26. Utilitarian Free-Market Economics

0:00Part 4. Modern Alternative Theories of Liberty. Having presented our theory of liberty and property rights and discussed the inherent role of the state vis-a-vis liberty, we turn in this part of the work to a discussion and critique of several leading alternative theories of liberty brought forth in the modern world by those who are very roughly in the free market or classical liberal tradition. Whatever the other merits of these theories, they will be seen to provide a flawed and inadequate foundation for a systematic theory of liberty and the rights of the individual. CHAPTER 26 UTILITARIAN FREE MARKET ECONOMICS A. INTRODUCTION. UTILITARIAN SOCIAL PHILOSOPHY This emerged as a distinct self-conscious science or discipline in the 19th century, and hence this development unfortunately coincided with the dominance of utilitarianism in philosophy.

1:08The social philosophy of economists, therefore, whether the laissez-faire creed of the 19th century or the statism of the 20th, has almost invariably been grounded in utilitarian social philosophy. Even today, political economy abounds with discussion of the weighing of social costs and social benefits in deciding upon public policy. We cannot engage here in a critique of utilitarianism as an ethical theory. Here we are interested in analyzing certain attempts to use a utilitarian ethic to provide a defensible groundwork for a libertarian or laissez-faire ideology. Our brief criticisms will concentrate, then, on utilitarianism insofar as it has been used as a groundwork for a libertarian, or quasi-libertarian, political philosophy.

2:05In brief, utilitarian social philosophy holds the good policy to be the one that yields the greatest good for the greatest number, in which each person counts for one in making and in which the good is held to be the fullest satisfaction of the purely subjective desires of the individuals in society. Utilitarians, like economists, see further below, like to think of themselves as scientific and value-free and their doctrine supposedly permits them to adopt a virtually value-free stance, For they are presumably not imposing their own values, but simply recommending the greatest possible satisfaction of the desires and wants of the mass of the population.

2:55But this doctrine is hardly scientific, and by no means value free. For one thing, why the greatest number? Why is it ethically better to follow the wishes of the greater as against the lesser number? What's so good about the greatest number? Suppose that the vast majority of people in a society hate and revile redheads and greatly desire to murder them, and suppose further that there are only a few redheads extant at any time. Must we then say that it is good for the vast majority to slaughter redheads? And if not, why not? At the very least, then, Utilitarianism scarcely suffices to make a case for liberty and laissez-faire.

3:45As Felix Adler Reilly put it, utilitarians pronounce the greatest happiness of the greatest number to be the social end, although they fail to make it intelligible why the happiness of the greater number should be cogent as an end upon those who happen to belong to the lesser number. Secondly, what is the justification for each person counting for one? Why not some system of waiting? This too seems to be an unexamined and therefore unscientific article of faith in utilitarianism. Thirdly, why is the good only fulfilling the subjective emotional desires of each person?

4:30Why can there be no supra-subjective critique of these desires? Indeed, utilitarianism implicitly assumes these subjective desires to be absolute givens, which the social technician is somehow duty-bound to try to satisfy. But it is common human experience that individual desires are not absolute and unchanging. They are not hermetically sealed off from persuasion, rational or otherwise. Experience and other individuals can and do persuade and convince people to change their values. But how could that be so if all individual desires and values are pure givens and therefore are not subject to alteration by the intersubjective persuasion of others.

5:22But if these desires are not givens and they are changeable by the persuasion of moral argument, it would then appear that intersubjective moral principles do exist that can be argued and can have an impact on others. Oddly enough, while utilitarianism assumes that morality, the good, is purely subjective to each individual, it assumes, on the other hand, that these subjective desires can be added, subtracted and weighed across the various individuals in society. It assumes that individual subjective utilities and costs can be added, subtracted and measured so as to arrive at a net social utility or social cost, thus permitting the utilitarian to advise for or against a given social policy.

6:17Furthermore, some preferences, such as someone's desire to see an innocent person suffer, seem immoral on objective grounds. Yet a utilitarian must hold that they, fully as much as the most innocuous or altruistic Preferences must be included in the quantitative reckoning. I am indebted to Dr. David Gordon for this point. Modern welfare economics is particularly adept at arriving at estimates, even allegedly precise quantitative ones, of social cost and social utility. But economics does correctly inform us not that moral principles are subjective, but Note that utilities and costs are, indeed, subjective. Individual utilities are purely subjective and ordinal, and therefore it is totally illegitimate to add or weight them to arrive at any estimate for social utility or cost.

7:21b. The Unanimity and Compensation Principles Utilitarian economists, even more than their Their Philosophic Confrères are eager to make scientific and value-free pronouncements on public policy. Believing, however, that ethics are purely arbitrary and subjective, how may economists then take policy positions? This chapter will explore ways in which utilitarian free-market economists presume to favor a One important utilitarian variant is the unanimity principle, based on the criterion of Pareto optimality, that a political policy is good if one or more people are better off in terms of satisfying utilities from that policy, while no one is worse off.

8:21A strict version of Pareto optimality implies unanimity, that every person agrees to, hence believes that he will be better off, or at least no worse off, from a particular government action. In recent years, the unanimity principle as groundwork for a free market of voluntary and contractual agreements has been stressed by Professor James Buchanan. The unanimity principle has great attractions for value-free economists eager to make policy judgments for far more than in the case of mere majority rule. Surely the economist can safely advocate a policy if everyone in the society favors it.

9:07While the unanimity principle may at first appear superficially attractive to libertarians, however, there is at its heart a vital and irredeemable flaw. that the goodness of free contracts or unanimously approved changes from the existing situation depends completely on the goodness or justice of that existing situation itself. Yet neither Pareto optimality nor its unanimity principle variant can say anything about the goodness or justice of the existing status quo, concentrating as they do solely on changes is from that situation or zero point. Neither does the unanimity principle, as will be shown further below, keep the economist from making his own value judgments and thus breaching his value freedom, for even if the economist merely shares in everyone else's value judgment, he is making a value judgment, nevertheless. Not only that, but the requirement of unanimous This approval of changes necessarily freezes the existing status quo.

10:20If the status quo is unjust or repressive of liberty, then the unanimity principle is a grave barrier to justice and liberty, rather than a bulwark on its behalf. The economist who advocates the unanimity principle as a seemingly value-free pronouncement for Liberty is instead making a massive and totally unsupported value judgment on behalf of freezing the status quo. The commonly accepted compensation principle variant of Pareto optimality contains all the flaws of the strict unanimity principle, while adding many of its own. The compensation principle asserts that a public policy is good if the gainers in utility Utility from that policy can compensate the losers and still enjoy net gains, so that while there are losers in utility from this policy at the beginning, there are no such losers after the compensations take place.

11:22But the compensation principle assumes that it is conceptually possible to add and subtract utilities interpersonally, and thereby to measure gains and losses. It also assumes that each individual's gains and losses can be precisely estimated. But economics informs us that utility, and hence gains and losses in utility, are purely subjective and psychic concepts, and that they cannot possibly be measured or even estimated by outside observers. Compensations and losses in utility, therefore, cannot be added, measured or weighted against each other, and much less can precise compensations be discovered.

12:10The usual assumption by economists is to measure psychic losses in utility by the monetary price of an asset. Thus, if a railroad damages the land of a farmer by smoke, it is assumed by the compensationists that the farmer's loss can be measured by the market price of the land. But this assumption ignores the fact that the farmer may well have a psychic attachment to that land which is far greater than the market price, and that furthermore it is impossible to find out what the farmer's psychic attachment to the land may be. Asking the farmer is useless, since he may say, for example, that his attachment to the The land is much higher than the market price, but he may well be lying.

12:58The government, or other outside observer, has no way of finding out one way or the other. Furthermore, the existence in the society of just one militant anarchist, whose psychic grievance against government is such that he cannot be compensated for his psychic disutility from the Existence or Activity of Government is enough by itself to destroy the Compensation Principle case for any government action whatsoever. And surely at least one such anarchist exists. A stark but not atypical example of the fallacies and the unjust devotion to the status quo of the Compensation Principle was the debate in the British Parliament during the early Early 19th century on the abolition of slavery.

13:49Early adherents of the compensation principle were there maintaining that the masters must be compensated for the loss of their investment in slaves. At which point, Benjamin Pearson, a member of the Libertarian Manchester School, declared that he had thought it was the slaves who should have been compensated. Precisely, here is a striking example of the need in advocating public policy to have some ethical system, some concept of justice. Those of us ethicists who hold that slavery is criminal and unjust would always oppose the idea of compensating the masters, and would rather think in terms of requiring the masters to compensate the slaves for their years of oppression.

14:38But the value-free economist, resting on the unanimity and compensation principles, is, on the contrary, implicitly placing his unsupported and arbitrary value imprimatur on the unjust status quo. In a fascinating exchange with a critic of the unanimity principle, Professor Buchanan concedes that, I am defending the status quo not because I like it, I do not. But my defense of the status quo stems from my unwillingness, indeed, inability, to discuss changes other than those that are contractual in nature. I can, of course, lay down my own notions, but to me this is simply wasted effort.

15:23Thus, tragically, Buchanan, admitting that his idea of ethics is one of purely subjective is yet willing to promulgate what can only be an equally subjective and arbitrary notion on his own grounds, a defense of the status quo. Buchanan concedes that his procedure does allow me to take a limited step toward normative judgments or hypotheses, namely to suggest that the changes seem to be potentially agreeable to everyone. Pareto-efficient changes, which must, of course, include compensations. The criterion in my scheme is agreement.

16:08But what is the justification for this limited step? What's so great about agreement on changes from a possibly unjust status quo? Isn't such a limited step also an arbitrary notion for Buchanan? And if willing to proceed to such an unsatisfactory limit, why not go still further to question the status quo? Buchanan proceeds to assert that our task is really that of trying to find, locate, invent schemes that can command unanimous or quasi-unanimous consent and propose them. What in the world is quasi-unanimity? Since persons disagree on so much, these schemes may be a very limited set, and this may suggest to you that few changes are possible, hence the status quo defended indirectly.

17:05The status quo has no propriety at all save for its existence, and it is all that exists. The point I always emphasize is that we start from here, not from somewhere else. Here one longs for Lord Acton's noble dictum, liberalism wishes for what ought to be, irrespective of what is. Buchanan's critic, though far from a libertarian or a free-market liberal, here properly has the last word, I certainly do not totally object to seeking contractual solutions, but I do think that they can't be projected in a vacuum which allows the status quo power Let us now turn to the position of Ludwig von Mises on the entire matter of praxeology, value judgments and the advocacy of public policy.

18:11The case of Mises is particularly interesting, for he was, of all the economists in the 20th century, at one and the same time the most uncompromising and passionate adherent of laissez-faire, and the most rigorous and uncompromising advocate of value-free economics and opponent of any sort of objective ethics. How then did he attempt to reconcile these two positions? Mises offered two separate and very different solutions to this problem. The first is a variant of the unanimity principle. Essentially, this variant affirms that an economist per se cannot say that a given governmental policy is good or bad. However, if a given policy will lead to consequences, as explained by praxeology, which every one of the supporters of the policy will agree is bad, then the value-free economist is justified in Calling the Policy a Bad One. Thus, Mises writes, an economist investigates whether a measure A can bring about the result P for the attainment of which it is recommended, and finds that A does not result in P, but in G, an effect which even the supporters

19:30of the measure A consider undesirable. If the economist states the outcome of his investigation And again, economics does not say that government interference with the prices of only one commodity is unfair, bad, or unfeasible. It says that it makes conditions worse, not better, from the point of view of the government and those backing its interference. Now this is surely an ingenious attempt to allow pronouncements of good or bad by the economist without making a value judgment.

20:23For the economist is supposed to be only a praxeologist, a technician, pointing out to his readers or listeners that they will all consider a policy bad once he reveals its full consequences. But ingenious as it is, the attempt completely fails. For how does Mises know what the advocates of the particular policy consider desirable? How does he know what their value scales are now or what they will be when the consequences of the measure appear? One of the great contributions of praxeologic economics is that the economist realizes that he doesn't know what anyone's value scales are except as those value preferences are demonstrated by a person's concrete action.

21:14Mises himself emphasized that one must not forget that the scale of values or wants manifests itself only in the reality of action. These scales have no independent existence apart from the actual behavior of individuals. The only source from which our knowledge concerning these scales is derived is the observation of a man's actions. Every action is always in perfect agreement with the scale of values or wants because these scales are nothing but an instrument for the interpretation of a man's acting. In Mises' own analysis, then, how can the economist know what the motives for advocating various policies really are, or how people will regard the consequences of these policies?

22:05Thus, Mises, qua economist, may show that price control, to use his example, will lead to unforeseen shortages of a good to the consumers. But how does Mises know that some advocates of price control do not want shortages? They may, for example, be socialists, anxious to use the controls as a step toward full collectivism. Some may be egalitarians who prefer shortages because the rich will not be able to use their money to buy more of the product than poorer people. Some may be nihilists, eager to see shortages of goods. Others may be one of the numerous legion of contemporary intellectuals who are eternally complaining about the excessive affluence of our society or about the great waste of energy.

22:58They may all delight in the shortages of goods. Still others may favor price control even after learning of the shortages because they or their political allies will enjoy well-paying jobs or power in the price control bureaucracy. All sorts of such possibilities exist, and none of them is compatible with Mises' asserting as a value-free economist that all the supporters of the price control or of any other government intervention must concede after learning economics that the measure is bad. In fact, once Mises concedes that even a single advocate of price control or any other interventionist measure may acknowledge the economic consequences and still favor it for whatever reason, then Mises as a praxeologist and economist can no longer call any of these measures bad or good or even appropriate or inappropriate without inserting into his economic policy pronouncements the very value judgments that Mises himself holds to be inadmissible in a scientist of human action.

24:12For then, he is no longer being a technical reporter to all advocates of a certain policy, but himself an advocate, participating on one side of a value conflict. Moreover, there is another fundamental reason for advocates of inappropriate policies to refuse to change their minds even after hearing and acknowledging the praxeological chain of consequences. Our praxeology may indeed show that all types of government policies will have consequences that most people, at least, will tend to abhor. However, and this is a vital qualification, most of these consequences take time, some a great deal of time.

24:59No economist has done more than Ludwig von Mises to elucidate the universality of time preference in human affairs. The praxeologic law that everyone prefers to attain a given satisfaction sooner than later. And certainly Mises, as a value-free scientist, could never presume to criticize anyone's rate of time preference, to say that A's was too high or B's too low. But in that case, what about the high time preference people in society who may retort to the praxeologist? Perhaps this high tax and subsidy policy will lead to a decline of capital. Perhaps even the price control will lead to shortages, but I don't care.

25:46Having a high time preference, I value more highly the short-run subsidies or the short-run enjoyment of buying the current good at cheaper prices than the prospect of suffering the future consequences. And Mises, as a value-free scientist and opponent of any concept of objective ethics, cannot call them wrong. There is no way that he can assert the superiority of the long run over the short run without overriding the values of the high time preference people, and this cannot be cogently done without abandoning his own subjectivist ethics. In this connection, one of Mises' basic arguments for the free market is that on the market there is a harmony of the rightly understood interests of all members of the market society.

26:40It is clear from his discussion that he doesn't merely mean interests after learning the praxeological consequences of market activity or of government intervention. He also and in particular means people's long run interests, for as Mises states, for rightly understood interests we may as well say interests in the long run. But what about the high time preference folk who prefer to consult their short run interests? How can the long run be called better than the short run? Why must right understanding necessarily be the long run? We see, therefore, that Mises' attempt to advocate laissez-faire while remaining value-free, by assuming that all of the advocates of government intervention will abandon their position once they learn of its consequences, falls completely to the ground.

27:38There is another and very different way, however, that Mises attempts to reconcile his passionate Advocacy of Laissez-Faire with the Absolute Value Freedom of the Scientist. This is to take a position much more compatible with praxeology, by recognizing that the economist qua-economist can only trace chains of cause and effect and may not engage in value judgments or advocate public policy. This route of Mises concedes that the economic scientist cannot advocate laissez-faire, but then adds that he as a citizen can do so. Mises as a citizen then proposes a value system, but it is a curiously scanty one, for he is here caught in a dilemma. As a praxeologist, he knows that he cannot, as an economic scientist, pronounce value judgments or advocate policy.

28:38But he cannot bring himself simply to assert and inject arbitrary value judgments. And so, as a utilitarian, for Mises, along with most economists, is indeed a utilitarian in ethics, although a Kantian in epistemology, what he does is to make only one narrow value judgment, that he desires to fulfill the goals of the majority of the public. Happily, in this formulation, Mises does not presume to know the goals of everyone. As Mises explains in his second variant, liberalism, that is laissez-faire liberalism, is a political doctrine. As a political doctrine, liberalism, in contrast to economic science, is not neutral with regard to values and ultimate ends sought by action.

29:32It assumes that all men, or at least the majority of people, are intent upon attaining certain goals. It gives them information about the means suitable to the realization of their plans. The champions of liberal doctrines are fully aware of the fact that their teachings are valid only for people who are committed to their valuational principles, while praxeology and therefore economics, too, uses the terms happiness and removal of uneasiness in a purely formal sense. Liberalism attaches to them a concrete meaning. It presupposes that people prefer life to death, health to sickness, abundance to poverty.

30:17It teaches men how to act in accordance with these valuations. In this second variant, Mises has successfully escaped the self-contradiction of being a value-free praxeologist advocating laissez-faire. Granting in this variant that the economist may not make such advocacy, he takes his stand as a citizen willing to make value judgments. But he is not willing to simply assert an ad hoc value judgment. Presumably, he feels that a valuing intellectual must present some sort of ethical system to justify such value judgments. But as a utilitarian, Mises' system is a curiously bloodless one.

31:03Even as a valuing laissez-faire liberal, he is only willing to make the one value judgment that he joins the majority of the people in favoring their common peace, prosperity and abundance. In this way, as an opponent of objective ethics, and uncomfortable as he must be with making any value judgments even as a citizen, he makes the minimal possible degree of such judgments. True to his utilitarian position, his value judgment is the desirability of fulfilling the subjectively desired goals of the bulk of the populace. A few points in critique of this position may here be made. In the first place, while praxeology can indeed demonstrate that laissez-faire will lead to harmony, prosperity and abundance, whereas government intervention leads to conflict and impoverishment, and while it is probably true that most people value the former highly, it is not true that these are their only goals or values.

32:10The great analyst of ranked value scales and diminishing marginal utility should have been Many people, whether through envy or a misplaced theory of justice, may prefer far more equality of income than will be attained on the free market. Many people, pache the aforementioned intellectuals, may want less abundance in order to whittle down our allegedly excessive affluence. Others, as we have mentioned above, may prefer to loot the capital of the rich or the businessman in the short run, while acknowledging but dismissing the long-run ill effects because they have a high time preference.

32:56Probably very few of these people will want to push statist measures to the point of total impoverishment and destruction, although this may well happen. But a majority coalition of the above might well opt for some reduction in wealth and prosperity on behalf of these other values. They may well decide that it is worth sacrificing a modicum of wealth and efficient production because of the high opportunity cost of not being able to enjoy an alleviation of envy, or a lust for power, or submission to power, or, for example, the thrill of national unity, which they might enjoy from a short-lived economic crisis. What can Mises reply to a majority of the public who have indeed considered all the praxeological consequences, and still prefer a modicum, or, for that matter, even a drastic amount of statism, in order to achieve some of their competing goals.

34:00As a utilitarian, he cannot quarrel with the ethical nature of their chosen goals. For, as a utilitarian, he must confine himself to the one value judgment that he favors the majority achieving their chosen goals. The only reply that Mises can make within his own framework is to point out that government intervention has a cumulative effect, that eventually the economy must move either toward the free market or toward full socialism, which praxeology shows will bring chaos and drastic impoverishment, at least to an industrial society. But this too is not a fully satisfactory answer. While many or most programs of statist intervention, especially price controls, are indeed cumulative. Others are not. Furthermore, the cumulative impact takes such a long time that the time preferences of the majority might well lead them, in full acknowledgment of the consequences, to ignore the effect. And then what? Mises attempted to use the cumulative argument to answer the contention that the majority of the public prefer egalitarian and Measures, even knowingly at the expense of a portion of their own wealth.

35:23Mises' comment was that the reserve fund was on the point of being exhausted in Europe, and therefore that any further egalitarian measures would have to come directly out of the pockets of the masses through increased taxation. Mises assumed that once this became clear, the masses would no longer support interventionist Measures. But in the first place, this is not a strong argument against the previous egalitarian measures, nor in favor of their repeal. But secondly, while the masses might well be convinced, there is certainly no apodictic certainty involved. And the masses have certainly in the past, and presumably will in the future, continue knowingly to support egalitarian and other statist measures on behalf of others of their goals, despite the knowledge that their income and wealth would be reduced.

36:21Thus Dean Rappard pointed out in his thoughtful critique of Mises' position, does the British voter for instance favor confiscatory taxation of large incomes primarily in the hope that it will redound to his material advantage? or in the certainty that it tends to reduce unwelcome and irritating social inequalities? In general, is the urge towards equality in our modern democracies not often stronger than the desire to improve one's material lot? And on his own country, Switzerland, Dean Rappard pointed out that the urban, industrial and commercial majority of the country have repeatedly and often at popular referenda endorsed measures to subsidize the minority of farmers in a deliberate effort to retard industrialization and the growth of their own incomes.

37:18Rappard noted that the urban majority did not do so in the absurd belief that they were thereby increasing their real income. Instead, quite deliberately and expressly, political parties have sacrificed the immediate material welfare of their members in order to prevent, or at least somewhat to retard, the complete industrialization of the country. A more agricultural Switzerland, though poorer, such is the dominant wish of the Swiss people today. The point here is that Mises, not only as a praxeologist but even as a utilitarian liberal, can have no word of criticism against these statist measures once the majority of the public have taken their praxeological consequences into account and chosen them anyway on behalf of goals other than wealth and prosperity.

38:15Furthermore, there are other types of statist intervention which clearly have little or no cumulative effect, and which may even have very little effect in diminishing production or prosperity. Let us for example assume again, and this assumption is not very far-fetched in view of the record of human history, that the great majority of a society hate and revile redheads. Let us further assume that there are very few redheads in the society. This large majority then decides that it would like very much to murder all redheads. Here they are. The murder of redheads is high on the value scales of the great majority of the public. There are few redheads, so that there will be little loss in production on the market.

39:04How can Mises rebut this proposed policy, either as a praxeologist or as a utilitarian liberal? I submit that he cannot do so. Mises makes one further attempt to establish his position, but it is even less successful. Criticizing the arguments for state intervention on behalf of equality or other moral concerns, he dismisses them as emotional talk. After reaffirming that praxeology and economics are neutral with regard to any moral precepts, and asserting that the fact that the immense majority of men prefer a richer supply of material goods to a less ample supply is a datum of history, it does not have any place in Economic Theory.

39:52He concludes by insisting that he who disagrees with the teachings of economics ought to refute them by discursive reasoning, not by the appeal to arbitrary, allegedly ethical standards. But I submit that this will not do, for Mises must concede that no one can decide upon any policy whatever, unless he makes an ultimate ethical or value judgment. But since this is so, and since according to Mises all ultimate value judgments or ethical standards are arbitrary, how then can he denounce these particular ethical judgments as arbitrary? Furthermore, it is hardly correct for Mises to dismiss these judgments as emotional, since for him as a utilitarian reason cannot establish ultimate ethical principles, which can therefore only be established by subjective emotions.

40:51It is pointless for Mises to call for his critics to use discursive reasoning, since he himself denies that discursive reasoning can ever be used to establish ultimate ethical values. Furthermore, the man whose ultimate ethical principles would lead him to support the free market should also be dismissed by Mises as equally arbitrary and emotional, even if If he has taken the laws of praxeology into account before making his ultimately ethical decision. And we have seen above that the majority of the public very often has other goals which they hold, at least to a certain extent, higher than their own material well-being. Thus, while praxeological economic theory is extremely useful for providing data and knowledge for framing economic policy, it cannot be sufficient by itself to enable the economist to make any value pronouncements or to advocate any public policy whatsoever.

41:55More specifically, Ludwig von Mises to the contrary notwithstanding, neither praxeological economics nor Mises' utilitarian liberalism is sufficient to make the case for laissez-faire and the free market economy. To make such a case, one must go beyond economics and utilitarianism to establish an objective ethics which affirms the overriding value of liberty, and morally condemns all forms of statism, from egalitarianism to the murder of redheads, as well as such goals as the lust for power and the satisfaction of envy. To make the full case for liberty, one cannot be a methodological slave to every goal that the majority of the public might happen to cherish.