Friday, September 7, 2012

The "Laws" of Economics

My brother David sent me this from the Bastiat Institute.  My father was a huge fan of Frederic Bastiat, the acerbic wit of the Austrian economics movement, and always kept a case of his The Law in his car trunk to hand out to anyone he thought might be interested and read it.  He probably gave away thousands of copies over his lifetime.

Sentimentality notwithstanding, the problem with this saying is (1) that it is so widely held (implicitly) in traditional neoclassical economic teaching and explicitly in public policy, and (2) that it fundamentally mistakes social contrivances for natural law.  The "law" of supply and demand certainly does work in many market contexts (if imperfectly, the modeling of which has built many economists' careers).  BUT, those market contexts are built on formal laws and informal norms, on historical trajectories and institutional structures that are cultural, social, human.

It is important that we understand that markets are social contrivances and not the product of natural laws--doing so gives us the freedom to use markets to promote the sort of life we value.  Sure, truck and barter is part of the human condition, as Adam Smith phrased it.  But we construct just how we go about it.  And seeing markets as something we create gives us the power to change them toward the ends we best see fit.  In contrast, seeing markets as expressing natural laws allows our leaders to disavow hard moral and political choices onto the moral logics of the market.  Industrial policy, regulation, and all the other currently unfashionable ideas should not be seen as misguided attempts to change the inevitable, but as morally neutral tools to orient markets towards ends that we collectively (if I dare use that word) decide are the best.


  1. Intriguing post!

    I'm an anthropologist very interested in the methodology of Austrian Economics and I'm thinking you may be just a little hasty. Neoclassical Economic tradition (NET), as I'm sure you know, is quite different than Austrian Economic tradition (AET) for one important reason. Consider that AET is profoundly influenced by Weber's critique of Marxian causality and his insistence upon hermeneutic accounts of human action. The AET adds to the critique of Marx a rejection of an objective theory of value (labor theory). Essentially, the AET developed the subjective theory of value in order to account for those socio-cultural factors absent from NET. (Sahlins ended up here as well, just many years later.) Such factors as historical trajectories and institutional structures very much effect the outcome of transactions, as the Austrians made great pains to assert. For the Austrians, economic activity is a broad category of action that is essentially subjective (think Alfred Schutz), and not at all reducible to quantification. The formalism you mention resides in the mechanism for any action, in other words the law is that action entails moving from one state to another driven by preference. Note, the Austrians say nothing about the content of the preferences - as those preferences are subjective and may include loyalty, kinship, rationalism, fear, obedience, etc. Part of what leads to the common misconception is that Mises specifically tries to recast "utility" as encompassing any preference - rightly recognizing that the NET definition falsely assumes that all economic action seeks to optimize quantifiable value (Mises makes the distinction that value can be ordinal but not cardinal and thus resists the NET approach). For Mises, in particular, utility may include maximizing social status, solidifying familial bonds, leisure, or any other subjective value. Additionally, Mises uses rational action in a specific sense that actions follow logically from subjective premises within constraints (time, scarcity, etc) - not that actions are necessarily (1) good or (2) effective. It isn't a normative claim. Think of his use of rational as similar to the way E. E. Pritchard speaks of the Nuer as rational. Finally, again I'm referring mainly to Mises, AET is intended to be descriptive and explicitly not normative. Mises states many times that his theory of action makes no claim about the value of any particular action. More specifically he states that a governing body or population may indeed choose to intervene because of some particular value system. (He rejects intervention as impractical, not immoral.)

    So when you mention that "those market contexts are built on formal laws and informal norms" you are asserting an unnecessary dichotomy.. The Austrian formal law is that subjective valuation and preference determines action and that there are time and scarcity constraints - norms inform those subjective valuations. So the formal laws regard subjective action which is situated in informal contexts.

    So with regard to the image - an Austrian would argue that the government cannot change the law of economics- the law being that human action is governed by subjective valuation, a law that is quite consonant with findings by anthropologists and sociologists from Garfinkel, through Sahlins and Appadurai.
    Now there is of course much anthro theory that would find disagreement with the Austrians, namely Marxian variations. I’m just saying that AET fits coherently within the Weberian paradigm and is somewhat supported by practice theory and interactionist theory. Of course there is a lot that the Austrians got wrong with regard to anthropology! But that could be another discussion.

    In all – I suppose my rambling is intended to say that I believe you and your brother might find a ton to agree on through Austrian theory as a mediator; your common enemy is neoclassical economic theory.

  2. In the universe of blog composing, this blog really should be known as the best.
    Joseph Hayon