Thursday, December 30, 2010

Austrian Economics: Objectivity and Choice

One of reasons I like Austrian economics stems from its objectivity.  Each of us values things differently, and we makes choices and trade-offs based on our individual and unique preferences.  Because we live in a world of scarce resources (yes, even Bill Gates makes trade-offs), we constantly choose between competing alternatives.  And in a capitalist society, we have lots of choices.

Austrian economics refrains from assigning values of “right” or “wrong” to individual decisions.  To impose my value system upon another violates the consumer sovereignty of the individual.  Moreover, only the individual acting in his own self-interest can make the best choice to satisfy his own unique preferences at that particular instant.  To suggest otherwise necessarily violates his consumer sovereignty. 
As an example, suppose my neighbor enjoys dining out, and frequently spends hundreds of dollars on expensive meals at fine restaurants.  Simply because my neighbor spends a lot of money on dining out doesn’t mean he’s making bad choices.  He’s simply making a choice.  He obviously places extraordinary value on the dining experience.  I’m happy for him, and I quietly acknowledge that he’s making trade-offs.  Expensive meals mean other things won’t get accomplished.  I may scoff at forking out that kind of money for food, but he has made the best decision for himself.  Why should I impose my values on him and vice versa?  He is free to choose, and I celebrate that we live in a society with numerous choices. 
What I refuse to do, though, is criticize him or subjectively label his decisions.  It would be easy for me (some might even say appropriate) to criticize his choice and substitute my own value system in place of his.  I could easily offer up a number of alternatives for the money spent on food, but those are my preferences, not his.  What right do I claim to have to say he made a bad choice?  None.   Likewise, I expect him to refrain from labeling my choices, and to accept them as that: choices among competing alternatives. 
I believe the more folks come to accept and ascribe to this way of thinking, the more we can all go about enjoying the many choices we make.


  1. Who doesn't appreciate markets? Seriously. I've never met a communist in my life, and that included a one year stint in post-communist Russia.

    However things get more grey when you talk about things that aren't best solved with free markets. Neoclassical economists recognize this, I think Austrians do too (it's been a decade since I've read Mises). What happens when it's less costly for a company to leak toxic chemicals into the local river or lake than dispose of them properly? So they say, well a legitimate roll for the state is property rights and enforcement.

    What if there is a tragedy of the commons, where profit maximizing fishermen want to catch as many fish as they can, but if they all do this they'll deplete the stock of fish and next year all the fishermen will have a smaller catch. The usual solution is for some form of governance to be worked out over the acceptable catch size. Here governance can actually improve market outcomes.

    Same thing with roads. Without a state to create laws, build roads, bridges, tunnels, traffic signs etc there would be no car industry, or conversely US public transportation ranks low compared to other nation's due to lack of public funding.

    Neoclassical economists also have identified requisites for markets to even be Pareto optimal- Low/no barriers to entry, many sellers, homogenous products, plentiful and accurate information for buyers and sellers. If there aren't perfect markets (and there rarely is) then the case can sometimes be made that government intervention can facilitate a Pareto improvement (if that's your objective).

    Then there are questions of what to do if what is demanded in the economy falls short of what can be produced. Here economists are very divided. Some say, just wait until prices fall "adjust" until the money supply can buy all that produced. I think this argument is dangerous and the people making this argument are unaware that it is possible that persistant mass unemployment can exist for both the short and long runs. They don't understand why Say's law doesn't apply to money, and they don't understand the logic behinds Irving Fischer Debt Deflation or Minsky's financial instability hypothesis, and they probably don't understand sticky prices. While it's good for prices to adjust relative to each other for reasons you know, it's hugely disruptive to markets for the overall price level to rise or fall dramatically. One way to stop economic collapse is for government to lower taxes and increase spending when people are unable to find jobs in the private sector. I made this video explaining this as simply as possible:

    There is something disturbing about economics being value neutral. I don't think it really is, nor should it be. This article is particularly memorable explaining it.

    So the way you (rightly) constantly focus your skeptical eye on government, I think you could do well at focusing it also on markets. When the balance of power shifts too much to government or markets the dynamism most of us like so much about capitalism goes away.

  2. Tschaff,

    We appreciate your thoughtful comments. The reason for this blog is because most of the public eyes are skeptical of markets. We want to balance this by being skeptical of the state.

    Note that we think there is a big difference between spontaneous order, or bottom-up governance if you will, and the state.

    Finally, there must, of necessity, be a sharp difference between positive economics and normative economics. This difference is due to the subjective nature of values. I may post more on that later, but subjectivism is a foundation of Austrian economics.

  3. On polluting, many problems can be solved when property lay in private hands. Firms will be more apt to pollute public rivers and streams than if they were privately owned, or at least if riparian rights extended into the waterway. How many cases can you name where a firm polluted private property and got away with it?

    As far as roads, we have too many roads in my opinion. The US went crazy laying asphalt without a plan to pay and maintain them.

  4. Brad,

    I'm glad you brought up rivers. Many assume that, because such water is in motion, property rights cannot be laid on rivers. This, of course, is wrong. Say a river travels through your property. Say your property is downstream of a paint manufacturer. Further assume that the paint manufacturer dumps waste into the river. That waste travels down through your property. In a society that respected individual property rights, which is not our current society, you could bring action through the courts against the paint manufacturer for violating your property rights, because you own that part of the river.

    I'm still trying to track down when the laws on this changed. Walter Block has indicated case law used to favor the household pre-1850s. Then, because of lobbying the gov't by business, case law went in the other direction: protection business, not people. Like I said, haven't done the appropriate legwork on the history though.

  5. You're exactly correct. Funny, I wrote a research paper for Marxwell (SU) and devoted a large portion to Walter Block and his "Environmentalism and Economic Freedom: The Case for Private Property Rights." I presented the exact case you lay out.

    I never saw the prof comments, but I doubt he gave it much consideration. He's a statist for sure.