession drifted away from democracy too. It is this latter drift that has made it so difficult for many economists to embrace inequality as a topic worthy of study. It is also this drift that makes many economists so tone deaf to the real world social outcomes of unfettered markets. Creative destruction is still destruction. The system may re-emerge healthier, but the human cost along the way is also real. Accounting for it sits outside the libertarian agenda. Besides our modern economy is not much like that being observed by the founders of economics. It isn’t even much like that of the 1930’s.

Are we sure economics ought to be invariant even while the economy itself evolves so radically?

This libertarian drift is also the reason that we see so many economist give attribution to the market for all sorts of social and political changes. In their narrow and binary world where the only agency is situated either in a market or in a state, they are forced to go to extremes. They give themselves no choice. They have to suggest that progress can only come from free market activity. After all, in their eyes, the state can only be negative.

Even if the state embodies the wishes of ‘we the people’.

 


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  1. September 4, 2015 at 6:34 am

    Excellent post. What economists need to do is craft policies that will by their very nature guarantee individual economic freedom without incurring an additional cost..like a universal and costless gift to individuals for instance, and that utilize the digital nature of the money system to avoid inflation and/or even create price deflation, like a macro-aggregately derived discount to retail prices to consumers that is rebated back to participating merchants. Policies that cause freedom…are freeing. A = A.

  2. September 4, 2015 at 12:06 pm

    Time to get rid of political economics
    Comment on Peter Radford on ‘Libertarian Economics’

    You say: “The libertarian worldview thus infects economics thoroughly. And it also means that much of economics is not scientific in the sense that it tries to understand aspects of reality, but is rather ideological in that it tries to advocate a particular way of organizing society.” (See intro)

    Indeed, it is of utmost importance to distinguish between political and theoretical economics. The main differences are:
    (i) The goal of political economics is to push an agenda, the goal of theoretical economics is to explain how the actual economy works.
    (ii) In political economics anything goes; in theoretical economics scientific standards are observed.

    Theoretical economics has to be judged according to the criteria true/false and nothing else. The history of political economics, on the other hand, can be summarized as the perpetual violation of well-defined and crystal-clear scientific standards.

    The fact of the matter is that theoretical economics has from the very beginning been dominated by the agenda pushers of political economics. Smith and Mill fought openly against the feudal order, Marx and Keynes were agenda pushers, so were Hayek and Friedman, and so are Krugman and Keen.

    Political economists of all stripes are characterized by three common traits:
    (i) They are mainly occupied with sociology, psychology, anthropology, political science, history, etcetera. That is, they miss the essentials of economics proper.
    (ii) They use theoretical economics as a means/support for their agenda. By this, they abuse/corrupt science.
    (iii) As far as they have tried to underpin their agenda theoretically it can be rigorously demonstrated in each case that their approaches lack formal and material consistency.

    It is not decisive what the political agenda is: all of political economics is worthless cargo cult science (Feynman).

    Ask yourself: when Krugman supports the Democrats, Wren-Lewis and Keen support Corbyn, when Varoufakis fights for democratizing the Eurozone, has this anything to do with scientific research? Just the contrary, as Marx well knew.

    “In the domain of Political Economy, free scientific enquiry meets not merely the same enemies as in all other domains. The peculiar nature of the material it deals with, summons as foes into the field of battle the most violent, mean and malignant passions of the human breast, the Furies of private interest.” (1906, M.10)

    In economics it is even more important than in other disciplines to realize that politics and science do not go together. Heterodoxy has this choice: to fight Orthodoxy politically, i.e. to become/join/support a party, or to refute and replace Orthodoxy by the true economic theory.

    There is nothing to choose between the ‘Libertarian’ Hayek and the ‘Statist’ Keynes: both were incompetent scientists and this holds for their followers until this very day.

    Egmont Kakarot-Handtke

    References
    Marx, K. (1906). Capital: A Critique of Political Economy, Vol. I. The Process of Capitalist Production. Library of Economics and Liberty. URL http://www.econlib.org/library/YPDBooks/Marx/mrxCpA.html

    • John McDonald
      September 4, 2015 at 10:45 pm

      I am curious about what you see as the benefits or uses of the scientific economic theory that you advocate and are working to explain? How do you think it will it be helpful in the analysis and solution to social/economic problems such as poverty or ecological pollution for example? How will it likely link or address in helpful ways the question of proper laws and marketplace activities? These are not rhetorical questions.

      • September 5, 2015 at 10:13 am

        ICYMI

        If you want to go to Mars the precondition is that you first get your physics right. If you want to solve the problem of unemployment or poverty the precondition is that you get your economics right. It is as simple as that.

        Economics is a laughing stock because it claims to know how overall welfare can be achieved while it is pretty obvious that already supply-demand-equilibrium is a logically defective construct.

        Because the theory of the interaction of markets (known as general equilibrium theory) is false, the labor market theory is false by implication. That is, economists bear the intellectual responsibility for the socially devastating unemployment during the Great Depression and for the currently worsening unemployment/deflation situation.

        Economics is a failed science and because of this the best contribution to human welfare economists can make at the moment is to get out of political blather and to do proper science. They are late by more than 200 years.

        See also my blog post ‘The case for pure economics’
        http://axecorg.blogspot.com/2015/07/the-case-for-pure-economics.html

    • September 5, 2015 at 12:06 pm

      Amen to what John is saying! It seems to me, Egmont, you are shooting yourself in the foot when your political “there is no alternative” polemic insists on the purposeless version of science invented by Adam Smith’s mentor Hume to proclaim a godless and therefore purposeless universe in which anything goes so long as politicians can agree on it.

      Your history is also wrong. The feudal order ended at the Reformation – 200 years before Smith and 300 before Mill – with the siezure of feudal and church (communal) lands, thereby ending acceptance of responsibility for the livelihoods of serfs.

      There IS an alternative, which starts from the philosophical foundation of the Einsteinian science of the Big Bang, the historical evidence also being consistent not only with the Christian story of a trinitarian God “dying that we might live”: intending to procreate a happy family but – like so many fathers since, when their offspring have grown up – being sorely disappointed by the thoughtlessness and ingratitude of his kids. The purpose of science, then, is not to bore us with calculating the obvious but to feed the kids and teach them how to SEE the bigger and smaller and historical pictures: to appreciate the family and home and inheritance God has given them, so that being grateful they will be happy and want to support rather than war with each other. It is about how to bring about what ISN’T rather than how to describe the unhappy world that IS. Its truth is not inert Humean accuracy but what Bacon sought and the advert boasts of: “It does what it says on the tin”.

      • September 5, 2015 at 12:17 pm

        Apologies for a “not only” left behind during editing: should have read “consistent with the Christian story”.

    • Larry Motuz
      September 5, 2015 at 5:59 pm

      Economics is, and was always referred to as “Political Economy” before the marginalist revolution. THAT was about how we provide for ourselves individually and together, and not merely about how monetized markets are claimed to work efficiently nor about equilibrium in markets, neither of which is empirically observable. Markets are always in transitional states. All of the theoretical deficiencies of modern mainstream economics stem from the vague but formally mathematized notion of ‘utility’ among the marginalists and the reduction of economic activity and welfare maximization to being about those who could afford to purchase rather than about human beings generally.

  3. C-R D
    September 4, 2015 at 4:51 pm

    Amen!!!

  4. September 4, 2015 at 5:11 pm

    “Free market” ideology is actually in the same ballpark as “Communist” ideology. Both attempt to prescribe an ideal world where people can live in peace and harmony. In other words, “Utopia”.
    Both these ideologies pander to the emotional need of people to embrace and cling on to simple ideas as life rafts in the uncertain unpredictable real world.

  5. Pmanderson
    September 4, 2015 at 7:32 pm

    Oh, it’s worse than that. Libertarians are not only intent on living in the past, they misread t the past.

    Adam Smith opposed corporations, except for consumer banking and infrastructure. He felt that a tax system was closest to the ideal when it most resembled a cost-free income tax, and thought that (when this was impractical) it should press less heavily on the poor than the rich.

    • JdeV
      September 7, 2015 at 3:24 pm

      Amen to pretty much all of the above, the proviso being that “libertarian” is another piece of terminology that has been largely appropriated by the “right”. Whose liberty / cui bono ?

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