Mises was wrong. About a lot of things. In economics, and especially in philosophy—which just means especially in economics.
First, to be reasonable, you try and get away with saying that Mises was a good economist, but a terrible philosopher. Folks who style themselves as intellectuals almost automatically concede this—as a form of gut reaction. If it’s not his speciality, the tendency is to want to avoid going out on a limb and defending the undefendable. After all, everyone knows that non-specialists never have anything interesting to say. Or even if it is interesting, it’s wrong. That’s where the priors point you.
I just feel particularly irrational today. Before I actually delve into the subject matter, I’m placing this paragraph here, rather than at the end. Here’s my placeholder stipulation: the whole point of this piece is to tear down logically necessary elements in economics. While it mainly targets Austrian economics, there are some spillover effects– neoclassical economics, in particular. I’m not advocating for socialism, and I’m not advocating for mass government intervention in the economy. There’s the interesting counterpoint–from Mises, interestingly–that interventions necessitate further interventions.
Besides, what about public choice theory? And so on. I’m just purely pointing out that it can very easily be the case that voluntary exchange, according to wrong-headed definitions of value, can lead to sub-optimal distributions of resources.
In short: Capitalism: not at all perfect, but better than the others.
In terms of the value theory underpinning his theories of exchange, Mises violates transitivity. Not just Mises, though. This is typically a staple of mainstream neoclassical economics. Here’s the scenario: suppose A and B are bidding for a resource C. If A outbids B and obtains C, then according to the highest valued use hypothesis, it’d seem to logically follow that A’s use of C provides the most productive social value. This is the whole point of the free market, after all: scarce resources as being efficiently directed to their highest valued use. In the absence of voluntary exchange and the presence of alternative forms of distribution, i.e. government redistribution, misallocation of resources is the inevitable course.
Suppose a wealthy oil Sheik has his eye on an automobile manufacturing plant. Being the good capitalist that he is, he doesn’t order his private defense agency to seize the plant. Rather, he puts in a bid. Others, too, place bids. One of the other bidders is an entrepreneur with a history of success expanding factory plants: more employees, more output, more profit, and so on. Regardless, the Sheik’s capital reserves far exceed anything the entrepreneur has from past profitable endeavors and what he could dredge up from the loanable funds market. Naturally, the plant goes to the Sheik, and the economists wave the flag of ‘highest valued use’.
But as a cruel joke, the Sheik decides to let the factory sit dormant, all the while losing money by the hour. Let’s just say more utility for him is generated by observing the suffering of workers living paycheque to paycheque. In spite of all this, the instinct is still to preserve the notion that scarce resources have been allocated to their highest valued use. But is it true?
Thought experiments like these ought to at least compel a re-glance at initial assumptions. What in the world would cause us to think that a dormant factory represents highest valued use, compared to the lowly entrepreneur, who, we’ll stipulate, would’ve done better than closure-for-perverse-utility? That’s not terribly hard to imagine. Now, the natural response is to examine reasons for capital disparity between the Sheik and the entrepreneur. The Sheik’s capital reserves are supposed to represent a history of utility provision—else, he wouldn’t have been able to obtain such reserves in the first place. I could deconstruct that in a variety of ways, but that’s for another time. For now, we’ll just assume that’s true.
That the factory was won through superior bidding power ipso facto is apparently supposed to be convincing, since the Sheik’s capital reserves are taken as a transmission of social value obtained from his previous dealings to the present dealings of the plant. In other words, the ‘coupons’ are in a sense taken to be stored social value. The other alternative is just to say that highest valued use has nothing to do with social value at all, but whoever obtains the most personal utility. First, it’d be wrong-headed to reduce highest valued use of a scarce resource to one person’s personal utility. The ex-ante/post-facto distinction already blasts this idea out of the water. Second, coupons (money) are not stored social value. To hold to the stored social value theory is to violate transitivity.
Transitivity works like this: if A is B and B is C, then A is C. Violations aren’t trivial—the classic example is Thomas Reid’s critique of John Locke’s theory of personal identity. Locke held that a person remains constant over time to the extent that he has memories of self at an earlier time, say, 10 years ago. That is, stable memory over time is metaphysically necessary and sufficient for rendering person at time 1 identical with person at time 2. Aside from the litany of bizarre memory-stitching thought experiments marshaled against Lockean personal identity, Reid provided one that stuck.
Suppose that we’re looking at an entity prima facie thought to be the same entity through time: A is 80-years-old, B is 50-years-old, and C is 10. Now, A certainly remembers being B. Thirty years ago is a long time, but not that long for simple recollection. B, too, remembers what it was like being C and snatching his mother’s apple pie off the windowsill before it cooled. Where this chain breaks down is that A suffers from Alzheimer’s and so does not remember being C. It’s too far back. The memories are gone.
This means that while A emphatically is B and B emphatically is C—A, in this case, is not and cannot be C by definition, which violates transitivity. If your theory is good, transitivity shouldn’t keep you up at night.
How this relates is fairly simple. A transmits wealth to B, the Sheik, which we’ll say for the sake of argument represents highest-value transmission. The Sheik then uses it to/for C. Similar to Reid’s example, the highest-value arrangement works from A:B and B:C, but it doesn’t work from A:C.
Voluntary exchange is a half-decent metric of determining societal value, but it breaks down. There’s no necessary connection, such that any sort of government intervention necessarily reduces the value that otherwise would have been created. The gut reaction from most libertarians is to vomit public choice theory all over the floor. It’s interesting: they simultaneously hold that the stereotype of libertarians as selfish, wicked, atomistic individuals is false, false, false! Individuals have a multitude of reasons for action and motivation, and altruism plays a significant role, after all—except for politicians, apparently who only calculate based on the most extreme and perverse egoism. Dissonance, dissonance.
And the libertarian reductionist approach to value isn’t compelling for other reasons: ex-ante/post-facto satisfaction from voluntary exchange as a good metric for well-being works only in the case that folks possess a baseline of virtue. We’re after well-being: voluntary exchange is only contingently coextensive with it.
Here’s a helpful way of thinking about ‘the value problem’ through the the welfare state: if a person can’t provide enough value to society, then like the similar situation of firing a person not providing enough value to a company, we ought not provide social safety nets because we care about value to society. They simply are not a good fit. How we define value in this case is crucial. And it changes the normative analysis.
Playing with the definition of value in other cases means we can plausibly say things like ‘colonialism allows for the highest value use of the land, since colonial administrators (at least historically) almost certainly will be able to direct the use of the resources to advancing well-being,’ given that, for example, resources were previously entirely underutilized owing to inferior technology. Again, this is a direct affront and assault on the idea that there’s a necessary link between highest possible social value and voluntary transactions, or that we ought to define the highest valued use of a resource strictly in terms of the utility of the Bidding War Victor. It’s not hard. Thought experiments are easy—moving past ideological blockers is not, hence the dearth of libertarians able to extract themselves from this crocked up conception of value.
The structure of the economy adjusts based on the aggregate preferences of the holders of a disproportionate amount of capital. Capital holders aren’t some homogenous group, but as there continues to be a slow gentrification and de facto segregation of income levels, this will become more and more the case. This accurately describes the process of gentrification. Instead of payday loans and crack joints, you get, for better or worse, Tarot Card readings for your Shiba Inu. Insofar as you ingratiate yourself to the gentrifiers, you do well.
Here’s a common theme: preventing voluntary economic exchange necessarily reduces value. Hold on. Forget enforcement problems for a second. Focus, dammit. If there’s a legal prohibition and John Q. Public isn’t allowed to indulge in the free market euphoria of prostitution (I fucking love markets), then it’s certainly seems true that both John and the lady of the night lose out on immediate desire satisfaction. But why identify desire satisfaction with sacrosanct visions of value? Hushed tones: “why, we couldn’t prevent that! It necessarily results in a reduction of value!”
Suppose, however, that as a result of this degenerate transaction, John’s wife finds out, initiates a divorce, and in the following court proceedings, John is forced to liquidate his business, thus throwing thirty employees into the street. Societal value? Highest valued use?
In other words, I’m driving at the intuition that there’s something seriously wrong with the libertarian value calculus if value is only calculated in the context of individual transactions, without an eye at societal consequences: externalities, externalities, externalities. Myopic libertarianism assumes either than no one is affected by individual transactions, or that the effects are irrelevant since one’s value calculus usually constrains theories of rights. And perhaps the other way ‘round, too. If X creates value, it would seem odd for it to be prohibited by a corresponding theory of rights. And in constructing a theory of rights, you don’t want to be calling the value-creating stuff ‘bad’ and the value-destroying stuff ‘good’. A definite symbiotic relationship exists between the value calculus and rights-theory.
The prostitution thought experiment is a classic example of what’s termed a victimless crime. Individuals are the only possessors of rights, so to think that society at large has any sort of rights-standing is bizarre—at least for libertarians.
What of societal stability? Well, in a libertarian order, you’d best hope that individuals are virtuous, such that the aggregate of individual transactions points towards positive, rather than negative externalities. If the set of transactions points to negative externalities, the law has no recourse, as no individual rights have been violated, and so society slowly burns.
If winning the game is keeping society afloat, and losing the game is society burning, then libertarian rights theory loses if the right demographics aren’t in place.
So what do?
In appealing to the common good, you could just invent a normative device to solve the problem of (1) negative externalities and (2) the problem of harms to self, which may also qualify as (1).
To clarify, if self-interest exercised through autonomy is unrestricted, then it’s easily conceivable for it to lead to an overall detrimental outcome. In other words, as a result of this unmistakable problem, rights should simply be invented out of thin air to address it. Sometimes state intervention is needed in specific cases where individual rights-claims cannot solve the externality load.
I don’t care if the individual transaction is even morally licit. I don’t care if it’s deemed to generate utility for the parties both ex-ante and post-facto. I just don’t. There are other relevant considerations at hand. Autonomy has its place. Desire-satisfaction has its place. But they only achieve the common good contingently. Just like property rights. Balance interests.
To put it more bluntly, the high-status escort with high-bargaining power who is chagrined by the fact that she can’t engage in consensual sex has to have her utility weighed against the negative individual and societal effects attached to this state of affairs. The exercise of autonomy as applied to the practical institution of prostitution is unavoidably other-regarding, in that negative externalities occur without there being legal recourse under individual rights-claims.
A proponent of the common good would say that rights are defeasible or alienable, much in the same way rights are alienated when one agent assaults other. In this case, agent X alienates some portion of his rights when he assaults agent Y, such that agent X can be justifiably reprimanded. Had he not engaged in those actions, reprimand would normally have been a violation of his rights. However, the common good perspective extends the range of defeasibility to conditions beyond individual actions, and considers the general outcome of an aggregate of individual actions.
Where a collective and consistent negative outcome exists from individual actions, the normal rights of autonomy become defeasible. This taps into the intuition that there are some cases where state intervention is warranted beyond addressing particular rights claims made by particular individuals.
I might need to read some definition of “social value” to fully grasp this, but it smeems a bit off. In reality, you could say that something is “valuable to most people”, but going from there to creating to creating some unified societal actor that can value things seems a whole lot like creation of a god. Does 200 000 ipads have higher “social value” than a Koenigsegg? You will never ansver that question without projecting your own values in some way.
“A transmits wealth to B, the Sheik, which we’ll say for the sake of argument represents highest-value transmission. The Sheik then uses it to/for C. Similar to Reid’s example, the highest-value arrangement works from A:B and B:C, but it doesn’t work from A:C.”
This is comparing value to A with value to B. You can’t just ad them together, or avarage them, or anything, since they are arrived at by different processes (in different brains). What you could say is that there is pareto improvements in both cases.
In “victimless crime”, note that there is still a concept of fraud, which is not considered a victimless crime. Fraud usually refers to exploitations of information assymetry, where one of the consenting parts is deliberatly kept in the dark. You could expand on this concept to cases where one of the consenting parts is incapable of processing the needed information; such as selling drugs to kids.
To handle externalities, we need most public spaces to be controlled by people whith long-term success in delivering value. These people would then be able to handle regulations locally, in accordance with their own projetions of what people ought to value in the long term.
What radical individualists miss is inness: People are in (socially, normatively, “sacramentally” united to) other people. So, not only not rarely, but most of the time, an economic actor is acting on behalf of some collective (often family) or at the behest of some hierarch to whom they owe fealty. Almost no one is perfectly free, and if one were, we’d suspect there was something quite wrong with him.
(I take this language from St. Paul who speaks of all men being dead in Adam and the faithful being alive in Christ. I deem this more than just a religious illustration or theological truth, but a cosmic and universal social principle.)
Pollution is another externality that libertarians struggle with. One need not be a neo-druid hippie nutjob to recognize the importance of keeping and water reasonably free from contaminants. Many libertarians say that the solution to pollution is for property owners to sue those who pollute their land, but the number of harmful particulates in any one place at any one time is often small and the effect on the environment can be cumulative and spread over a vast area.
You state:
“If A outbids B and obtains C, then according to the highest valued use hypothesis, it’d seem to logically follow that A’s use of C provides the most productive social value.”
This violates Mises theory of value. There’s no reason it logically follows that A’s use of C provides more “productive social value.”
(Actually the term “social value” is almost certainly totally bullshit – at minimum, if you’re going to use it, you need to provide a definition).
Mises says that the only thing we can conclude from this transaction is that A values C more than B. All the evils of modern economics flow from people making totally unjustifiable conclusions that go way beyond Mises. Your conclusion of something related to social value (the entire concept of which Mises rejects – correctly IMHO) is a great example of that sort of conclusion.
So a couple things: first, while Mises might rail against the idea of ‘social value,’ it’s hard to see how a quote like this isn’t driving at the same idea: “The business of the entrepreneur is…to select from the multitude of technologically feasible methods those which are best fit to supply the public in the cheapest way with the things they are asking for most urgently.” I don’t understand why libertarians have a knee-jerk reaction to terms like ‘social value,’ or the ‘common good’. It’s not that hard to grasp, and it doesn’t at all have to imply collectivism. Employing capital to the best possible satisfaction of consumers seems to be Mises’ way of understanding social value–that is, in fact, why he likes the profit and loss system. The point of the thought experiments, as far as I can read them, were just to poke a few holes in that analysis.
Have a look at this other quote, for example: “Perhaps the grumbler will object on the ground that he considers p a vital commodity, much more important than q, and that therefore the production of p should be expanded and that of q restricted. If this is really the meaning of his criticism, he is at variance with the valuations of the consumers. He throws off his mask and shows his dictatorial aspirations. Production should not be directed by the wishes of the public but by his own despotic discretion. But if our entrepreneur’s production of q involves a loss, it is obvious that his fault was poor foresight and not intentional.”
So he’s at variation with the consumers. So what? Dictatorial? Well, I don’t care about democracy, first, and second, this assumes that consumer demand in every instance ‘gets at’ social value. Now, if we define social value as that which satisfies the most consumers, then I’m by definition wrong. But all these different attempts to flesh out social value are just rough approximations of it, so I see no reason to cling to overall consumer satisfaction as entirely identical with social value.
With transitivity in particular: it seems like a problem with how the price system allocates scarce resources to their most high-valued use, so the transitivity argument, in context, is meant as a counterargument to a counterargument of the original oil Sheik thought experiment.
Your first Mises quote speaks only of entrepreneurs. People can value goods for other reasons beyond entrepreneurial reasons. Jewelers, collectors, religious people, and hard-money cranks all value gold. Mises’ quote is exactly correct when restricted to the thing he’s actually talking about – the jeweler’s need for gold. It’s meaningless when applied beyond that to things he wasn’t talking about – everyone else.
I react to “social value” with horror for two reasons: 1) first, it’s a meaningless term and 2) it’s the sort of term that’s used to justify all sorts of horrors.
On the first, as Mises notes, value is a purely relative and non-exact concept. Currently, I would value a bottle of water at $0, since I’m at home with endless fresh running water. If I were lost in the desert, I’d give everything I had for a bottle of water. Therefore, to say that a bottle of water is worth some particular specific amount of money is absurd. It’s all relative – even for one individual. That problem is multiplied infinitely when you try to assign the value of something to all of society. Complete gibberish multiplied thousands or millions or billions of times is more gibberish.
Historically speaking, “social value” seems to have only one meaning – the value assigned by the guys in charge. For example, if we want to maximize social value, we could restrict gold purchases to jewelers – of course doing so would (totally coincidentally, of course!) help someone in charge control the money supply. Etc. The point is that, since the concept is entirely devoid of meaning, it can be used to mean whatever anyone wants at any given time.
Foseti is correct. If you want to argue for a certain definition of social value, fine, but you should remove reference to Mises because you are seriously mischarachterizing the meaning of what he said.
If you want to read what a real debate on the issue of the subjectivity of value and the fact value dichotomy is like, Mises debated the legendary Leo Strauss in person at the William Volker fund symposium on morality and relativism in 1961, and definitely got the better off the argument. The proceedings were published as “Relativism and the study of man”.
OK, it is not ideal if a rich sheik buys a factory in order to close it and make people suffer. But are such misanthropic investments anywhere near as common in modern society as are wasted “investments” made by government? If not, then why should we give more power to governments to prevent this rare (virtually nonexistent, really) phenomenon?
Bad to go this route. All of the econ 101/301 criticisms of Austrian economics and for mixed economy are valid and reason enough for dismissing libertarianism. There are essentially no doctrinaire libertarian economists today for a reason. Once the first externality-based market failures were discovered, it was unreasonable to expect that market-based solutions would be optimal everywhere.