Why I believe in Austrian economics

Bryan Caplan has written a piece criticizing Austrian economics, apparently preferring the “neoclassical economics” of Hayek over Ludwig von Mises and Murray Rothbard. I’m going to parse out my reaction to a couple of the points he thinks he made:

“Why I Am Not an Austrian Economist”
http://econfaculty.gmu.edu/bcaplan/whyaust.htm
Hans-Hermann Hoppe, arguing for Rothbard’s approach, makes a subtly stronger claim: “Pareto-optimality is not only compatible with methodological individualism; together with the notion of demonstrated preference, it also provides the key to (Austrian) welfare economics and its proof that the free market, operating according to the rules just described, always, and invariably so, increases social utility, while each deviation from it decreases it.”[21] (emphasis mine) Strictly speaking, however, Rothbard could only claim the welfare effects of government intervention upon “social utility” are indeterminate; i.e., since the victim loses and the intervener gains, it is impossible to say anything about social utility without making a verboten interpersonal welfare comparison.

There is no way to deny that the free market increases utility over state interference in the free market processes, for two reasons: any transaction, for any selected individual, based on coercion, has two consequences.

Any coercive “tax”, for example, reduces the trade opportunities for a subset of the affected individuals. Take any set of individuals, say A, B, and C. Along comes Mr. D and lays a tax on them. That reduces the opportunities for all three of A, B and C to increase their net value, according to whatever their *individual* perception of value is, to the extent that would have happened without D robbing the “tax” from them.

Say A and C would have “paid” that “tax” for the same thing D used it for, the net value is less because B sees a degrade in the value.

If you want to include theft as a legitimate value to calculate, though, all bets are off and I’m sure this is Mr. Caplan’s mistake. There are no humans so omniscient as God as to judge the value for everyone as optimal no matter what, even considering only the opportunities that government must steal in order to give resources to third parties as in a welfare state.

No doubt Rothbard’s arguments rest not at all on some so-called imaginary “objective” measure of value that a Keynesian needs, or any welfare-supporting argument. You have to pretend you don’t understand the logical construction of marginal value based in the action taken.

And action taken is not “behaviorist”, if you mean “behaviorist” in the sense of any arrogant pretension of assuming any knowledge about patterns or motivations as most non-Austrian economists. You can measure what *did* happen, but you cannot measure what *might* happen with enough certitude to justify dictating to individuals what they can or must do. Even if you had a utilitarian argument in favor of it (which falls before the logic of “human action” principles), it fails the coercion test.

This is an important point, because it shows that Rothbard’s welfare economics provides a much weaker defense of the free market than usually assumed. In particular, Rothbard’s own theory strips him of the ability to call any act of government “inefficient.” By denying the ability to endorse state action in the name of efficiency, Rothbard also implicitly denies the ability to reject state action in the name of efficiency. This is no logical flaw in Rothbard’s theory (although it does reveal a logical flaw in Hoppe’s presentation of Rothbard’s theory), but it’s political implications are rather different than commonly assumed: Rothbard’s welfare criterion justifies agnosticism about – not denial of – the benefits of statism.

So Capman thinks he has shown a weakness in Rothbard’s welfare economics and he has done no such thing. The indoctrination of government institutions and centuries of self-justifying kings and rulers is strong in the training of youth.

It will not last, it cannot.

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