Does the Austrian school of Mises and Rothbard or the Chicago school provide better economic arguments for libertarianism?
If by "better" we mean "scientific" then the answer is given by Mark Blaug who says that Austrian economics is “an antiempirical undertone in the history of continental economics that is wholly alien to the very spirit of science”.
With the Austrians, one can neither evaluate the results, nor give empirical proofs, the only admissible argument is to say that it is obvious that freedom is good.
But if this evidence is not scientific (empirical), it can only be psychological.
And it's not because psychologically we see things this way that things are like that.
Post strictum: If we can't evaluate the results, I wonder how we can conclude that freedom is better?
The Austrian argument would be that the axioms, rules of human behavior, are observed, if only in ourselves, which is a reason to support conclusions deduced from them. Mathematics is not empirical — does that make it unscientific?
Mises argues that the empirical method can't work for economics because there are too many uncontrolled variables to do controlled experiments. I think he was mistaken, but it is worth at least looking at his arguments.
"Can't work" is too strong but the Austrians have a strong point. The history of standard economics, especially as seen in its models and predictions, suggests that economics in the 21st century is still unable to make reliable predictions. Economists' forecasts of even very near-term variables such as GDP growth, unemployment, and inflation are no better than random, maybe worse.
There are predictions economics cannot make reliably, other that it can, such as the effects of price controls or of printing lots of money. An economy is a very complicated system.
“rules of human behavior, is a reason to support conclusions”
A reason, yes, necessary but not sufficient.
Science is logic + empirical refutation.
Mathematics is not scientific; it is only a logical language. The logic of action (rules of human behavior) is not scientific, it is not sufficient to predict anything. Empirical hypotheses must be added, for example an empirical hypothesis on the convexity of the production set and preferences, a budgetary constraint, an assumption on the concrete intensity of competition, on the absence of externalities, etc… Only then can we support conclusions, show that freedom leads to the optimum. The logic of action alone cannot do this.
The "logic of action" is insufficient to deduce empirical implications, and therefore to build an economic science. It is insufficient, it is only when combined with other empirical hypotheses that we can deduce refutable empirical predictions and make it a science.
The "logic of action" is insufficient to deduce the normative implication that freedom is a good thing. To say that freedom is good, we need to have a way of evaluating, a norm. Of course, we cannot make inter-individual comparisons of utility, but we can use the Pareto criterion to conclude that the competitive equilibrium is optimal.
"but we can use the Pareto criterion to conclude that the competitive equilibrium is optimal."
I don't think so. The proposition "this outcome could not be improved for one person without making someone else worse off," which is what Pareto-optimal means, is true of lots of outcomes — a world with laissez-faire plus one exception, say a steel tariff, cannot be improved without making the beneficiaries of the exception worse off. To get a stronger criterion you need to replace Pareto with Hicks/Kaldor aka Potential Pareto. But since the compensating payments cannot actually be made, that's just a way of pretending to do Pareto while actually doing economic efficiency, introduced by Marshall as economic improvement and depending for its justification on interpersonally comparable utility.
I have always thought that Pareto-optimality was a bizarre and, in practice, useless concept. Maybe even worse than "perfect competition" with its impossible conditions.
Yes, you are right, very often, "compensating payments cannot actually be made". But this is a practical problem, not a theoretical one.
Whereas the impossibility of evaluating theoretically prohibits saying that freedom is better. This is the heart of your problem. This is a fundamental reason why I think the Chicago school provides a better argument than the Austrian school.
A theoretical impossibility seems to me to be more problematic than a practical difficulty, especially since sometimes compensatory payments are possible. For example, in Europe, we want to move from unanimous voting (which satisfies the Pareto criterion) to coalitions (which requires negotiations that take place "as if" compensatory payments are made).
If compensating payments can be made than you make them and the change is an actual Pareto improvement. The only situations where you need Hicks/Kaldor to support a change are ones where they cannot be made, which is virtually all large number situations.
It is a theoretical problem because if you are going to make compensating payments that affects the incentives of the actors, moving you away from the H/K optimum. Better to admit that you are adding up utilities as per Marshall than to pretend you are not.
Can you offer any other convincing reason why a H/K improvement without compensating payments is a good thing?
A lump sum payment does not affect the recipients' incentives and it is financed by a Pigouvian tax on the others. For example, petrol is taxed to reduce CO2 emissions and an "energy cheque" is given to the poorest.
Inter-individual comparisons of utilities are impossible, OK, but I will add: for the moment. Here again, a practical problem, not a theoretical one.
One reason why an H/K improvement without compensatory payments is a good thing? No, because it is not a normative criterion but a descriptive one.
Neither side “supports” libertarian conclusions. Both sides make contributions to the theories that explain such conclusions. Austrian school economics is at the a-priori end and the Chicago school is at the empirical end of what is better seen as a continuum rather than exclusive alternatives.
Several things occur to me about your proposed question:
* Economics as such doesn't provide arguments for or against libertarianism. It provides constraints on what is possible, but given a range of possibilities, which one is desirable calls for an evaluation, which it isn't the business of economics to provide.
* Even stipulating certain things as desirable, it seems as if the question between Austria and Chicago is not "Which one is more likely to lead to the conclusion that libertarian leads to desirable outcomes?" but "Which one is true?" or, even behind that, "Which one's methodology is valid?"
* However, I'm going to say that utilitarianism, understood in the original Benthamite terms, is in fact incompatible with libertarianism. A basic utilitarian approach is to require A to be made worse off to confer a greater benefit on B, or to confer small benefits on a lot of B1, B2, ..., Bn for sufficiently large n. That is, utilitarianism is a sacrificial ethic. I think Rand was right to say that a sacrificial ethic inherently favors coercion, and to call for a nonsacrificial ethic.
* I've seen the puzzles you propose about how to apply libertarian ethical principles in various situations. But it strikes me that many of them amount to versions of the paradox of the bald man. Outside of mathematics and perhaps parts of theoretical physics, every conceptual argument is going to involve concepts with boundary cases, such as "If I shine my flashlight onto your front door, have I initiated force?" But in dealing with the real world, we have to use concepts and make judgment calls. That's why prudence, the ability to exercise judgment in applying principles, is a central virtue in Aristotelian ethics and a necessary element in law. Trying to construct mathematically rigorous arguments in deductive form isn't a useful path for our own clarity of thought on ethics or law.
All of this seems to be by way of a prolegomena to actually evaluating the merits of Austrian economics in terms of methodology or theory. But I think that that's really a more productive task.
Austrians emphasize that you cannot compare interpersonal utility. This makes it more difficult to show that a policy makes things better or worse. But surely Austrians also emphasize the point that people in a free market expect to benefit from a voluntary transaction. Therefore, any policy that restricts that freedom can be expected to make them worse off.
I used to be well steeped in Austrian economics in the 1980s but am very rusty now, but this seems correct to me.
X bidding up the price of Y's house makes Z, who also wants it, worse off, yet the transaction is voluntary. To show that it produces net benefits you have to be able to add up the costs and benefits of all three. Without some way of comparing personal utilities, or some equivalent, you cannot show that a change is an improvement as long as it makes at least one person worse off.
I was talking about a two-party exchange. You are right, of course, that effects on third parties could be positive or negative.
To dismiss the Austrian points about gains from exchange, you would require an assumption that third-party effects are more negative than positive generally. And to push that point, you would have to be anti-market.
Whether influenced more by Chicago or Austria, I think the vast majority of libertarian-adjacent people would agree that the presumption should be that free exchanges are mutually beneficial, and likely to be overall beneficial -- in the absence of genuine and substantial externalities.
Personally, I don't believe that you can add up costs and benefits objectively or accurately, but you can get a sense of what they are and their general magnitude. Much more than than is "the pretense of science" as some obscure person once said. This is one reason (not the only one) why I am not a utilitarian. (Note: David, I know you have explained that you don't consider yourself a utilitarian -- but you do place consequences as extremely important in decision making. So I'm not implying that you are here!)
"To dismiss the Austrian points about gains from exchange, you would require an assumption that third-party effects are more negative than positive generally. "
What does that mean? If effects on different people can't be added up, how can you say whether the net third-party effect is positive or negative?
The economic argument is to show that the gain to the gainers, measured by the dollars they would pay to get it, is greater than the loss to the losers, similarly measured. You then argue that in most contexts there is no reason to expect a dollar to represent more utility to one random person than to another. But that breaks down in contexts where there is a reason to expect the losers to have a higher marginal utility of income than the gainers, most obviously if the losers are poorer than the gainers.
There are a variety of problems with that approach, which I discuss in Chapter 2 of _Law's Order_ (http://www.daviddfriedman.com/Laws_Order_draft/laws_order_ch_2.htm), but it is a more coherent argument than "to push that point, you would have to be anti-market", since part of the point of the analysis is showing if you should be pro-market.
I'm not sure why we're not connecting. I'm not assuming Austrians are correct about measuring utility, if that's the problem. (The first part of your reply suggests you are talking to me as if I were an Austrian.) I agree with the Austrians to the extent that I don't believe you can measure "utility" -- what are its units and what physical reality are they based on? -- with all the different states that includes. But I also think it's silly to deny that you can make some rough comparisons.
To take it to an extreme: We are in a situation where one person is enjoying the pleasure of stroking a cat but could not do so unless another person is being tortured. (Not quite like LeGuin's "The One's Who Walk Away From Omelas" but that strikingly highlights a related point.) Of course any sane person will agree that the negative "utility" is far greater than the positive utility in this peculiar and implausible situation.
I'm not sure why you push back against my point that it requires a generally anti-market view to see voluntary transactions as primarily leading to poor outcomes. You don't have to be able to precisely measure costs and benefits (although preferences expressed through money help) to have a sense of how the balances of costs and benefits works out and that some outcomes are better than others. Of course you can show examples where the general assumption breaks down. But if you think it breaks down most of the time -- or more often than in any other possible system -- then surely that is an anti-market view?
Anyway, I will read ch.2 of Law's Order. It should be on my reading list anyway! By the way, I think my argument is entirely coherent but, undoubtedly, your chapter-long treatment will be deeper than my short-blog-reply argument. They are different animals.
That seems to me to misconceive what the "transaction" is. If Z purchases the house, that is a transaction between Z and Y. If Z drops out, and X purchases the house, that is a transaction between X and Y. But X making an offer for the house is not a transaction between X and Y, and still less a transaction between X and Z. Either of the actual transactions will make the actual participants mutually better off; that's the original point of the notion of a Pareto improvement. Saying that no one else should have any feelings of disappointment seems an overgeneralization: It can hardly be useful in analyzing markets, because it applies so broadly that a very large share of market transactions could be forbidden by it.
What seems to be involved in this notion is the idea that if A wants something and hopes or aspires to get it, then if their aspirations are not met, their disappointment makes them worse off. So, for example, if the "something" is sexual relations with B, and B says No, B has disappointed A and made A worse off. But the only way to avoid this is to say that A's mere desire gives A a right to fulfillment. But then B might be disappointed by A's wishes being granted! This kind of thinking turns every case where people want different things into a "conflict." And I think such thinking is overbroad.
You are talking about rights. I am talking about what things make people better or worse off. If A wants to sleep with B, B's refusal makes A worse off than B's acceptance would. If you want to claim that freedom makes people better off in that particular case, you have to argue that the value to B of not sleeping with A is greater than the value to A of sleeping with B. If you believe that costs and benefits to different people cannot be compared you cannot also believe that laissez faire or free trade makes people overall better off because "overall better off" doesn't mean anything.
You can argue that costs are comparable but that, in practice, there is no way to compare specific costs, but you then have the option of indirect arguments, such as Marshall's for economic improvement, to provide evidence the net effect of something is good or bad.
How does "better off" work here? What's the point of comparison?
If A and B don't have an established sexual relationship, the baseline is that A isn't having sexual relations with B. If B then doesn't want to have sexual relations, A is left in the status quo ante. Their situation hasn't changed for the worse. I don't see how you can be entitled to take the zero point as "B is having sexual relations with A" when A and B aren't in a relationship. The choice is not "better off" versus "worse off" but "better off" versus "not better off."
It might seem different if A and B are in a sexual relationship: that B deciding to break it off makes A worse off. But that assumes that the relationship is one in which A and B have lastingly chosen to consent to sex with each other. At some point, though, they weren't in such a relationship, or any sexual relationship. Would it make B better off to enter into a relationship where they will always has sexual relations when A wants them? That seems like a major surrender of control; it doesn't seem as if it would be to B's benefit to accept it. If B hasn't done so, then they're in a situation where each new sexual act requires a new agreement, and if B says, "No, I don't want to now," then A is not made worse off: They're simply not made better off.
And I think that last analysis works for almost all transactions. Hardly any transactions are made on the basis that once you engage in one transaction, you have to engage in similar transactions forever after.
“Since Austrians means economists are committed to the idea that economic conclusions must be based on theory not evidence, an Austrian economist qua economist cannot use the fact that policies have had bad effects in the past as evidence that they will in the future. “
The categories here are ambiguous. Economic conclusions include theoretical conclusions, estimates, predictions, policy recommendations, and historical reports. My steelman would be that even if empirical data tempted an Austrian theorist to revise a theory, the revised theory would not be based on the data, but on a priori propositions; and if estimates or predictions were to be made, past data might be usefully employed in some way. But such predictions are profoundly conjectural, and data alone can’t refute a theory.
This can still be interpreted as making the theory tautological, which is the basic objection. A more charitable view is that a theory can only be criticized in comparison with an alternative theory. So the framing seems to matter. Austrians are not the only economists who say it takes a theory to beat a theory.
So what would it take to get Austrians to revise their theories, or abandon them for new ones? I’m not sure. But I note that even non-Austrians, including quite a number of economists with a more leftish bias, have not abandoned some basic theoretical approaches that are not well supported by data.
Milton Friedman was quite willing to make use of theoretical assumptions that contradicted empirical reality. Of course, he wanted to use these to generate interesting testable hypotheses, and then test them. That project seems feasible, but it isn't clear what the universality of such hypotheses is. They are either compatible with the data or not, but a large (infinite?) number of such hypotheses exist, and no usable theory could include an exhaustive list of potentially relevant factors. Inevitably, exogenous factors can swamp a particular historical instance.
But this is out of my depth. Perhaps our host can clarify.
The connection between theory and policy recommendations is particularly opaque for me. Some people seem to genuinely believe that libertarianish policy recommendations have trended toward disaster, while the alternatives muddle through depending on the honesty and competence of the implementers. I'd like to see a real test where the subjects get to choose somehow, but It is less about refuting false hypotheses and more about letting people try things out and stick with what they like. I realize this is not possible in all cases, but I suspect it could be more widely practiced than it is.
Humans can make mistakes in their reasoning — Rothbard makes many, Mises at least one I have spotted. If your theory produces a prediction that is inconsistent with the data that could mean that you made a mistake in getting from your axioms to your conclusion.
Sure. But the inconsistency being caused by a logic error is one possible explanation. Another is that the data are flawed. A third is that one of the premises is false. Maybe there are more.
But if I really had my finger on this, I’d be able to come up with a historical example when researchers stuck with an old theory in spite of anomalous data and later were vindicated. Or at least make my point more briefly and clearly. I’ve never been able to make up my mind which side I agree with, or whether I think they’re both wrong.
>Chicago school economics provides arguments to show that libertarian policies generally increase economic efficiency, hence that they are likely to increase utility, for which economic efficiency can be viewed as a proxy.
Rothbard: "For there are several layers of grave fallacy involved in the very concept of efficiency as applied to social institutions or policies: (1) the problem is not only in specifying ends but also in deciding whose ends are to be pursued; (2) individual ends are bound to conflict, and therefore any additive concept of social efficiency is meaningless; and (3) even each individual’s actions cannot be assumed to be “efficient”; indeed, they undoubtedly will not be. Hence, efficiency is an erroneous concept even when applied to each individual’s actions directed toward his ends; it is a fortiori a meaningless concept when it includes more than one individual, let alone an entire society."
In the end, austrian economics really shines when it becomes radically subjective and deconstructs economic concepts like efficiency or utility, demonstrating their imaginary/unrealistic nature.
Well, my text is a detailed response to such texts and views. Feel free to read it.
Friedman's conclusion:
"In order for economists to conclude that abolishing a tariff or a minimum wage law or practically any other change is (or is not) good for the country, an improvement, they must be willing to bite the bullet, treat utility as interpersonally comparable."
The bullet to bite here is to take intensive subjective judgments and treat them as objective and extensive. You can obviously do this. Nietzsche would call it 'eine Zurechtmachung des Geschehens' (a beneficial falsification of events). I mean, that is not science, but politics.
Evaluating outcomes - I'm not sure where you get the idea that Austrians can't explain how things like tariffs and rent control make us worse off. Rothbard devotes full attention to the harms of such government intervention in his supplement to "Man, Economy and State" titled "Power and Market". I think the main difference is that the Chicago school, by attempting to model economic outcomes empirically, opens the door to the possibility that some government interventions may make us better off. The Austrian school on the other hand rules that out a priori - economic theory shows us that any intervention in the free market makes consumers worse off by definition.
Evidence as argument - I think the crucial insight of the Austrian school is that the harms of intervention are not always visible in the data but they are still there, only discoverable by theoretical analysis rather than empirical observation. So e.g. after rent control is imposed you might still find that housing supply increases and rents fall even in uncontrolled properties. However, this does not prove that rent control did no harm - presumably other factors are responsible for the continued fall in housing prices such as a cut in the property tax rate. What theory can tell us is that housing supply would have increased even more and rents fallen even further in uncontrolled properties without the imposition of the rent control.
Evidence from accomplishment - This seems to be your strongest argument. We've certainly seen greater influence from Friedman on monetary policy than from Hayek or Mises, for instance. But from the Austrian perspective it's not clear how much this is a good thing. At best our monetary overseers manage the expropriation of wealth in such a way as to avoid major inflationary shocks that would upend society. Instead, people are robbed quietly and gradually so they don't suspect too much.
Public Choice remains a less accurate name than Government Choice would have been—too bad Buchanan didn’t use that title. The Public is NOT the government. We would have more choices for the public with less government involvement in schools, healthcare, and housing.
"Hence, an Austrian economist understands that it is impossible to show that a tariff, a minimum wage, or rent control makes the U.S. worse off. A Chicago economist doesn't."
My claim is that a Chicago economist can show a reason to believe that those things lower total utility, although not a proof that they do. Do you agree and object that one cannot show that lowering total utility makes the US worse off, indeed cannot show that anything short of making some people worse off and nobody better off, should count, or disagree?
My words were "can show a reason to believe." If you limit "show" to "show with certainty" there is very little that you can show.
Is it your view that all statements by economists of all schools that something, such as a tariff or a minimum wage law, is bad or is good are unjustified? That would include Rothbard's statement that:
"We simply conclude that the relative extent of areas within or between firms on the free market will be precisely that proportion most conducive to the well-being of consumers and producers alike." (Man, Economy and State p. 65)
Yes, your LATER words were "can show a reason to believe."
Your ORIGINAL words were:
"Hence an Austrian economist cannot offer an economic argument to show that a tariff, a minimum wage, or rent control makes the U.S. worse off. A Chicago economist can."
Not "show a reason to believe X," but "show X."
Since total utility is incalculable (being composed of incommensurable units), neither school can "show that a tariff, a minimum wage, or rent control makes the U.S. worse off." The Austrian school admits that. The Chicago school doesn't.
By the “Chicago School” do you just mean mainstream neoclassical economics and freshwater macroeconomics (new classical/RBC)?
Or do you mean the specific “Chicago approach” which might include price theory, public choice theory, preference for markets over intervention, and emphasis on structural models relative to reduced-form approaches?
For the first debate I wanted to make it "Marshallian economics." Gene argued, probably correctly, that most of the audience at Porcfest would not know what that meant, so I agreed to make it Chicago economics.
In this post, I think the only point which might be limited to Chicago economists is footnote 4, since Chicago economists are more likely to be pro-market than other Marshallians. But I was taking advantage of Gene's terminology in the first debate, "The Austrian economics of Mises and Rothbard," to limit the other side to the Misesian branch of Austrian economics, both because I don't know enough about other variants and because Hayek arguably has been influential, mostly via _The Road to Serfdom_.
On the issue of Austrian vs. Chicago economics: although I recall not loving the book, Mark Skousen's "Vienna and Chicago" might be a helpful resource. https://www.amazon.com/Vienna-Chicago-Friends-Foes-Free-Market/dp/0895260298
It does seem like Hayekian economics might be more useful than Misean or Rothbardian. When I think “Austrian Economics” I think Hayek, at least.
Your problem is:
Does the Austrian school of Mises and Rothbard or the Chicago school provide better economic arguments for libertarianism?
If by "better" we mean "scientific" then the answer is given by Mark Blaug who says that Austrian economics is “an antiempirical undertone in the history of continental economics that is wholly alien to the very spirit of science”.
With the Austrians, one can neither evaluate the results, nor give empirical proofs, the only admissible argument is to say that it is obvious that freedom is good.
But if this evidence is not scientific (empirical), it can only be psychological.
And it's not because psychologically we see things this way that things are like that.
Post strictum: If we can't evaluate the results, I wonder how we can conclude that freedom is better?
The Austrian argument would be that the axioms, rules of human behavior, are observed, if only in ourselves, which is a reason to support conclusions deduced from them. Mathematics is not empirical — does that make it unscientific?
Mises argues that the empirical method can't work for economics because there are too many uncontrolled variables to do controlled experiments. I think he was mistaken, but it is worth at least looking at his arguments.
"Can't work" is too strong but the Austrians have a strong point. The history of standard economics, especially as seen in its models and predictions, suggests that economics in the 21st century is still unable to make reliable predictions. Economists' forecasts of even very near-term variables such as GDP growth, unemployment, and inflation are no better than random, maybe worse.
There are predictions economics cannot make reliably, other that it can, such as the effects of price controls or of printing lots of money. An economy is a very complicated system.
“rules of human behavior, is a reason to support conclusions”
A reason, yes, necessary but not sufficient.
Science is logic + empirical refutation.
Mathematics is not scientific; it is only a logical language. The logic of action (rules of human behavior) is not scientific, it is not sufficient to predict anything. Empirical hypotheses must be added, for example an empirical hypothesis on the convexity of the production set and preferences, a budgetary constraint, an assumption on the concrete intensity of competition, on the absence of externalities, etc… Only then can we support conclusions, show that freedom leads to the optimum. The logic of action alone cannot do this.
The "logic of action" is insufficient to deduce empirical implications, and therefore to build an economic science. It is insufficient, it is only when combined with other empirical hypotheses that we can deduce refutable empirical predictions and make it a science.
The "logic of action" is insufficient to deduce the normative implication that freedom is a good thing. To say that freedom is good, we need to have a way of evaluating, a norm. Of course, we cannot make inter-individual comparisons of utility, but we can use the Pareto criterion to conclude that the competitive equilibrium is optimal.
"but we can use the Pareto criterion to conclude that the competitive equilibrium is optimal."
I don't think so. The proposition "this outcome could not be improved for one person without making someone else worse off," which is what Pareto-optimal means, is true of lots of outcomes — a world with laissez-faire plus one exception, say a steel tariff, cannot be improved without making the beneficiaries of the exception worse off. To get a stronger criterion you need to replace Pareto with Hicks/Kaldor aka Potential Pareto. But since the compensating payments cannot actually be made, that's just a way of pretending to do Pareto while actually doing economic efficiency, introduced by Marshall as economic improvement and depending for its justification on interpersonally comparable utility.
I have always thought that Pareto-optimality was a bizarre and, in practice, useless concept. Maybe even worse than "perfect competition" with its impossible conditions.
Yes, you are right, very often, "compensating payments cannot actually be made". But this is a practical problem, not a theoretical one.
Whereas the impossibility of evaluating theoretically prohibits saying that freedom is better. This is the heart of your problem. This is a fundamental reason why I think the Chicago school provides a better argument than the Austrian school.
A theoretical impossibility seems to me to be more problematic than a practical difficulty, especially since sometimes compensatory payments are possible. For example, in Europe, we want to move from unanimous voting (which satisfies the Pareto criterion) to coalitions (which requires negotiations that take place "as if" compensatory payments are made).
If compensating payments can be made than you make them and the change is an actual Pareto improvement. The only situations where you need Hicks/Kaldor to support a change are ones where they cannot be made, which is virtually all large number situations.
It is a theoretical problem because if you are going to make compensating payments that affects the incentives of the actors, moving you away from the H/K optimum. Better to admit that you are adding up utilities as per Marshall than to pretend you are not.
Can you offer any other convincing reason why a H/K improvement without compensating payments is a good thing?
A lump sum payment does not affect the recipients' incentives and it is financed by a Pigouvian tax on the others. For example, petrol is taxed to reduce CO2 emissions and an "energy cheque" is given to the poorest.
Inter-individual comparisons of utilities are impossible, OK, but I will add: for the moment. Here again, a practical problem, not a theoretical one.
One reason why an H/K improvement without compensatory payments is a good thing? No, because it is not a normative criterion but a descriptive one.
Neither side “supports” libertarian conclusions. Both sides make contributions to the theories that explain such conclusions. Austrian school economics is at the a-priori end and the Chicago school is at the empirical end of what is better seen as a continuum rather than exclusive alternatives.
https://jclester.substack.com/p/critical-rationalism?utm_source=publication-search
Several things occur to me about your proposed question:
* Economics as such doesn't provide arguments for or against libertarianism. It provides constraints on what is possible, but given a range of possibilities, which one is desirable calls for an evaluation, which it isn't the business of economics to provide.
* Even stipulating certain things as desirable, it seems as if the question between Austria and Chicago is not "Which one is more likely to lead to the conclusion that libertarian leads to desirable outcomes?" but "Which one is true?" or, even behind that, "Which one's methodology is valid?"
* However, I'm going to say that utilitarianism, understood in the original Benthamite terms, is in fact incompatible with libertarianism. A basic utilitarian approach is to require A to be made worse off to confer a greater benefit on B, or to confer small benefits on a lot of B1, B2, ..., Bn for sufficiently large n. That is, utilitarianism is a sacrificial ethic. I think Rand was right to say that a sacrificial ethic inherently favors coercion, and to call for a nonsacrificial ethic.
* I've seen the puzzles you propose about how to apply libertarian ethical principles in various situations. But it strikes me that many of them amount to versions of the paradox of the bald man. Outside of mathematics and perhaps parts of theoretical physics, every conceptual argument is going to involve concepts with boundary cases, such as "If I shine my flashlight onto your front door, have I initiated force?" But in dealing with the real world, we have to use concepts and make judgment calls. That's why prudence, the ability to exercise judgment in applying principles, is a central virtue in Aristotelian ethics and a necessary element in law. Trying to construct mathematically rigorous arguments in deductive form isn't a useful path for our own clarity of thought on ethics or law.
All of this seems to be by way of a prolegomena to actually evaluating the merits of Austrian economics in terms of methodology or theory. But I think that that's really a more productive task.
Austrians emphasize that you cannot compare interpersonal utility. This makes it more difficult to show that a policy makes things better or worse. But surely Austrians also emphasize the point that people in a free market expect to benefit from a voluntary transaction. Therefore, any policy that restricts that freedom can be expected to make them worse off.
I used to be well steeped in Austrian economics in the 1980s but am very rusty now, but this seems correct to me.
X bidding up the price of Y's house makes Z, who also wants it, worse off, yet the transaction is voluntary. To show that it produces net benefits you have to be able to add up the costs and benefits of all three. Without some way of comparing personal utilities, or some equivalent, you cannot show that a change is an improvement as long as it makes at least one person worse off.
I was talking about a two-party exchange. You are right, of course, that effects on third parties could be positive or negative.
To dismiss the Austrian points about gains from exchange, you would require an assumption that third-party effects are more negative than positive generally. And to push that point, you would have to be anti-market.
Whether influenced more by Chicago or Austria, I think the vast majority of libertarian-adjacent people would agree that the presumption should be that free exchanges are mutually beneficial, and likely to be overall beneficial -- in the absence of genuine and substantial externalities.
Personally, I don't believe that you can add up costs and benefits objectively or accurately, but you can get a sense of what they are and their general magnitude. Much more than than is "the pretense of science" as some obscure person once said. This is one reason (not the only one) why I am not a utilitarian. (Note: David, I know you have explained that you don't consider yourself a utilitarian -- but you do place consequences as extremely important in decision making. So I'm not implying that you are here!)
"To dismiss the Austrian points about gains from exchange, you would require an assumption that third-party effects are more negative than positive generally. "
What does that mean? If effects on different people can't be added up, how can you say whether the net third-party effect is positive or negative?
The economic argument is to show that the gain to the gainers, measured by the dollars they would pay to get it, is greater than the loss to the losers, similarly measured. You then argue that in most contexts there is no reason to expect a dollar to represent more utility to one random person than to another. But that breaks down in contexts where there is a reason to expect the losers to have a higher marginal utility of income than the gainers, most obviously if the losers are poorer than the gainers.
There are a variety of problems with that approach, which I discuss in Chapter 2 of _Law's Order_ (http://www.daviddfriedman.com/Laws_Order_draft/laws_order_ch_2.htm), but it is a more coherent argument than "to push that point, you would have to be anti-market", since part of the point of the analysis is showing if you should be pro-market.
I'm not sure why we're not connecting. I'm not assuming Austrians are correct about measuring utility, if that's the problem. (The first part of your reply suggests you are talking to me as if I were an Austrian.) I agree with the Austrians to the extent that I don't believe you can measure "utility" -- what are its units and what physical reality are they based on? -- with all the different states that includes. But I also think it's silly to deny that you can make some rough comparisons.
To take it to an extreme: We are in a situation where one person is enjoying the pleasure of stroking a cat but could not do so unless another person is being tortured. (Not quite like LeGuin's "The One's Who Walk Away From Omelas" but that strikingly highlights a related point.) Of course any sane person will agree that the negative "utility" is far greater than the positive utility in this peculiar and implausible situation.
I'm not sure why you push back against my point that it requires a generally anti-market view to see voluntary transactions as primarily leading to poor outcomes. You don't have to be able to precisely measure costs and benefits (although preferences expressed through money help) to have a sense of how the balances of costs and benefits works out and that some outcomes are better than others. Of course you can show examples where the general assumption breaks down. But if you think it breaks down most of the time -- or more often than in any other possible system -- then surely that is an anti-market view?
Anyway, I will read ch.2 of Law's Order. It should be on my reading list anyway! By the way, I think my argument is entirely coherent but, undoubtedly, your chapter-long treatment will be deeper than my short-blog-reply argument. They are different animals.
That seems to me to misconceive what the "transaction" is. If Z purchases the house, that is a transaction between Z and Y. If Z drops out, and X purchases the house, that is a transaction between X and Y. But X making an offer for the house is not a transaction between X and Y, and still less a transaction between X and Z. Either of the actual transactions will make the actual participants mutually better off; that's the original point of the notion of a Pareto improvement. Saying that no one else should have any feelings of disappointment seems an overgeneralization: It can hardly be useful in analyzing markets, because it applies so broadly that a very large share of market transactions could be forbidden by it.
What seems to be involved in this notion is the idea that if A wants something and hopes or aspires to get it, then if their aspirations are not met, their disappointment makes them worse off. So, for example, if the "something" is sexual relations with B, and B says No, B has disappointed A and made A worse off. But the only way to avoid this is to say that A's mere desire gives A a right to fulfillment. But then B might be disappointed by A's wishes being granted! This kind of thinking turns every case where people want different things into a "conflict." And I think such thinking is overbroad.
You are talking about rights. I am talking about what things make people better or worse off. If A wants to sleep with B, B's refusal makes A worse off than B's acceptance would. If you want to claim that freedom makes people better off in that particular case, you have to argue that the value to B of not sleeping with A is greater than the value to A of sleeping with B. If you believe that costs and benefits to different people cannot be compared you cannot also believe that laissez faire or free trade makes people overall better off because "overall better off" doesn't mean anything.
You can argue that costs are comparable but that, in practice, there is no way to compare specific costs, but you then have the option of indirect arguments, such as Marshall's for economic improvement, to provide evidence the net effect of something is good or bad.
I don't think that makes sense.
How does "better off" work here? What's the point of comparison?
If A and B don't have an established sexual relationship, the baseline is that A isn't having sexual relations with B. If B then doesn't want to have sexual relations, A is left in the status quo ante. Their situation hasn't changed for the worse. I don't see how you can be entitled to take the zero point as "B is having sexual relations with A" when A and B aren't in a relationship. The choice is not "better off" versus "worse off" but "better off" versus "not better off."
It might seem different if A and B are in a sexual relationship: that B deciding to break it off makes A worse off. But that assumes that the relationship is one in which A and B have lastingly chosen to consent to sex with each other. At some point, though, they weren't in such a relationship, or any sexual relationship. Would it make B better off to enter into a relationship where they will always has sexual relations when A wants them? That seems like a major surrender of control; it doesn't seem as if it would be to B's benefit to accept it. If B hasn't done so, then they're in a situation where each new sexual act requires a new agreement, and if B says, "No, I don't want to now," then A is not made worse off: They're simply not made better off.
And I think that last analysis works for almost all transactions. Hardly any transactions are made on the basis that once you engage in one transaction, you have to engage in similar transactions forever after.
“Since Austrians means economists are committed to the idea that economic conclusions must be based on theory not evidence, an Austrian economist qua economist cannot use the fact that policies have had bad effects in the past as evidence that they will in the future. “
The categories here are ambiguous. Economic conclusions include theoretical conclusions, estimates, predictions, policy recommendations, and historical reports. My steelman would be that even if empirical data tempted an Austrian theorist to revise a theory, the revised theory would not be based on the data, but on a priori propositions; and if estimates or predictions were to be made, past data might be usefully employed in some way. But such predictions are profoundly conjectural, and data alone can’t refute a theory.
This can still be interpreted as making the theory tautological, which is the basic objection. A more charitable view is that a theory can only be criticized in comparison with an alternative theory. So the framing seems to matter. Austrians are not the only economists who say it takes a theory to beat a theory.
So what would it take to get Austrians to revise their theories, or abandon them for new ones? I’m not sure. But I note that even non-Austrians, including quite a number of economists with a more leftish bias, have not abandoned some basic theoretical approaches that are not well supported by data.
Milton Friedman was quite willing to make use of theoretical assumptions that contradicted empirical reality. Of course, he wanted to use these to generate interesting testable hypotheses, and then test them. That project seems feasible, but it isn't clear what the universality of such hypotheses is. They are either compatible with the data or not, but a large (infinite?) number of such hypotheses exist, and no usable theory could include an exhaustive list of potentially relevant factors. Inevitably, exogenous factors can swamp a particular historical instance.
But this is out of my depth. Perhaps our host can clarify.
The connection between theory and policy recommendations is particularly opaque for me. Some people seem to genuinely believe that libertarianish policy recommendations have trended toward disaster, while the alternatives muddle through depending on the honesty and competence of the implementers. I'd like to see a real test where the subjects get to choose somehow, but It is less about refuting false hypotheses and more about letting people try things out and stick with what they like. I realize this is not possible in all cases, but I suspect it could be more widely practiced than it is.
"and data alone can’t refute a theory. "
Humans can make mistakes in their reasoning — Rothbard makes many, Mises at least one I have spotted. If your theory produces a prediction that is inconsistent with the data that could mean that you made a mistake in getting from your axioms to your conclusion.
Sure. But the inconsistency being caused by a logic error is one possible explanation. Another is that the data are flawed. A third is that one of the premises is false. Maybe there are more.
But if I really had my finger on this, I’d be able to come up with a historical example when researchers stuck with an old theory in spite of anomalous data and later were vindicated. Or at least make my point more briefly and clearly. I’ve never been able to make up my mind which side I agree with, or whether I think they’re both wrong.
Libertarianism is normative, economics is descriptive, so there is quite a is-ought gap between the two.
https://en.wikipedia.org/wiki/Is%E2%80%93ought_problem
https://utilitarianism.net/
>Chicago school economics provides arguments to show that libertarian policies generally increase economic efficiency, hence that they are likely to increase utility, for which economic efficiency can be viewed as a proxy.
Rothbard: "For there are several layers of grave fallacy involved in the very concept of efficiency as applied to social institutions or policies: (1) the problem is not only in specifying ends but also in deciding whose ends are to be pursued; (2) individual ends are bound to conflict, and therefore any additive concept of social efficiency is meaningless; and (3) even each individual’s actions cannot be assumed to be “efficient”; indeed, they undoubtedly will not be. Hence, efficiency is an erroneous concept even when applied to each individual’s actions directed toward his ends; it is a fortiori a meaningless concept when it includes more than one individual, let alone an entire society."
https://mises.org/articles-interest/myth-efficiency
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In the end, austrian economics really shines when it becomes radically subjective and deconstructs economic concepts like efficiency or utility, demonstrating their imaginary/unrealistic nature.
my take on this: https://pointcloud.substack.com/p/on-the-operationality-of-utilitarian
https://daviddfriedman.substack.com/p/utility-part-ii?utm_source=publication-search
Well, my text is a detailed response to such texts and views. Feel free to read it.
Friedman's conclusion:
"In order for economists to conclude that abolishing a tariff or a minimum wage law or practically any other change is (or is not) good for the country, an improvement, they must be willing to bite the bullet, treat utility as interpersonally comparable."
The bullet to bite here is to take intensive subjective judgments and treat them as objective and extensive. You can obviously do this. Nietzsche would call it 'eine Zurechtmachung des Geschehens' (a beneficial falsification of events). I mean, that is not science, but politics.
Evaluating outcomes - I'm not sure where you get the idea that Austrians can't explain how things like tariffs and rent control make us worse off. Rothbard devotes full attention to the harms of such government intervention in his supplement to "Man, Economy and State" titled "Power and Market". I think the main difference is that the Chicago school, by attempting to model economic outcomes empirically, opens the door to the possibility that some government interventions may make us better off. The Austrian school on the other hand rules that out a priori - economic theory shows us that any intervention in the free market makes consumers worse off by definition.
Evidence as argument - I think the crucial insight of the Austrian school is that the harms of intervention are not always visible in the data but they are still there, only discoverable by theoretical analysis rather than empirical observation. So e.g. after rent control is imposed you might still find that housing supply increases and rents fall even in uncontrolled properties. However, this does not prove that rent control did no harm - presumably other factors are responsible for the continued fall in housing prices such as a cut in the property tax rate. What theory can tell us is that housing supply would have increased even more and rents fallen even further in uncontrolled properties without the imposition of the rent control.
Evidence from accomplishment - This seems to be your strongest argument. We've certainly seen greater influence from Friedman on monetary policy than from Hayek or Mises, for instance. But from the Austrian perspective it's not clear how much this is a good thing. At best our monetary overseers manage the expropriation of wealth in such a way as to avoid major inflationary shocks that would upend society. Instead, people are robbed quietly and gradually so they don't suspect too much.
Public Choice remains a less accurate name than Government Choice would have been—too bad Buchanan didn’t use that title. The Public is NOT the government. We would have more choices for the public with less government involvement in schools, healthcare, and housing.
"Hence, an Austrian economist understands that it is impossible to show that a tariff, a minimum wage, or rent control makes the U.S. worse off. A Chicago economist doesn't."
Fixed, no charge.
My claim is that a Chicago economist can show a reason to believe that those things lower total utility, although not a proof that they do. Do you agree and object that one cannot show that lowering total utility makes the US worse off, indeed cannot show that anything short of making some people worse off and nobody better off, should count, or disagree?
My objection is that "total utility" is incalculable.
You don't have to be able to calculate it to use economics to show a reason to believe that a tariff reduces it. For an explanation, see:
https://daviddfriedman.substack.com/p/the-connection-between-economic-efficiency
Having "reason to believe" something is not "showing" something.
My words were "can show a reason to believe." If you limit "show" to "show with certainty" there is very little that you can show.
Is it your view that all statements by economists of all schools that something, such as a tariff or a minimum wage law, is bad or is good are unjustified? That would include Rothbard's statement that:
"We simply conclude that the relative extent of areas within or between firms on the free market will be precisely that proportion most conducive to the well-being of consumers and producers alike." (Man, Economy and State p. 65)
Yes, your LATER words were "can show a reason to believe."
Your ORIGINAL words were:
"Hence an Austrian economist cannot offer an economic argument to show that a tariff, a minimum wage, or rent control makes the U.S. worse off. A Chicago economist can."
Not "show a reason to believe X," but "show X."
Since total utility is incalculable (being composed of incommensurable units), neither school can "show that a tariff, a minimum wage, or rent control makes the U.S. worse off." The Austrian school admits that. The Chicago school doesn't.
By the “Chicago School” do you just mean mainstream neoclassical economics and freshwater macroeconomics (new classical/RBC)?
Or do you mean the specific “Chicago approach” which might include price theory, public choice theory, preference for markets over intervention, and emphasis on structural models relative to reduced-form approaches?
For the first debate I wanted to make it "Marshallian economics." Gene argued, probably correctly, that most of the audience at Porcfest would not know what that meant, so I agreed to make it Chicago economics.
In this post, I think the only point which might be limited to Chicago economists is footnote 4, since Chicago economists are more likely to be pro-market than other Marshallians. But I was taking advantage of Gene's terminology in the first debate, "The Austrian economics of Mises and Rothbard," to limit the other side to the Misesian branch of Austrian economics, both because I don't know enough about other variants and because Hayek arguably has been influential, mostly via _The Road to Serfdom_.