Saturday, 23 June 2012

The Task of Economists

In my post “The Task of Political Philosophers” I explained the circumstances that give rise to the subject of political philosophy: namely, scarcity and diversity, and therefore the possibility of conflicts over scarce goods.  I explained the solution that humans have evolved to deal with this problem of conflicts: namely, the principle of ownership, property and rights.  I explained that political philosophy is about specifying when coercive actions are acceptable, and when they are not, and that this reduces to specifying a particular set of property assignment principles or rules for determining who owns what.

In my post “Libertarian Property Assignment Rules” I explained the principles that libertarians use to determine who owns what: namely, homesteading and voluntary exchange.  I contrasted the libertarian property assignment rules to the property assignment rules of other political philosophies, which reject homesteading and/or voluntary exchange in favor of some other set of principles for determining ownership.

Naturally, the next question is: Why support libertarian property assignment rules and not the property assignment rules of some other political philosophy?

Many libertarians have given justifications for libertarianism.  They are often categorised as either “deontological” (or “ethical”) or “consequentialist” (or “economic”).  I will set aside the deontological arguments for now to focus on the consequentialist argument.  This argument is based on the claim that a society operating using libertarian property assignment rules will be more prosperous, all other things being equal, than a society using some other property assignment rules.

To understand why this is the case, we need economics.  Economics is defined as the study of the logical consequences of the axiom that humans act (i.e. behave purposefully).  By considering the logical consequences of human action in different situations, economics teaches us the logical consequences of different property assignment rules.

The study of economics starts by considering a single individual – often named Crusoe – living alone on a deserted island and engaging in action (purposeful behavior).  There is a great deal we can learn from considering a lone human actor.  The categories of ends, means, knowledge, time, scarcity, environment, value, goods, choice, uncertainty, risk, desire, costs, benefits, profits, losses, production, consumption, saving, investing, capital, wealth, entrepreneurship, speculation, labor, leisure, supply, marginal utility, efficiency, convertibility, durability, and the structure of production – are all logically implied by the action axiom and apply even to a single individual living alone.

The next step is to bring in additional individuals and consider a simple ‘island society’ of individuals making direct voluntary exchanges with each other.  The categories of exchange, buyer, seller, demand, price, contract, specialisation, cooperation, competition, employment, charity, credit, debt, interest, the division of labor, the division of knowledge and the law of association – all emerge even in a simple society of direct voluntary exchanges between individuals.

Any society of purely direct exchanges will be limited by the well-known problems associated with direct exchange, such as the requirement of a ‘double coincidence of wants’.  If an individual has pears and wants to exchange them for fish, he has to find someone who has fish and wants to exchange them for pears, which he may not be able to because of the cost of searching for such a person.  The solution is for him to use a medium of exchange.  He sees that the fisherman has fish and wants salt, so he finds someone willing to exchange salt for his pears, and then goes back to the fisherman to exchange the salt for fish.  This is an indirect exchange of fish and pears, where salt has functioned as a medium of exchange.   

Some goods are more suitable than others as a medium of exchange.  And once a medium of exchange becomes widely accepted, there is a tendency for it to become generally or even universally accepted.  A good that is a generally accepted medium of exchange is called a money

The next step for the economist is to look at the logical consequences of a society where individuals make indirect exchanges, using a money.  Money makes more exchanges possible, so more wealth is generated.  Besides solving the problems associated with direct exchange, money brings many other benefits to society, the most important being that it enables economic calculation.  Individuals are able to directly compare goods through money prices, so they can calculate whether their actions are adding value or destroying value.  Producers can compare the prices of their inputs and the price of their outputs to determine whether they are using resources wisely or wastefully.  Money prices – formed through a society of voluntary indirect exchanges – serve as signals which guide the actions of individuals towards making good use of resources.

Up to this point, the economist has only considered a society of voluntary exchanges.  Such a society may be called a free market.  It is the result of the operation of the principles of libertarianism: homesteading and voluntary exchange.  In order to compare libertarian property assignment rules to other property assignment rules, the economist must begin to consider what happens when coercion is used by some individuals.  Does any form of coercion result in better consequences than those which result from a purely free market voluntary society?  Can targeted, systematic coercion ever increase prosperity?

Not many people believe that coercive acts such as murder, rape, slavery, robbery, theft, assault, fraud, trespass, etc, have good consequences when carried out by ‘ordinary’ individuals.  However, there are many who believe that similar coercive acts committed by individuals acting as States have good consequences.  Coercive actions carried out by individuals acting as States include war, conscription, prohibitions, price controls, product controls, labor controls, monopolisation, taxation, tariffs, subsidies, bailouts, forced wealth redistribution, eminent domain, forestalling, etc. 
The task of the economist is to first understand the workings of a voluntary society, and then to examine the logical consequences of coercive actions, to show whether such actions increase or decrease prosperity compared to a society of purely voluntary actions. 

The consequentialist case for libertarianism is based on the economic reasoning that shows that free markets – the form of society that results from libertarian property assignment rules – maximise prosperity.  Austrian School economists such as Ludwig von Mises and Murray Rothbard have shown that coercive actions – even those carried out States – always have negative consequences on the prosperity of a society.


  1. Really with your assignment rules you choose maximising prosperity over justice and peace. If I pick apples in your garden and get rich selling them (I am the first to pick them, so they are mine), you are going to be pissed off when you find out.
    This is what happens with oil in the middle east right now. It also happened with American natives in the time of colonisation. I can't understand why people can't see how unjust these assignment rules are.

  2. No, the libertarian assignment rules maximise justice, peace and prosperity. These three things are all related.

    You have misunderstood the homesteading principle. If it was MY garden, then they were MY apples. Why on earth would they become YOURS if you trespass on my land and steal my apples?

    Oil, really? You think the U.S. government stealing money from taxpayers, spending it on armed forces, and then invading foreign lands to secure oil on behalf of the big oil companies that lobby government and fund the politicians... is somehow relevant to a free market? Likewise the barbaric treatment of American natives. It's clearly trespassing, theft, etc. How is any of this relevant to libertarian principles?

  3. You clearly stated yourself, property comes into existence when a resource is assigned.

    'The libertarian says that you were the rightful owner of the apple, because you picked it, and I did not.'

    This assignment rule, created by John Locke, is the justification of settlers taking land from natives and of American companies (and state) taking oil from other nations. It is still the foundation of modern economics and it is obviously unjust. Apparently there where people at the time of Locke who felt that resources should be owned to all the people on earth. But Locke, working for the Government (yeah, I know) pushed this law. A resource based economy would also consider resources to be owned by all the worlds people. It maximizes justice, peace and the survival of the species.

    1. Homesteading is the libertarian principle for determining original ownership, i.e. how previously unowned objects can be owned for the FIRST time.

      So obviously taking land FROM NATIVES has nothing to do with homesteading because that land was PREVIOUSLY OWNED BY THE NATIVES. It was not PREVIOUSLY UNOWNED. It was therefore simple theft by the settlers from the natives, and not anything to do with the modern libertarian principle of homesteading, which applies to previously unowned objects and deciding ORIGINAL owners.

      In my apple example, as I made clear, I was referring to original appropriation. The apple WAS, by supposition, previously unowned, and the question was: which of the two claimants ought to be considered the rightful FIRST owner, given that there is a dispute between them over how the apple is to be used and they cannot both be satisfied?

      What is your criterion for determining original ownership? Or, in other words, what criterion would you use to determine which of the two claimants to the apple will get their way?

    2. Basically neither would own the apple, as it is produced by the earth, and the earth belongs to all the people on it. So they would have to share it. Find an agreement.

      People are obliged to take care of each other. Failure to do so is not acceptable. If one group of people would have 100 apples, the other 100 fish, they could trade 50 a for 50 f. If one would have a 1000 apples, the other 0 fish, in a market system the latter would be left to die because they have nothing to offer, while in an rbe system they would have to share the apples.

    3. That's not an answer. The PREMISE is that the two people cannot reach agreement, so they turn to some third party to help them reach an agreement. I am asking you, as if you were that third party, which of the two claimants you would award the apple to.

      Wouldn't it be great if we all just got along? Unfortunately, that's not the world we live in and so we need some way of deciding what is to happen when interests clash.

      Your second paragraph is a complete contradiction of your first. Ownership is a prerequisite for trade.

      And just to clarify, when you say that in RBE people are OBLIGED to do certain things and they HAVE TO share certain things, what you mean is that you consider it acceptable for someone to use coercion against them if they have no wish to share. Your idea of sharing is holding a gun to people's heads to force them to share. Is that right?