Is the Market a Test of Truth and Beauty? Is the Market a Test of TRUTH BEAUTY? Essays in Political Economy by L B. Y Ludwig von Mises Institute © 2011 by the Ludwig von Mises Institute and published under the Creative Commons Attribution License 3.0. http://creativecommons.org/licenses/by/3.0/ Ludwig von Mises Institute 518 West Magnolia Avenue Auburn, Alabama 36832 mises.org ISBN: 978-1-61016-188-6 Contents Introduction . vii : Should Austrians Scorn General Equilibrium eory? . Why Subjectivism? ..................... Henry George and Austrian Economics ........... e Debate about the Efficiency of a Socialist Economy . e Debate over Calculation and Knowledge ......... Austrian Economics, Neoclassicism, and the Market Test . Is the Market a Test of Truth and Beauty? . Macroeconomics and Coordination . e Keynesian Heritage in Economics . Hutt and Keynes ....................... e Image of the Gold Standard . Land, Money, and Capital Formation . Tacit Preachments are the Worst Kind . Tautologies in Economics and the Natural Sciences . : Free Will and Ethics . Elementos del Economia Politic . Is ere a Bias Toward Overregulation? . Economics and Principles .................. American Democracy Diagnosed . Civic Religion Reasserted . A Libertarian Case for Monarchy . v vi Contents Uchronia, or Alternative History . Hayek on the Psychology of Socialism and Freedom . Kirzner on the Morality of Capitalist Profit . Mises and His Critics on Ethics, Rights, and Law . e Moral Element in Mises’s Human Action . Can a Liberal Be an Egalitarian? ............... Rights, Contract, and Utility in Policy Espousal . Index ............................... Introduction Tis book’s title is the same as the newly chosen title of chapter , “Is the Market a Test of Truth and Beauty?” Tat chapter, along with the one before it, questions a dangerously false argument for the free-market economy sometimes made by its supposed friends. eir argument threat- ens to discredit, by association, the powerful and valid case for the mar- ket. Asked whether the market is a test of truth and beauty—of excel- lence—Ayn Rand would presumably give the same answer as mine: “No, of course not!” Consider her hero of e Fountainhead, Howard Roark. Political economy is the area of overlap among economics, political science, and philosophy. Beyond its positive content, political economy does bear on policy but not only on policy; it is far from a hodge-podge of different people’s policy prejudices. Economics, when not disregarded, is obviously relevant to policy. So are philosophy and psychology, as when they underlie doctrines such as redistributionism and egalitarianism. Pol- icy can affect economics. More exactly, a policy proposal may help clar- ify a strand of economic analysis even when, considering side-effects, the author does not actually recommend the policy; “Land, Money, and Cap- ital Formation,” chapter , provides an example. Regrettably, though, policy-driven economists do exist who start with their or their employ- ers’ preferred policies and then twist their analysis into supporting them. Writings in political economy, being interdisciplinary, typically omit the deep technicalities of any specific field. Most of this book’s chapters are semipopular pieces that the attentive “general reader” should under- stand. ey deal with intersecting fields rather than with advanced details of any one field. Left out of this book, then, are any of my relatively tech- nical writings, as on monetary theory and international economics. A few semitechnical chapters, including numbers and , come close to mak- ing an exception. Chapter contributes to a field of particular interest to Austrian economists, capital theory. Yet it too strives for nontechnical language. vii viii Introduction Some linkages among the chosen articles may not be immediately obvious. But, for example, “Free Will and Ethics” and “Uchronia, or Alternative History” both illuminate the chance aspects of life. So doing, both bear on political philosophy (as on the role of luck in personal sta- tus). Both also underline the difficulty of pinpointing the supposed “deep parameters” of the economy and so to making quantitative predictions, as opposed to what F.A. Hayek (1967) called “pattern predictions.” (Far be it from me, however, to say that the necessary achievements of the econo- metricians are forever downright impossible.) About half of the articles deal with economics in particular. “e Debate about the Efficiency of a Socialist Economy” and “e Debate Over Calculation and Knowledge” are among them. e latter chapter summarizes points made more fully in my “Mises and Hayek on Calcula- tion and Knowledge,” Review of Austrian Economics 7, no. 2, 1994, and in the ensuing debate with Joseph Salerno, Guido Hülsmann, Jeffrey Her- bener, and Hans-Hermann Hoppe in 1996 and 1997 issues of that Review. at debate runs to too many pages for inclusion here (see the Review’s issues of 1994, 1996, and 1997, online at the Mises Institute’s website). My “Austrian Economics, Neoclassicism, and the Market Test,” chap- ter , also provoked controversy, specifically from David Laband and Rob- ert Tollison in the Quarterly Journal of Austrian Economics 3, no. 1, Spring 2000. e reader should read their article (at the Mises Institute’s website) along with or before reading my reply in chapter . Chapters on “Macroeconomics and Coordination,” “e Keynesian Heritage in Economics,” “Hutt and Keynes,” and “e Image of the Gold Standard” deal with money-macro topics. e last two of the Economics chapters concern methodology or, rather, countermethodol- ogy: they advise against being intimidated by narrow methodological preaching. Several chapters in the Politics and Philosophy section examine the merits and demerits of democratic government. Two of them are book reviews. One of the books treats the American political system realistically. e other takes the George Stigler/Earl ompson line that—if I may exaggerate just a bit—whatever institution exists must be optimal or at least satisfactory; otherwise it would already have been replaced. Other chapters in the section deal with political philosophy. Most chapters are reprinted with only slight editing, particularly to standardize the system of references. Chapter has been expanded (and renamed) to take account of developments in the fifteen years since it first Acknowledgments ix appeared, and chapter (also renamed) has been modified at its beginning to read less like an invited introduction to others’ articles. Several pages of chapter have been cut out because they rebut a strained interpretation of Mises’s work that is hardly worth attention. Chapter , “e Debate about the Efficiency of a Socialist Economy,” although and perhaps especially because it dates from 1949, is printed unchanged. e selection process has just happened to give the book an Austrian flavor not originally intended. e bulk of my work is not particularly Austrian. On whether I count as an Austrian economist, see the opening lines of chapter . For enjoyable and instructive discussions over many years, I am indebted to dozens, even hundreds, of students in my graduate Seminar in Polit- ical Economy at the University of Virginia and at Auburn University. (at seminar covered its topics in more scope, detail, and technicalities than the articles included here.) Many persons, including ones both men- tioned and unmentioned in the individual papers, have given me valu- able instruction, encouragement, provocation, and warnings. I hesitate to list names because any such list would be incomplete and would suffer from my lapses of memory; but it would include Roger Garrison, Luis Dopico, Daniel Edwards, Robert Greenfield, Roger Koppl, Juergen Back- haus, Steven Caudill, Warren Nutter, Edgar Browning, William Breit, Northrup Buechner, Murray Rothbard, James Buchanan, Gordon Tul- lock, and, to go back many years, Aurelius Morgner, James Waller, and Clarence Philbrook. e Ludwig von Mises Institute made no suggestion that I mod- erate any views contrary to its own. For this and other reasons I am indebted to Llewellyn Rockwell, the Institute’s chairman, and Douglas French, its president. Jeffrey Tucker, editorial vice president, encouraged and patiently supported this book project from the beginning. Perhaps the Institute’s greatest support has been the services of Miss Lauren Bar- low. She helped select the papers to reprint; standardized the system of citations (including placement of notes where they belong, at the bottom of each page); questioned errors, undue repetition, and infelicitous for- mulations; coped with many drafts; and gave invaluable support on the many arduous chores scarcely imaginable by someone who has not tried to assemble diverse articles into a coherent (I hope) book. x Introduction For these reasons I extend my special admiration and thanks to Lauren Barlow. Hayek, F.A. “Degrees of Explanation” and “e eory of Complex Phenom- ena.” In Studies in Philosophy, Politics and Economics, 3–21, and 22–42. Chicago: University of Chicago Press, . Economics [ Should Austrians Scorn General Equilibrium eory?* Austrian economists try to explain how a whole economic system func- tions. ey do not focus narrowly on the circumstances of the individual household or the geometry of the individual firm. ey investigate the coordination of the mutually influencing yet separately decided activities of many millions of individual units; they investigate general interdepen- dence. General equilibrium