*Classical Liberalism and the Austrian School* by Ralph Raico (updated)

Classical Liberalism and the Austrian School is the latest collection of essays from Ralph Raico, published by the Ludwig von Mises Institute. Ralph was kind enough to send me a print copy.

The introductory, eponymous essay concerns the relationship between Austrianism as an economic methodology and classical liberalism as a political program or ideology. Raico disputes Mises’ contention that Austrian methodology (methodological individualism) is clearly separate from the normative claims of classical liberalism (2-3). Raico builds a persuasive case that Austrianism as traditionally understood is indeed naturally related to classical liberalism; however, I would argue that this implication is not entirely to the credit of traditional Austrianism.

First, let us take methodological individualism. Modern neoclassical economics is as thoroughly methodologically individualist as Austrianism ever was. But note that both neoclassical and Austrian economists depart from methodological individualism when convenient to do so, for instance when deploying the firm as a rational actor. The firm is a collective entity. Robert Nozick in Anarchy, State, and Utopia has a brilliant insight into when methodological individualism “might go wrong” (22):

If there is a filter that filters out (destroys) all non-P Q’s, then the explanation of why all Q’s are P’s (fit the pattern P) will refer to this filter. For each particular Q, there may be an explanation for why it is P, how it came to be P, what maintains it as P. But the explanation of why all Q’s are P will not be the conjunction of these individual explanations, even though these are all the Q’s there are, for that is part of what is to be explained… The methodological individualist position requires that there be no basic (unreduced) social filtering processes.

The filtering process for the firm is profit maximization. We can know that firms try to maximize profit even if we do not have a good explanation for why each individual firm tries to maximize profit, or why individuals have chosen so to organize themselves. The answers to the latter question were developed by Coase and Williamson, by the way (Chicagoites, not Austrians, though fully taken on board by contemporary Austrians).

Second,

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Left-Libertarian Economics: Response to Carson

Kevin Carson was good enough to drop by and comment on my posts about his book, Studies in Mutualist Political Economy (here and here). I copy the comments below with my responses:

(Kevin) Thanks again, Jason. In general, I don’t think any paradigms are falsifiable; you can add epicycles to anything. And I think a revived LTV contributes analytical insights that are obscured by vanilla-flavored marginalism (like the normal relationship between cost and price for reproducible goods, and the intersection of the Tuckerite theory of artificial property rents with the Ricardian theory of rents as a subtraction from wages).

I see the subjective mechanism for the LTV not so much as moral as — believe it or not — praxeological.

My response:

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Left-Libertarian Economics’ Critique of Capitalism: Part Three

In my last look at left-libertarian economics, I argued that Kevin Carson’s resurrection of the Labor Theory of Value adds no new information to standard, neoclassical price theory. Carson wishes to disapprove morally of profits but does not show that capitalists add nothing to the value of production. In particular, Carson acknowledges that capitalists contribute “time preference,” providing saved or borrowed funds to production in exchange for higher consumption at a later date. Carson relabels this investment as a kind of labor.

In this installment in the series, I examine Carson’s argument in Studies in Mutualist Political Economy that “really existing capitalism” depends crucially on exploitation and coercion, and that if coercion were to abolished and markets truly freed, “capitalism” would disappear. Carson’s argument that free markets abolish economic profit is not altogether without support in standard economic theory. In introductory microeconomics classes, the model of “perfect competition” is taught. Under perfect competition, firms in each industry sell an identical product, and entry is costless. Therefore, if firms charge more than the cost of production, including the interest rate on investment, new entrants would undercut their price. The equilibrium price therefore yields zero “economic profit.” “Accounting profit” will be all that remains, representing the natural interest rate on investment, which in turn is determined by the opportunity costs of investment (forgone consumption).

Carson does seem to be relying on the perfect competition model to make the case that economic profit will not exist in a free market (116-7). But of course, really existing markets do not conform to the perfect competition model. Why not? Standard microeconomic theory points to product differentiation, imperfect information, and costs of entry as frictions that generate market power and, accordingly, economic profit. For Carson, however, the explanation of economic profit lies in coercion, the exploitation of workers and enrichment of capitalists by the state:

Without state intervention in the marketplace, the natural wage of labor would be its product. It is statism that is at the root of all the exploitative features of capitalism. Capitalism, indeed, only exists to the extent that the principles of free exchange are violated. “Free market capitalism” is an oxymoron. (129)

How plausible is this claim?

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Left-Libertarian Economics as a Degenerative Paradigm: Part Two

In this post, I continue my series on left-libertarian economics by examining Kevin Carson’s arguments for the labor theory of value (LTV) in Studies in Mutualist Political Economy. I argue that this is one area in which left-libertarian economics does represent a degenerative research program, that is, a body of scientific theories that protects itself from refutation by redefining itself in such a way as to render itself nonfalsifiable. The problem is not that the LTV as Carson formulates it is false, but that it is simply a relabeling of the Marshallian synthesis with scientifically irrelevant normative claims added on.

Carson begins his book with a discussion of classical political economists’ understanding of the LTV. He persuasively demonstrates that the LTV of the classical political economists was not as naive as the later marginalists made it out to be. Both Ricardo and Marx recognized that demand played a role in determining prices, and that labor effort could not cause a good to become valuable. The classical political economists held a “correlational” LTV, that is, that in most markets the price of a good would correlate strongly with the amount of labor used to make it – and the “amount” of labor had to be understood as its opportunity cost. Expending labor on making a mud pie would not make it valuable, because no one would be willing to pay for it. Alfred Marshall synthesized the marginalist-utility and labor theories of value by modeling the way in which the interaction of supply (determined by cost of production) and demand (marginal utility) determines prices. In the short run, Marshall argued,

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Is Left-Libertarian Economics a Degenerative Paradigm? Part One

“Left-libertarianism” can be defined in one of at least three ways. It can refer to “liberaltarianism,” a tactical stance and set of policy positions combining a substantially libertarian thrust with a preference for making alliances with the modern center-left. It can refer to a revisionist philosophical movement that differs from Robert Nozick’s entitlement theory of property rights in a more or less egalitarian direction, without going all the way to a Rawlsian social-ownership theory (Michael Otsuka, Peter Vallentyne, Philippe van Parijs, etc.). Finally, it can refer to anarcho-socialism, the original “libertarianism.” In what will probably be a fitfully updated series of posts, I am going to investigate the last of these, insofar as it has attempted to create a new school of positive economics.

I am going to focus, at least initially, on Kevin Carson’s Studies in Mutualist Political Economy, which seems to be one of the most influential recent works in this area. Carson’s theories have, for instance, had some influence on Auburn philosopher Roderick Long and a number of other libertarian public intellectuals such as Sheldon Richman, Gary Chartier, and others associated with the “agorist” and “voluntaryist” movements and with organizations such as the Center for a Stateless Society. And of course, influence has gone back the other way as well. Many left-libertarians, such as Fred Foldvary, have also been influenced by late 19th century economist Henry George, but I will not be focusing on their theories, which are relatively close to the neoclassical mainstream, compared to Carson’s mutualism.

Mutualism itself is situated to the right of

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Weekend Musing

O Capitalism, how I adore you. You are always thinking, day and night, of ways to make my life just a little bit easier. Like pull-tabs on the top of cookie packages so that they stay fresh – what a great idea. But O dear, sweet Capitalism – why doesn’t every wine bottle have one of those convenient little pull-tabs in the foil at the top?

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“Commodities” vs. “Basic Human Rights”

I’m going to make a generalization here. Treating a good as a “basic human right” is one way to make sure you don’t have enough of it. Treating a good as a “commodity” is the only way to make sure you have plenty of it. I’m thinking about K-12 education, housing for the poor, access to a clean environment, and just about everything in a socialist system.

Other examples? Exceptions?

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Pinewood Derby and the Future of Capitalism

We have been working on Pinewood Derby cars for Cub Scouts.  My own Cub Scout has been bugging me about every 5 minutes for the past month to work on his car.  It is, fortunately, mostly done now.  My son can be very intense.

Tears are a possibility.

A few years ago another son was in the Pinewood Derby.  There is no heritage of Pinewood Derby excellence in my family.  However, that year I think we actually had the fastest car in the Pack.  I say “I think” because the powers that be decided it would be better if they didn’t actually designate a winner; instead every boy got some kind of award.  Since no one in my family ever wins these kind of things , I was a little frustrated, as was my son.  But we were good sports and went along.

I am of two minds about this Everyone is a Winner approach.  On one hand, I want to shield my children as long as possible from the “agony of defeat,” which is relatively inevitable when their father has the car-building skills that I do.  Childhood is something precious that should be protected vigilantly.  They will have plenty of time to learn about the disappointments and ugliness of the adult world.

My other mind wonders that maybe kids need to have defeat along with encouragement, rather than being always told how special they are.  Some people think the sooner they get tough and recognize that the world rewards winners, the sooner they will understand the importance of doing their best and learning to deal with setbacks and disappointment.

I also wonder about the social implications of Everyone is a Winner approach.  The American work ethic has been essential to economic prosperity in the United States and elsewhere.  We work far more hours per year than our counterparts in Europe, for instance.   When kids grow up playing games where everyone wins, are we breeding this essential capitalistic spirit?  (T-ball games where the referees don’t even call outs on the rare occasions that kids are actually able to generate one are another example.)

I read a lot in the press about the current generation of young adults who want interesting, satisfying careers without “putting in their dues.”  Most careers have traditionally required grunt work, which lets young workers show their commitment and work ethic to elder superiors who then reward that ethic with more responsibility.  Sure, everyone would like an intellectually stimulating career from the outset, but the fact remains that most of the essential work that drives our economy is not that interesting—even in the jobs that require college degrees.  Are young people able to work patiently their way up the totem pole and do the hard things that are poorly rewarded in the short run but pay off in the long run? Are they willing to spend some time on the bottom, or do they want to “win” right off the bat, like the always did growing up?

On the other hand, people are much less likely than in decades past to work for the same company, or even in the same career, for long periods of time.  Putting in the grunt work is no guarantee the economy won’t leave you behind as technology changes.  What does accommodating a changing economic climate require?  It seems to me that experience in losing and moving on to the next challenge would be beneficial.

Several years ago I read Weber’s The Protestant Ethic and the Spirit of Capitalism.  At the time I thought it was one of the silliest things I’d ever read.  A colleague told me that was usual—economists hate Weber, but sociologists love him.  I’d have to look at that text again to see if I’ve changed my mind, but I have become convinced that there are powerful cultural underpinnings to the capitalistic spirit, and I wonder how our society is doing keeping that spirit alive.  This short essay has been full of clichés (and there have been more that I mercifully deleted), but I think that those clichés might be some of the most important drivers of our economic engine.  I hope they are still alive in the minds of our kids and young adults.

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