Economists and Antieconomists

Someone unwisely asked me to put forth my arguments in favor of my political position. Obviously this would take a small book, or a large, to do rigorously. But as a courtesy to any reader curious about my basic assumptions, allow me by way of introductory matter to reprint an article from two years ago on the topic of economics.

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A reader comments:

 “I believe that most socialists strongly believe the world would be a better place if everyone believed and acted as they do and they may well be right. The problem is that everyone doesn’t believe and act as they do but their system requires such a thing for it to succeed so they turn to government to enforce the act part if not the believe part. In the end, any system that starts with, “If only everyone would do X…” is doomed to failure.”

Here I must respectfully disagree. Even if everyone believed as the Marxists believe and acted as unselfishly and irrationally as Marxist theory commands, they still would not be right.

In other words, Marxists are not only evil. They are also wrong.

Economics studies the invariant relations of cause and effect surrounding human action, particularly economic phenomena. Economists deal with categories like cause and effect, cost and benefit, barter, currency, scarcity, priority, price, interest, time-preference, trade barriers, transaction costs, and so on and on. There are invariants in the phenomena that fit these categories.

For example, there is something called scarcity, which says that one factor of production cannot at the same time fulfill all possible mutually exclusive uses to which it might be put. This is also known as the law that “you cannot keep your cake and eat it too.”

For example, there is something called priority, which says that of two mutually exclusive uses, the one that serves a human desire more or better or more thoroughly is preferred to one that does serves less well.

Forgoing the less desired use for the sake of the best use is called the opportunity cost. This is also known as the law that “there aint no such thing as a free lunch.”

For example, there is also something called the disutility of labor, which says that, unlike machines, to persuade a man to forgo a desired idleness involves an opportunity cost.

For example, there is something called time preference, which says that eating a hamburger today and eating a hamburger tomorrow are not equally desirable, time being what it is: and that to overcome the reluctance of delayed gratification, interest must be added to the future use. I might be willing to give you my lunch money today, so that you can buy a hamburger, if, in return, you promise to buy me a hamburger and an order of French fries tomorrow. This is also known as the law that “A bird in the hand is worth two in the bush.”

For example, there is something called specialization of labor, which holds that between two people (or two countries) if one specializes in what he does best, and he trades the fruits of his labor for what the second man does best, they both benefit, even if the first man is more skilled than the second in both areas. Imagine a surgeon and a handyman. The surgeon’s skill at surgery is worth one hundred pounds an hour; the surgeon also can clean his instruments between operations in six minutes. The handyman is not as adept at cleaning instruments as the surgeon. It takes him half an hour, five times as long, to do the same task. However, the handyman’s basic skill, to do odd jobs, is only worth five pounds an hour. The six minutes it takes the surgeon to clean his instruments, if he were to do it himself, has an opportunity cost of ten pounds. Even if he hires the handyman to do in thirty minutes what he can do in ten, provided the wage is less than his opportunity cost (he can be making 100 pounds an hour in the operating theater), there is a benefit to him; and if the wage is greater than the opportunity cost of the handyman’s next most efficient use (he can make 5 pounds per hour for odd jobs) then the benefit is mutual. This is also known as Ricardo’s Law of Comparative Advantage.

However, the calculation as to whether or not having someone do a task five times as slowly for the same result is worth it cannot be made unless the comparative value of the opportunity cost related to their wages is known or can be assessed.

Socialism, at least in its Marxist form, is necessarily based on the assumption that all these are political or psychological or philosophical phenomenon, if not defects, and ergo they are not laws of nature. Marxism is the faith that refining or re-engineering political institutions, and training (or conditioning) human beings to a different psychology never before seen in human history will produce a new type of man and a new type of reality. In this reality, there is such a thing as a free lunch, because goods and services will be produced without cost, by fiat, and distributed without cost, by fiat, and men will labor without wages, by fiat, because no disutility of labor nor opportunity cost will apply to their labor. There will be no want, no scarcity, and hence no need to conserve or economize or prioritize scarce goods and resources. At the same time, and for no particular reason, human beings will no longer crave those things the Marxists regard as luxury goods. This reality technically is called Utopia, Cockaigne or Cloudcuckooland.

This is why discussions between Marxists and economists are mostly fruitless. One side, the economists, regards the subject matter as a matter of scientific logic, able to be rationally debated with reference to reality; whereas the other side, the so-called scientific socialists, regards the subject matter as an epiphenomenon of psychological defects on the part of the Benighted, and psychological perfection or enlightenment on the part of the Elect, and no rational debate is possible or even needed, because reality is a fluid waste-product of a materialist dialectic unfolding with the inevitability of Calvinist double predestination throughout the stages of history.

In a Marxist commonwealth, there is no need for a price structure, no need to buy and sell, no need to borrow money nor charge interest, because there will be no time preference related to present as opposed to future uses of goods and services.

Marxism not only postulates that utopia is possible in reality, it also pretends that reality is a dystopia. For example, where an economist would look at a handyman and a surgeon and discover a possibility of mutual benefit, the Marxist denies the possibility of mutual benefit, and assigns one party to the trade the role of exploiter, and the other party to the trade the role of victim. Contrary to logic and evidence, the assertion here is the that  mutually beneficial exchanges do not and cannot exist. Since economics is the study of mutually beneficial exchanges and how to facilitate them, in effect Marxism is the assertion contrary to logic and evidence that economics does not exist. The only thing that exists is politics, and the power struggle between mutually belligerent factions, which must end in the utter obliteration of one and the triumph of the other.

For no particular reason the Marxist always picks the employer as the exploiter and the employee as the victim, but I myself have been in the position of being a paralegal in a rich law firm who was the employee and the servant of an indigent employer, and we dictated the terms of the employment contract, a contingency fee with a healthy percentage if we won the case going to us. (Sixty percent, if I recall.) The percentage was unconscionable: we were exploiting our employers. No other firm in the county was willing to take the case, so we bargained for an unusual degree of profit. There was nothing in the economic category of the trade, us being servants and them being employers, that had any bearing on who was getting the raw side of the deal. Sometimes it is the investors, the capitalists, who get the raw side of the deal. According to Marxist theory, it is impossible for capitalists to be in the exploited position.

The other and bigger problem with Marxism is that even in a world where everyone did do X (where X, in this case, was live like monks in dormitories, eat communal food, work without reward, and have all goods and services distributed by a central quartermaster) the Marxist program could not work. Even if elves or angels and Martians or some other being with a completely different psychology and nature than human beings tried to run an economy larger than a family without specialization of labor or the exchange of goods and services, IT COULD NOT BE DONE.

The reason why it could not be done is that no central quartermaster of any group of activities larger than a family can keep track of the comparative worth of every possible use to which a good or a service, or any of the factors of production, including labor, that goes into making that good or service can be put. Further, no comparison can be made between the value of one possible use of a factor of production and the value of all other possible uses.

Let us say, for example, that you are a Martian. For this hypothetical,you, dear reader, may pick your Martian psychology and philosophy; it can be anything imaginable, no matter how outlandish: you are a dog-man with a strong sense of pack, or a bull-man with the strong sense of herd, or a bug-man entirely devoted to the hive. It does not matter.

What matters is that, for this hypothetical, you have the power to decide what happens to a certain tonnage of iron. One group of members of your society has approached you and ask it be made into an ironclad barge to sail the canals of Mars, to bring needed supplies from Lesser Helium. Another asks that it be made into rails, to build a steam engine running from Greater Helium to Mons Olympos. Of this second group, one faction prefers the rail line go over the Mountain, and that effort be expended to carve out a pass. The other faction opines that drilling a tunnel a shorter distance straight through the mountain would take less effort and yield better results. At the same time, yet another group wants the iron made into girders and beams to build a telescoping tower powered by radium to stand in yet another location, having nothing to do with whether the supplies are brought in by rail or barge. At the same time, some planners believe that the need for iron will be greater in the future than at present, and they ask you to store it without using it against those coming lean years.

In a Marxist commonwealth, there is no non-arbitrary price, rent, or wage. All these things are set by fiat by commissars like yourself. You therefor cannot compare the cost and benefit of selling the iron to the tower builders, the barge builders, the tunnel-rail builders or the pass-rail builders. The cost is something you yourself decide. Nor is there any quid-pro-quo: the four possible customers are not customers are all, but assignees. You simply assign the iron to whom you would. You cannot decide based on comparing cost and benefit, because the loss to you in each case is the same: your commissariat loses the iron, and then you have it no more.

Keep in mind that all these uses are mutually exclusive. Keep in mind that the value of a use is discontinuous. Giving the railroad builders an amount of iron allowing them to build nine-tenths of a rail road is worse less (probably far less) than giving them the amount needed to build the whole rail road all the way to the destination. Rare and unusual would be the passenger or freight who would receive nine-tenths of the value of a railway ticket when dumped nine-tenths of the way to his or its destination.

Now, keep in mind also that iron comes in different grades and conditions and degrees of availability. Iron that has to be shipped costs more, due to transaction costs, than iron on site. Some iron is less useful for certain uses, and some not useful at all. If a steel plant is not available, or coal, iron cannot be made into steel.

You, as the Martian, even if your motives were entirely benevolent and angelic simply do not have the information necessary to make the decisions involved in this hypothetical.

Even if an highly trained and technical staff were at hand to assist you in answering every single question of fact involved, such as the length of the two proposed alternative train routes, the tonnage and composition of the barge, the height and structural properties of the proposed tower, no one can tell you what the aggregate needs and preferences and wants of all persons involved in the decision would be. Some of those persons, for example, are train passengers for a train that does not yet exist, and may never.

In the market economy, the information is readily available, because the price is set by supply and demand. The supply side tells you how much iron is ready to sell as opposed to store, both your own and that of your competition, and the demand side tells you whose needs or wants are most urgent. When the price information does not reflect this reality (and in a market economy, the reflection is never perfect) an opportunity is created either for you to underbid your competitor and make a sale, or an opportunity is created for one buyer to outbid another, and in either case the trade is a better bargain that it would have been had the price information been perfect.

In the market economy of Mars in this hypothetical, no one has all the information needed to weigh the comparative value of all the factors of production of all the uses of the iron in question. The specialization of labor involves a specialization of information as well. The capitalist seeking stock to drive a train tunnel through Mons Olympos will be able to make a cost estimate of the whole project, by adding the costs of all the factors of production, whose costs estimates each vendor and workingman contributing to the project makes for himself by setting his prices and wages where he would. If he sets his price or wage above or below the market rate, an opportunity is created for someone else to profit from his mis-estimation. The tunnel builder will place a bid against the pass builders, and either will be vindicated, if they attract the custom they anticipate, or, if they suffer a loss, the loss is not due to an arbitrary decision on your part.

For that matter, if speculators in the futures market anticipate lean years to come when iron will be more in demand, they will buy it now when the price is low, and wisely husband it against future use, and, again, will make a profit if and only if their expectations are correct. They have a strong incentive to be right.

You, as the Martian Commissar of Iron, have no incentive to be right. If your nephew could do your job better than you, there is no way for the Supreme Coordinator of Mars to determine that and replace you and put you in a job where you could serve Mars better. The Supreme Coordinator is in the position of a teacher who never gives tests or talks to his students and no grades can be assigned, or of an umpire in a game where no goals are defined and no score can be kept, but the teacher must select a valedictorian, and the umpire must declare a winner.

Nothing in the free market protects a person from the ills that follow from a poor estimate of the cost and benefit involved in organizing such projects. Nothing says that for certain each time an opportunity is created for profit, someone will arise to exploit the opportunity. Nothing says everyone acts with perfect information about the market conditions. But we are not comparing the disadvantages of reality to the advantages of Cloudcuckooland, because reality exists and Cloudcuckooland does not. What the free market does do is avoid the even more severe drawbacks of the socialist commonwealth, where instead of having imperfect market information, the commissars have no information at all. What the free market does is provide opportunities, when waste and inefficiency arise in the system, for someone to be rewarded if he finds an efficient way to correct it. What the socialist commonwealth provides is an incentive toward waste and inefficiency, so that someone will be rewarded if he makes the waste and inefficiency worse.

There were prices for goods and wages for services in Soviet Russia, but these prices were nominal only, and did not reflect the real market information in any way, shape or form. They were assigned by fiat, in the most arbitrary fashion imaginable: the Soviet pricing board met and examined the price of similar or similar-sounding goods in France and England, and commanded the price tags on goods and services to be raised or lowered according to the aggregate supply and demand of people living far away who neither offered to buy or offered to sell anything in the Soviet economy. If there was a good year for cows in England, the price of cheese was lowered in Russia, whether the Russian cows produced more milk or less. If more women bought red shoes in France, the cost of red shows was raised in Russia, even if fewer people needed or wanted red women’s shoes that season, or had the shoemakers to make them.

The hypothetical above applies to a situation where the mining and refining and railway industry on Mars has been nationalized or Sovietized. In other words, the hypothetical reflects the conditions of a theoretical Marxist commonwealth. After the fall of the Berlin Wall, Marxism lost much of the hypnotic glamour it employed to deceive the world into a century of brutal genocidal bloodshed by inhuman thugs in the East and the corresponding blind apologetics and encouragement by inhuman and smug intellectual vermin in the West. The records from the Soviet archives show to all non-partisan historians that Senator McCarthy was completely vindicated: everyone he accused of being a Soviet spy was in fact a soviet spy. Hiss was in the pay of the Soviets; the Rosenbergs were in the pay of the Soviets; Aleksandr Solzhenitsyn had been telling the complete truth; Walter Duranty had been telling a complete lie. Marxism as an effective and alluring “narrative” to excuse bloodthirsty class-envy and hatred of the Jews had been exploded, at least insofar as the mainstream of Western intellectual leaders were concerned.

However, at the same time pure Marxism was corroding the civilization in Eastern Europe, China, Asia, Africa and South America, a milder form of the mental disease became a permanent fixture of the West. It is often mislabeled “socialism” (honestly speaking, socialism and communism are synonyms) and it refers to an incoherent version of Marxism, or, rather, an even more incoherent version, that adopts a haphazard collection of some Marxist policies and elements but not others. The best term for this is “Fabianism” and it is best thought of as a peaceful form of Marxism that proposes substituting commissariat ukase for price and wage information in some areas and not others, and does not seek immediate nationalization of all industries, only of certain crucial industries. As far as I know, no single coherent apologetic of Fabianism has ever been written, any more than a coherent apologetic for fascism has ever been written: reasonable men can even differ as to what this means.

Fabianism is a mild form of Marxism and its flaws are milder forms of the flaws of Marxism. The commissar who sets the price of goods and services for the nationalized industry is not making an utterly and entirely arbitrary decision, as in our Martian hypothetical. Instead he is making a mostly arbitrary decision, and one which the normal market mechanisms for correcting an erroneous decision have been jammed and dismantled.

A single example will have to suffice for the whole. Suppose the rulers of Ruritania hear the clamor of people who say there is not enough milk in Ruritania. A new law, enacted for the stated goal of increasing the milk supply and lowering costs, sets the price dairy farmers are allowed to charge for milk.

It stands to reason that if the dairy farmers of Ruritania had been able to make a profit at that price, they would have underbid each other to reach that price, each farmer hoping to maximize sale and hence increase his total profit by lowering his marginal profit (selling six buckets of milk for five zloty nets you more than selling four buckets for six zloty, even though you lowered your price per bucket). While it is possible that no dairy farmer noticed the opportunity for lowering his price and outselling his competitor, or that all farmers somehow combined to sell above the natural rate, the idea that the central government would know the particular conditions of the dairy market better than the dairy farmers is even less possible. So we can assume the price mandated by the new law is below the natural market price.

If a vendor is required by law to sell any good or service below the natural rate as defined by the realities of supply and demand, he does so at a loss. He loses a zloty a bucket for each bucket of milk he hauls to market. This creates an opportunity for profit in another field: if the farmer instead churns the milk into butter or cream, or some other good whose price is not dictated by a commissar, he diverts production from milk to some other good. Less milk is produced, and shortages develop. Since the farmers are not allowed to react to the opportunity for profit engendered by the shortage (in an unhindered market, buyers eager for milk would bid against each other, driving up the price, and hence luring marginal dairy farmers eager for profit back into the field) the milk is distributed according to first-come-first-serve, and any latercomers are forbidden by law from satisfying their wants and needs for milk, no matter how high they would have been willing to bid to get the milk. (If the latecomers want to buy buckets of milk from scalpers or speculators who arrived early and bought milk on speculation, the law would forbid this, since the price of milk is controlled.)

In order to correct the shortage, the rulers of Ruritania either have to admit their error, and go take a Freshman course in economics, or they have to control the prices of all the secondary markets for the good, such as butter and cream. If the resulting regulations force marginal users out of the dairy business altogether, this create an opportunity for farmers to turn the cows toward the next highest priority demand the market expresses for this particular factor of production: for example, they might slaughter the milk-cows for meat. Again, in order to prevent the shortages caused by the regulation, the rulers of Ruritania have to regulate the secondary markets as well, and set the wages and prices for butchers as well as farmers. In theory, nothing would prevent the same logic from operating, until the market had abolished all price information, whereupon we are in the same position as the Martian hypothetical above; in reality, the dictates of which industries and services are nationalized depends on purely political considerations, so that the shortages are forced onto a group with less political power and willpower by a group with more, and the sum result of the regulations is to act as a transfer payment from the weaker group to the stronger.

In the example given above, small farms would be forced out of business to the benefit of large agribusiness combines, who would then give such generous donations to political parties, as to ensure a government mandate to sell ethanol, so that the price of grain to the very poor would go up rather than down. If this sounds eerily reminiscent of real-world events, that is because economics offers a framework for rendering real world events meaningful, whereas socialism describes the conditions of Cloudcuckooland. If this sounds paradoxical, that a policy intended to lower the price of some needed good or service to the poor ends up raising the price or creating a shortage, this is because the so called social engineers not only do not bother to study the real world laws of cause and effect underpinning society, they heap scorn, hate, and opprobrium on any who do.

Not only do they not read the owner’s manual, not only do they sneer at you if you try to tell them what the owner’s manual says, these self-appointed geniuses of social engineering blame those of us who read the manual when their actions break the machine they are tinkering with, or drive us all off a cliff.

Whatever you call a person who is proud of the fact that he does not know a thing about engineering, (not even schoolboy-level basics like the mechanics of screws, levers, and pulleys) who nonetheless monkeys with a machine he never tries to understand, you cannot call him an engineer. He is an anti-engineer, someone who thinks the laws of engineering are optional.

Whatever you call a person who is proud of the fact that he knows not a damn thing about economics, (not even schoolboy-level basics like the mechanics of supply and demand, profit and interest, opportunity costs) who monkeys with an economy he never tries to understand, you cannot call him an economist. He is an anti-economist, someone who thinks the laws of economics are optional.

10 Comments

  1. Comment by Rolf Andreassen:

    I suppose that in mentioning Fabian socialism you are thinking of, for example, 1970s Britain, in which some but not all industries were nationalised. But your description does not seem to match what are usually called (at least in American political discourse) ‘socialist’ states today, such as the Scandinavian countries, which don’t try to regulate the details of prices but instead tax some of the population and redistribute that money to a different part. Are there any modern (that is, twenty-first century!) examples of nations which nationalise industries, or which attempt to fix the prices of particular goods? I observe in passing that many nations have minimum-wage laws, but while this undoubtedly causes some unemployment it doesn’t seem to have the knock-on effects of additional required regulations that you (or rather, Hayek) describe.

  2. Comment by joetexx:

    “He loses a zloty a bucket for each bucket of mail he hauls to market. ”

    Because his customers are looking for a milkman, not a postal carrier.

    Sorry, couldn’t resist. It is an excellent summary of the realities of price setting and resource allocation.

  3. Comment by Mary:

    One notes that if the Martians were in fact perfectly virtuous — well, prudence is one of the cardinal virtues. So even all the factions would have a perfectly prudent evaluation of the relative worth of the different proposals.

    So is justice. So the Commissiar would have an incentive to get it right.

    • Comment by John C Wright:

      The point here is that no one, not even Martians with brains the size of watermelons, can prudently decide between using the steel to build rail to go around the mountain, the tunnel through the mountain, or to build a tower without knowing the relative value of all the factors of production and their opportunity costs.

      It would be like prudently deciding between three goods hidden in three closed boxes with no information printed on the outside.

      Without a price structure, the opportunity costs of the factors of production cannot be compared because it is not known to anyone. The information does not exist.

      • Comment by Rolf Andreassen:

        The point here is that no one, not even Martians with brains the size of watermelons, can prudently decide between using the steel to build rail to go around the mountain, the tunnel through the mountain, or to build a tower without knowing the relative value of all the factors of production and their opportunity costs.

        That is true, but why should not these relative values be judged by the watermelon brains? A market price is an aggregate of tens of thousands of pieces of information, and in the end all those pieces are of the same kind: “I would rather have this thing than that thing”. In principle a planet-brained Martian should be able to consider justly and accurately all the preferences and values of his fellow Martians, and reproduce in his head the same weighing and tradeoffs that a free market does. If nothing else, he could say “Now, if all prices were set by free bargaining, what would this cost? Well, let’s see. Grzyg the miner would, at a pinch, sell his iron for enough cactus pulp to feed himself and his children, but Frgag the railroad builder and Mxtok the toolmaker both have a lot of cactus pulp and are eager to buy the iron, so Grzyg would actually get Mxtok’s maximum price which is twenty weights of pulp to the weight of iron; then Mxtok will sell his tools for…” and so on, and eventually find the equilibrium prices just as the market does. This is an impossible calculation for a human, but I don’t see why it should be impossible in principle, given a sufficiently informed evaluation of all the desires involved.

        The information that a market gives does not arise out of pure nothingness; it is an aggregate of all the desires of the actors involved, and their command of resources. It is in principle possible to aggregate the same information in a different way and get the same results. It is admittedly the same sort of in-principle as calculating the movements of all the atoms of Shakespeare’s body, with the added difficulty of collecting information about desires rather than atomic energies, but still. The information exists in the problem. It’s just rather intractable.

      • Comment by Mary:

        If he needs the relative values, he can ask for them. The other Martians, being perfect, would of course be honest and tell him the true answer, unblinded by pride or stubbornness or desire to put down an opponent or greed.

        Indeed a price structure is telling him, with additional provision for honesty by ensuring you lose something if you lie. The posited perfect Martians would not need that provision.

  4. Comment by The Deuce:

    Ah, a classic! About a month ago, I actually dug up your original post of this entry from a couple of years ago, and posted it on Facebook for the edification of my socialist friends.

  5. Ping from The Dismal Science Gets Even More Dismal: Wages Fall as a % of GDP « Yard Sale of the Mind:

    […] (to me, anyway) issues. A couple of commentators on Mr. Shea’s site linked above pointed to this essay on John C Wright’s blog, which is helpful.  We’re going to take it a bit […]

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