Thoughts on economics and liberty

Tag: Ludwig von Mises

Hans-Hermann Hoppe’s attack on Hayek doesn’t stick

Herman Hoppe whom I have discussed here and here, believes that Hayek is misrepresented as a classical liberal when he is, in reality, a social democrat. Also worth reading is Hoppe's interview here.

I've read much of Hayek's political philosophy (but virtually none of his economics). Despite Hoppe's claims, I'm unable to see why Hayek should be seen as a social liberal. Rawls, yes (although Hayek did seem to approve of Rawls). But Hayek, no. 

Hayek (along with many others such as Friedman) comes from the tradition of Locke and Smith. Locke allowed for a modicum of poor laws. Even Mises is not averse to a form of social insurance. This tradition is an investigative, open ended tradition that examines all aspects of liberty. It is not a closed system with its propositions "proven" and agreed by everyone. My take on classical liberalism emphasises, for instance, the importance of accountability. There are many aspects of liberty. 

In my view Hoppe greatly exaggerates Hayek's willingness to allow a government to take over any function for the "common good". The entire goal of his books, The Road to Serfdom and The Fatal Conceit (among others) would be lost if Hayek recommended giving the government a blank cheque. Indeed, at each step, and in great depth, Hayek warns us against government. A few unqualified statements are certain to remain in any work of the magnitude that Hayek wrote. The whole work must be seen as of one piece. A few minor statements here or there do not detract from his main thesis.  

Hoppe also makes false analogy between a firm and government to argue that the information problem that Hayek pointed out is less important than the private property problem that Mises pointed out. Indeed, both these necessarily go hand in hand. It is only private property that provides incentives to seek out the relevant local information (through prices). If you didn't own private property why would you even care to know? All you'd care for is whom you know and how many people you can terrorise. Why would specific information of an investment nature benefit you? Hayek is merely referring to prices as the key relevant information, and prices don't exist without private property. His theory is therefore entirely consistent with Mises's (and with mine, where private property is a function of accountability).

No firm has yet arisen to provide all services that a government generally provides. Some argue that such firms should naturally arise (Nozick wrote about protection associations). But they don't.

What prevents businesses (firms) from becoming governments if firms are so good at managing information? Well, to answer this we need to keep in mind Coase's insights and those of Demsetz, Milgrom and Roberts, and of many others. There are necessary limits on the size and nature of firms. But there are no limits to the size of countries (and hence of governments).

Small countries and large countries both operate with the same informational problems that Hayek pointed out. The SAME informational problems found in a large country government are found in a small country government. Providing border protection, police, and justice services is a different ball game to that of profit maximisation. If Hoppe were correct, then a small village government could successfully manage all its economic, border protection and justice activities as a registered corporation. It can't. That's precisely the point Hayek makes. Unless you make it a commune (even in which case the information problem doesn't disappear). But I trust Hoppes is not suggesting a communist solution. 

Hayek's information approach is therefore persuasive to practical policy makers like me who have seen how easy it is to make poor decisions within governments. That is why Hayek has been more influential with (classical) liberal politicians. 

I probably need to read Hoppe in more detail to understand his points. But from what he has raised, and from my preliminary analysis, I'm afraid the case against Hayek does not stack up.

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What we know vs. what we can’t possibly know

Mises is a great thinker but not a great writer – or at least his translations in English are not easy reading. The first part of Human Action by Mises is painfully slow.

Why does Mises call his book "Human Action" and not "Political Economy" (on the pattern of similar books by Mill or Ricardo) or even, simply, "economics" as Marshall dubbed the new discipline?

That's because Mises sees economics as a sub-discipline of a broader discipline of praxeology – the general theory of human action. According to him, the general theory of choice and preference (which is about human choosing and acting) goes beyond political economy or economics.

Carl Menger, an Austrian, was the first to clarify the concept of diminishing marginal utility. This was the foundation of the subjective theory of human action which led to modern price theory. Mises was one of the early students of this new subjective discipline. Human Action by Mises is perhaps the best description of praxeology available today. Not many people understand it (I don't), perhaps because Mises is so tedious as a writer.

But for those with limited patience (like me), I found this excellent lecture by Hans-Hermann Hoppe today. (I chanced upon it through FB.) This lecture is 50 minutes long and although it can appear, at times, to be repetitive and slow, it is amazingly insightful. Hoppe is a good teacher.

After you've understood this lecture, you'll smile at the delusion of any Keynesian (like Krugman) "prescribing" solutions for an economy. Even Friedman's monetarism becomes suspect (and indeed, has been overtaken by rational expectations models, which, in turn, are largely suspect; any aggregation of human behaviour is fraught with huge methodological problems) .

If you know about the Hawthorne effect, you perhaps realise that it not only applies to psychological experiments but has distorted results in many"altruism" experiments conducted by naive and confused experimental economists. This is one more obvious implication that you get from Hoppe. If only these "scientists" had studied Mises and understood Hoppe. A lecture of just 50 minutes would be enough to eliminate their fundamental methodological mistakes.

The point Hoppe is making is that human action is influenced by a myriad of factors and is therefore constantly changing, making prediction (almost) impossible. Most importantly, people learn through experience. This means (for all practical purposes) that concepts of bounded rationality (e.g. the Kahneman and Trversky effects) aren't readily evident in real life. On the other hand, significant human error (where people overcome bias but still make errors of reason due to over-confidence, for instance) is found. Economics can't explain that, but praxeology can. 

Hoppe's talk will significantly sharpen your understanding of Mises's work (and hence of Hayek). 

Let me end by quoting a short section from Mises's Human Action. You will understand this short section MUCH better after listening to the talk, above:

The transformation of thought which the classical economists had initiated was brought to its consummation only by modern subjectivist economics, which converted the theory of market prices into a general theory of human choice.
For a long time men failed to realize that the transition from the classical theory of value to the subjective theory of value was much more than the substitution of a more satisfactory theory of market exchange for a less satisfactory one. The general theory of choice and preference goes far beyond the horizon which encompassed the scope of economic problems as circumscribed by the economists from Cantillon, Hume, and Adam Smith down to John Stuart Mill. It is much more than merely a theory of the "economic side" of human endeavors and of man's striving for commodities and an improvement in his material well-being. It is the science of every kind of human action.
Choosing determines all human decisions. In making his choice man chooses not only between various material things and services. All human values are offered for option. All ends and all means, both material and ideal issues, the sublime and the base, the noble and the ignoble, are ranged in a single row and subjected to a decision which picks out one thing and sets aside another. Nothing that men aim at or want to avoid remains outside of this arrangement into a unique scale of gradation and preference.
The modern theory of value widens the scientific horizon and enlarges the field of economic studies.
Out of the political economy of the classical school emerges the general theory of human action, praxeology[1].
The economic or catallactic problems [2] are embedded in a more general science, and can no longer be severed from this connection. No treatment of economic problems proper can avoid starting from acts of choice; economics becomes a part, although the hitherto best elaborated part, of a more universal science, praxeology.
[1] The term praxeology was first used in 1890 by Espinas. Cf. his article "Les Origines de law technologies," Revue Philosophique, XVth year, XXX, 114-115, and his book published in Paris in 1897, with the same title.
[2] The term Catallactics or the Science of Exchanges was first used by Whately. Cf. his book Introductory Lectures on Political Economy (London, 1831), p. 6.

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The doctrine of liberalism #1

In the USA the term liberalism has long been stolen by the enemies of liberty. Fortunately, in Australia, this term remains largely (but not entirely) intact, and represents broadly its classical meaning; although I notice significant contamination with social liberalism.

In England, this term has been hijacked by "social" liberals. It is hard to say who represents the Whigs now. Perhaps none. The Conservative party (Tory) does seem to express a few key ideas of liberalism now and then (e.g. as they did through Thatcher), but they are not really the Whigs. Liberty is not their natural political stance.

A project to reclaim the term liberalism was initiated over half a century ago, and is still underway. 

In 1962, after having established the Mont Pelerin society in 1947 (the year of India's independence, coincidentally), Von Mises, the elder Austrian economist (Hayek is the younger one – far more widely known than Mises) published an English translation of his book, Liberalismus which he had first published in the German language in 1927. The book is called, simply: Liberalism.

Writing in German is not the best way to influence the lay public. So, fortunately, this edition helped start a chain of events that has revived liberalism once again. The books' third edition (in 1985) is now freely available here at the Mises institute

I've not yet read the book but suspect that I could use some of its sections for a primer on liberty that I'm trying to prepare for India.

Since it is inconvenient to make notes in a PDF file, I've converted the PDF version into Word for my own personal purposes, and have uploaded it here. I'll provide key highlights from this book in the coming days/weeks, not necessarily in the order in which these appear in the book.

Let me begin with this brief extract:

Liberalism is not a completed doctrine or a fixed dogma. On the contrary: it is the application of the teachings of science to the social life of man. And just as economics, sociology, and philosophy have not stood still since the days of David Hume, Adam Smith, David Ricardo, Jeremy Bentham, and Wilhelm Humboldt, so the doctrine of liberalism is different today from what it was in their day, even though its fundamental principles have remained unchanged.

The philosophers, sociologists, and economists of the eighteenth and the early part of the nineteenth century formulated a political program that served as a guide to social policy first in England and the United States, then on the European continent, and finally in the other parts of the inhabited world as well. Nowhere was this program ever completely carried out. Even in England, which has been called the homeland of liberalism and the model liberal country, the proponents of liberal policies never succeeded in winning all their demands. In the rest of the world only parts of the liberal program were adopted, while others, no less important, were either rejected from the very first or discarded after a short time. Only with some exaggeration can one say that the world once lived through a liberal era. Liberalism was never permitted to come to full fruition.

Nevertheless, brief and all too limited as the supremacy of liberal ideas was, it sufficed to change the face of the earth. A magnificent economic development took place. The release of man’s productive powers multiplied the means of subsistence many times over. On the eve of the World War (which was itself the result of a long and bitter struggle against the liberal spirit and which ushered in a period of still more bitter attacks on liberal principles), the world was incomparably more densely populated than it had ever been, and each inhabitant could live incomparably better than had been possible in earlier centuries. The prosperity that liberalism had created reduced considerably infant mortality, which had been the pitiless scourge of earlier ages, and, as a result of the improvement in living conditions, lengthened the average span of life.

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America’s forthcoming mendicancy is unavoidable, it would appear

I'm reproducing my comment on I bet Ludwig von Mises can get more fans than John Maynard Keynes Facebook page in relation to an article that totally misrepresented von Mises on

Its a shame that the comments section is closed on Salon. I'd have liked to comment. Americans need to be reminded that Mises is no stranger but someone in the long tradition of liberty that laid the foundations of USA. Jefferson, even Washington, would have fully embraced Mises. The damage done by Keynes (and his followers like Krugman) to America will be written about in another 100 years when it becomes a mendicant nation, begging before nations like India and China for crumbs. This endless violation of the basic laws of economics by American policy makers will not end well.

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