Home > Uncategorized > The Paradox of People

The Paradox of People

from Peter Radford

Last week I stirred up a certain curiosity as to why I had lumped Peter Drucker into the same bag as both von Mises and Hayek.

Well, simply put, the three of them, along with Karl Popper and Joesph Schumpeter, had an enormous, even oversized, impact on modern economics. Yes economics. Let’s not fall into the same trap as economists do when they, with a sweep of their hands, dismiss business theory as not an aspect of economics. Of course it is. After all if business is not an aspect of the economy, what is?

In any case, the general point is that there is a distinct Austrian flavor to modern economic/business theory that can be traced back to the work of that group. More importantly, the influence of that group, particularly Hayek, was to emphasize the terrors and the tyranny of socialism to a degree that precludes social democracy as well. In the hands of their various followers that emphasis became exaggerated eventually emerging as doctrinaire anti-government theory.

We thus end up with a profound ideological stance as we enter economic thought: anything the government does almost invariably dilutes or pollutes the so-called perfection of the market. So deeply is this stance accepted that most economists fail to realize its political import: that the democratic expression of the people’s will through their elected representatives is viewed negatively automatically in economic thinking. What economists are saying is that the people are entirely rational in their economic dealings, thus producing the perfection of markets, but are irrational in their political dealings thus mucking up that same perfection. The contradiction is exquisite. The paradox unresolved.

This paradox of people sits as testimony to the gulf between what would be a holistic social science and the much more limited study of allocation and/or choice that economics has opened up for itself. Since it is my belief that economies are first and foremost social phenomenon and are thus enmeshed in the political, institutional, cultural, and historical milieu of general social activity, the limitations of economics and its ability to discuss real economies is rather glaring. In fact it can’t contribute much at all other than its over-developed enquiry into choice under a highly restrictive set of assumptions which seem entirely designed to eliminate any connection to the larger milieu just referenced.

The emergence of the of the paradox of people can be traced, substantially, back to the personal biases and histories of the group of Austrians I mentioned yesterday. Let me give you a lengthy quote from Tony Judt on the topic:

“… We live in the long shadow of a debate with which most people are unfamiliar. If we ask who exercised the greatest influence over contemporary Anglophone economic thought, five foreign-born thinkers spring to mind: Ludwig von Mises, Friedrich Hayek, Joseph Schumpeter, Karl Popper, and Peter Drucker. The first two were the outstanding “grandfathers” of the Chicago School of free-market macroeconomics. Schumpeter is best known for his enthusiastic description of the “creative destructive” powers of capitalism, Popper for his defense of the “open society” and his theory of totalitarianism. As for Drucker, his writings on management exercised enormous influence over the theory and practice of business in the prosperous decades of the postwar boom. … All were forced into exile … and all — Hayek in particular — were to cast their writings and teachings in the shadow of the central question of their lifetime: Why had liberal society collapsed and given away — at least in the Austrian case — to Fascism? Their answer: the unsuccessful attempts of the (Marxist) left to introduce into post-1918 Austria state-directed planning, municipally owned services, and collectivized economic activity and not only proven delusionary, but had led directly to a counterattack.” — “What is Living and What is Dead in Social Democracy?” Tony Judt, a public lecture at NYU, October 2009

A long shadow indeed.

Judt is correct. Much of modern economics thought, indeed much of the underpinnings of neoliberalism generally, is directly attributable to the lifetime experiences of a small group of emigre Austrian thinkers who managed to exert an outsized influence. Why? because their fears fit well within those of the postwar West: the dark cloud of Marxist authoritarianism hanging over the West during the early Cold War years made the Austrian experience appear a lot more relevant than it is.

And, as I have already said, one consequence is that modern economics has no theory of government that is democratic. It assumes tyranny from the outset. It dresses this as tampering with “freedom”. With freedom exclusively expressed as the kind of libertarianism advocated by the likes of Milton Friedman.

I make no apology for agreeing with Judt on this issue. Hayek and the others built considerable theories based on their personal, albeit profound, experiences of tyranny. They made the error of transferring the ills of far-left Marxist politics onto all forms of social action. They became blind to the subtleties of democracy, and especially blind to the crucial role democracy plays in balancing or mitigating against capitalism. Instead, in various ways, they preferred to believe that impersonal individual action could somehow accrete into perfect collective action as expressed through a market. Moreover such expression was always preferable to any other expression including, for example, that through the ballot box.

But why was the government always a source of tyranny for these thinkers?

Because once instantiated it becomes a self interested agent with goals of its own that are not wholly those of the voters. Government by the people for the people thus becomes government by an agent of the people for the people, introducing along the way all the issues of agency that economists love to wrestle with. Since economics has no theory of politics within it, other than the Hayekian version, it has great difficulty squaring the economic and political motivations of the people. Indeed it doesn’t really try.

What we end up with is a modern economics that not only harkens back to its roots as an effort to wrest the economic sphere away from post-medieval monarchic interference, but also is now infused with a deeply anti-democratic vision built on the more recent conflicts inside the decaying Hapsburg Empire and its immediate successor state.

For anyone advocating democracy that’s a pretty potent one-two punch. Until economics incorporates a modern post-marxist theory of politics it will always appear to be resolutely opposed to the popular will. This is despite its purported advocacy of radical individualism accumulated into the collective known as the market.

The paradox of people lives on. With an Austrian twist no less.

  1. robert locke
    August 15, 2016 at 9:55 pm

    Peter, you are overlooking a very significant movement in economic, right after the war, which formed the theory of the German social market economy. It is called Ordoliberialism. ”

    “Ordoliberal theory holds that the state must create a proper legal environment for the economy and maintain a healthy level of competition (rather than just “exchange”) through measures that adhere to market principles. This is the foundation of its legitimacy.[8] The concern is that, if the state does not take active measures to foster competition, firms with monopoly (or oligopoly) power will emerge, which will not only subvert the advantages offered by the market economy, but also possibly undermine good government, since strong economic power can be transformed into political power.[9]” Wedipedia

    Ordoliiberals, also known as the Freiburger school, should be investigated, since neoliberalism has faired so poorly, by every student of economics today.

  2. August 16, 2016 at 8:23 am

    Thank you for this, I was actually thinking about this very paradox of these Austrians recently, so you struck a chord. Their erroneous projection of their own personal experiences onto the societies that gave them refuge is really quite striking. Their native land had a very thin and short experience of democracy and was subsumed quickly by the tyranny of Nazism, rather than the socialism they so feared. Yet the nations that received them, with their deeper traditions of democracy, defeated that tyranny- through massively mobilised government power (with the not insubstantial help of the Red Army, lest we forget…) – and then not only retained democracy, but drove unprecedented gains in human well-being and social equality in the post-war social democratic “big government” era. Until, that is, these guys’ ideas took hold in the form of neoliberalism…However clever they were, Hayek and von Mises in particular seemed not to understand anything about the traditions and character of the USA and Britain that led them to triumph over tyranny, not fall to it. Yet we could make a plausible case that their ideas have contributed in no small part to the erosion and enfeebling of those very traditions. For us to get out of this dead end, it is not just that economics must incorporate an adequate theory of politics – we as economists must accept (willingly) that economics is and can only be subordinate to the needs of society and polity and – most importantly – to moral ends.

    As an aside, it is also intriguing to think of the very significant contribution of the economics profession to the successful war effort in the USA and the UK – and to the post-war reconstruction. Then contrast that to the nature of Austrian economics, and quite how incapable that would have been of serving a useful purpose at that time of global crisis. There is probably a good comedy sketch in there for someone’s economics faculty Christmas revue…

  3. Larry Motuz
    August 25, 2016 at 12:57 am

    Thank you for this post, Peter Radford. I still wouldn’t include Peter Drucker in this crowd. Though I haven’t read much concerning him over the last forty years or thereabouts, what I did read –alas, long ago– did not mark him as one who thought governments could only ‘interfere’ with [er, mythical] ‘free markets’ or that he ever argued for and regulation- free ‘market’ solutions.

    But that is a difference of opinion at the margin.

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