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Samizdata, derived from Samizdat /n. - a system of clandestine publication of banned literature in the USSR [Russ.,= self-publishing house]

Economics and Morality

Paul Marks points out why the likes of Paul Krugman really dislike what we have to say.

Paul Krugman (the pet economist of the New York Times) is fond of sneering at the Austrian school theory of the boom-bust cycle as a ‘moral theory’.

According to Professor Krugman, Austrian school economist believe the bust is a moral punishment for the degenerate luxury of the boom.

Of course to a ‘liberal’ like Paul Krugman moral and morality are ‘boo words’ to be sneered at (unless they are talking about George W. Bush – in which case it is quite all right to talk about lack of morality). However, Professor Krugman is (I believe) up to a bit more than this here. Ludwig Von Mises was insistent that economic science be “value free” – the methods of natural science were not suitable for economics (or so Von Mises taught), but economics (like natural science) must be kept distinct from ethics. As an economist one explained the consequences of a policy – and only then did one (as a human being) decide whether these consequences were good or bad.

So by claiming that Austrian school of economics is a moral school Professor Krugman is playing the same game that Marx and Engels played with Max Stirner – knowing he was obsessive atheist (even more so than they were) they insisted on calling him “Saint Max”, “Our Saint” (and so on). Stirner had claimed that a communist society (which he opposed) would have to be based on the ethical (‘religious’) principle that equality was good (communism as an overgrown monastery) – so Marx and Engels were trying to get their own back on someone who had argued that communism was not ‘scientific’.

There is clearly a long tradition in ‘social science’ of regarding the accusation of ‘morality’ as a deadly insult, so Professor Krugman clearly knows where to hit. However, is he totally wrong? Is there no connection between Austrian economics and morality?

Murray Rothbard often argued that there was a connection between the concept of economic law and the idea of natural law in ethics.

I will not examine Rothbardian Aristotelianism in this blog but I mention it in case any one supposes that I am the first person to try and explore the connections between economic law and moral law.

Von Mises (like Carl Menger before him) based his whole conception of economics on human choice – on the reasoning “I” which decides how to act and then acts. It is true that Hayek (being influenced by determinism) did not go along with the concept of agency (the choosing agent – the “I”) but, in practice, Hayek accepted that people should be considered “as if” they were actually different from clock work toys so he need not be examined here (although I wonder who is doing the considering if Hayek himself was not an agent-subject – but simply a complex object like the rest of us supposed to be).

Mises himself was careful to never actually formally endorse the concept of free will (to do so would have been the ultimate horror in early 1900’s Vienna) but clearly (as for the Aristotelian Menger) the whole of his thought depends on man being able to think – to consider, to make choices, to be “acting man” the agent. Agency may not be ethics but it is at least a doctrine of metaphysics. This is why both Mises and Karl Popper were amused when they were accused of being ‘positivists’. The Vienna Circle would never accept any metaphysical doctrines – indeed that was the whole point of the Vienna Circle (circles with points? oh well “you know what I mean”).

Still how does all this metaphysical stuff relate to practical ‘policy issues’? Someone might accept that not allowing private ownership of the means of production and money prices derived from voluntary interaction will (eventually) lead to mass starvation, but still hold that mass starvation does not matter (the Cambridge economist Maurice Dobbs came close to this – he accepted that socialism was not as good at giving people what they wanted as capitalism was – but held that this was not relevant, as it did not matter what people wanted) surely then Mises’ distinction between economics and morality still holds? Perhaps. But consider this example: A man, in a society in which gold is the accepted money, finds some gold (purely by chance as he is having a walk in the wilderness), and another man, in a society in which their is a fiat currency, has the government (or central bank or other politically favoured institution) print him some money (or issue it via computer).

To the Austrian school man the effects of the two men’s actions are quite different. The first man does not create a boom–bust cycle and a boom-bust cycle is exactly what the second man helps create. One can say (of course) that the first case is different because the man could use the gold for some other purpose that to make coins (he might make rings, or use the gold for an industrial process) – whereas in the second case we are dealing with an artificial made up money based on force (fiat – command).  It has been pointed out that a fiat money system need not produce a boom–bust cycle if there is no increase in the ‘monetary base’ and all financial institutions operate on the basis of 100% reserves – but this does not affect the current example.

But is not morality straining to get in here with every word? The made-up money has bad effects because it is based on coercion (i.e. the universe is structured in such a way that evil actions tend to have evil results overall). A man who finds gold may use it (to make things) or spend it to buy goods, or save it – none of these actions does any economic harm (as long as everything is voluntary), but a man who uses influence to have fiat money created for him will tend to produce horrible results – the relative share of resources in the process of voluntary interaction will fall, the relative share of resources in the process of involuntary interaction will rise – the golden rule that investment must be backed by real savings (not credit-money manipulation) may well be violated, ‘mal-investment’ – “distortion” will result and everything will be harmed. 

Certainly Mises argued that (unlike the physical universe) the world of human interaction was based on the human mind and therefore must make sense in terms of human thought (the universe may violate what seems sensible to the human mind – but human sense must make sense), but human logic (economics) and ethical thought do (at least to me) seem to be getting very close together in Austrian economics.

Is it not worthy of note that any violation of human freedom seems to reduce economic efficiency? Certainly one can say that is because economic efficiency (to the Austrian) is defined as what allows people to be as close as possible (which, of course, may not be very close at all – the physical universe limits how much we can satisfy our desires) to how they wish to live (what they wish to do, what things they wish to have and so on). Mises made it very clear that in strict economic science if people wished to have very few things having very few things was efficient and if people wished to have lots of things – well then having lots of things was efficient (as economic value was subjective).

But we can not see how all this irritates our enemies? We are building in the nonaggression principle to our basic economic laws and then saying “economic law (which is [supposedly] nothing to do with ethics) happens to vindicate our (ethical) non aggression principle” – “so you [the collectivists] are unscientific – and you are evil as well”. The human universe may indeed be like this – but we should expect our enemies to be very upset with us for pointing it out.

Paul Marks

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