Redistribution within the Austrian camp

A question was recently raised about policies of redistribution within the Austrian approach to political economy.  This is a fundamental question and should be addressed.

I think it is important to stress that there is nothing within Austrian economics per se that would entail a rejection of a normative focus on income inequaity and the standard of living of the poorest of the poor.  In fact, one of our current graduate students --- Adam Martin --- is doing some serious thinking (and writing) on the topic of global justice and his first efforts are an immanent critique of the work of Thomas Pogge.   In my graduate course in political economy, we spend a considerable amount of time discussing the distributive justice literature found in Hayek, Rawls, Nozick and Buchanan.*

So in response to the question concerning redistribution I would stress the following:

1. Public policy is never a question of "fair division", but always a choice between a set of rules which engender a pattern of exchange and production.

2. There are endowments and individual choice incentives, and while we can "fix" unequal initial endowments we have not found a way to do so that does not impact adversly choice incentives.

3. The tendency within a market economy is for workers to get paid their marginal product.

4. The only way to increase real income is to increase real productivity, and the best ways to increase real productivity is through improvements in labor skill, additions to, and advancements in, capital investment, and enhancements in managerial practices and organizational structures.

5. The policy environment that raises the real income of the least advantaged in society is, in fact, one of economic freedom, and not one of redistribution.

The most important writings on the question of distributive justice within the Austrian school are, as usual, found in Mises, Hayek, and Kirzner.  In fact, Kirzner has written an entire book on the subject, Discovery, Capitalism, and Distributive Justice. Hayek's critique of 'social justice' in Law, Legislation and Liberty, and in particular his emphasis on catallactics and the non-teleological nature of the market economy is obviously on point.  And obviously, Hayek's concern that our atavistic moral sentiments conflict with the moral demands of the 'Great Society' is an important tension in the liberal project.  But I think Mises's discussion of Ricardo's Law of Association and the foundations of social cooperation is perhaps the most fundamental point of departure for the entire discussion.

Finally, one would be hard pressed to think about these issues without some appeal to moral theory and from a libertarian perspective perhaps the best expositions are to be found in Murray Rothbard and Robert Nozick.  David Schmidtz's Elements of Justice is also an extremely important contribution to the field.

My question in all of this, is what empirical arguments do you find most persuasive in challenging the prevailing opinion that social justice demands transfer of resources from the rich to the poor?

*In the October Freeman, Sudha Shenoy has an excellent discussion of Jeffrey Sachs's claim that the Nordic countries prove Hayek to be wrong on The Road to Serfdom thesis, and the idea that redistribution policies undermine economic growth and development.

Comments

[Steve Horwitz]

One of the most compelling arguments is that the market is already doing quite well by the poor, if not better than any redistribution would do in the long run. I posted some thoughts on this over at Liberty and Power:

http://hnn.us/blogs/entries/44568.html

The other element of an Austrian approach to redistribution, I think, is that "ought presupposes can." If social justice says we "ought" to redistribute, but in fact we cannot do so in a way that makes the poor absolutely better off (perhaps because redistributionist policies destroy the incentive to create the capital that increases the wages of the poorest), then the "ought" is irrelevant. Think of this as an application of Yeager's work on the contributions of social science to ethics.

If you're sufficiently interested, you might take a look at some remarks I gave on my campus about two years ago in response to a lecture on ethics and economic justice by an alum who is a Unitarian minister and social justice activist. It's pretty short.

http://myslu.stlawu.edu/~shorwitz/mackay06.htm

I'm not sure how distinctly Austrian any of this is, but it's sure good economics I think.

[matthew mueller]

Steven Horwitz makes a good point, and is similar to the main argument Professor Boettke has identified in the work of Mises --- that of "suitability analysis". Given the acknowledgment of commonly accepted ends (the utilitarian improvement of material wealth and welfare) the question then becomes one of means, or the practical application of desirable ends. Once the flaws of interventionism and socialism have been exposed, so the argument goes, the efficacy of capitalism will finally be vindicated as the most effective way of achieving utilitarian ends.

However, I have problems with some of the other points Boettke outlined in his post, namely, the natural tendencies of the market to coordinate demand and supply in a way that equilibrates market processes. Is the market really capable of diffusing completely or successfully valuable information that will enable workers to get paid their marginal product and allow the production of capital to generate greater productivity?

These assumptions in my view grant far too much to the natural abilities of the market process (or the Kirznerian entrepreneur). But is this not the main problem with the work of Ludwig Lachmann? How can we defend the free market if we are forced to acknowledge the reality of the dark forces of time and ignorance?

So I think progress in this area (progress being defined as the refutation of the prevailing view advocating wealth redistribution) can only be achieved by making assumptions that defy economic reasoning. There is no inexorable tendency in the free market to consistently improve the welfare of individuals in society.

[Peter Boettke]

Matthew,

Take a look at Lachmann's contribution to the Mises feitshrift --- it is on the question of distribution and the market economy.

I really think that the interpretation you are pushing for Lachmann (an interpretation admittedly that many in the Austrian camp push for) is actually a false reading. Lachmann understood systemic forces that are at work in market economies. He was against the idea that (a) we were in equilibrium, and (b) that we can know THEORETICALLY whether equilibrating or disequilibrating factors were the dominant factors in operation. But nothing in that says that there are not powerful equilibrating tendencies in market economies --- and those equilibrating tendencies are captured in the limit by the neoclassical optimality conditions.

To put this another way, the subjectivist tradition of Shackle and Lachmann makes vital contributions, but it should never displace our understanding the positive role that economic calculation plays in coordinating economic activities at any point in time and through time.

Any economics worth the name economics, must be able to discuss the systematic function of relative price adjustments. Failure to do so means that you move away from talking about economic phenomena in an economically sensible manner.

Pete

[dglesvic]

If taking from the rich to give to the poor doesn't reduce but increases inequality, it is immoral by the redistributionist's own standards, and there is no more question of social justice. The economic theory settles the moral as well as the economic issue.

So, let's pick up the discussion where we had left off.

Querist had asked:

“Lump-sum tax or income tax? If latter what is the rate? More detail is needed to evaluate the coherence of the argument.”

I had simply responded that his question was immaterial. Here's why.

None of the details of a redistribution change the fact that it consists of burdens and benefits, and that the market will compensate for them. The only question is whether it will under, fully, or over-compensate for them.

Whether the burdens and benefits are large or small, in lump-sums or spread over time, and at a 50 or 51% rate, the question is still the same: will the market under, fully, or over-compensate for them.

Since the question is the same, regardless of the details, the details are immaterial.

You can access the full theory by clicking on my name below, and then just a little way down the page you'll come to, clicking on Comments.

[Greg Ransom]

Kirzner's _Discovery, Capitalism, and Distributive Justice_ is a truly great book and deserves to be much more widely known.

[Steve Horwitz]

A second for Greg R's last comment. A much underappreciated work of Israel's.

[Vilfredo Pareto]

I think that we have to distinguish two interrelated questions:

(1) The first one is common: disequilibrating/equilibrating tendencies, with all the theoretical questions behind it.

(2) The notion of marginal productivity.

These two questions are interrelated since the notion of marginal productivity can be analytically defined and conceptualized only as an equilibrium construct. But further questions must be raised.
These further questions are due to the Austrian conception of capital: heterogeneous, multiple specificty, joint production, flow-input flow-output.
If we accept all these hypotheses, the question is :
How can we impute the creation of value to one particular (type of?)input when its "productivity" exclusively depends on the production plan (i.e. the capital combinations) into which it is integrated?
If the very same kind of good does not have the same productive efficiency in two different capital combinations, how can we even define (just define, not determine, which would be a still harder question) its marginal contribution to the output?
Further theoreticla difficulties abond if we take into account the "flow" conception of production.

I think that the notion of marginal productivity only applies when: (1) the production set is given (no discovery, no innovation); (2) capital is homogeneous; (3) constant returns to scale (the basic critic against Wieser's imputation); (4) equilibrium and (5) point input/point output.

Obviously, none of these conditions are met by the Austrian theory of capital. I have always thought that the concept of marginal productivity is politically powerful, but theoretically questionable if one doesnt accept strong hypotheses on production.

I may be wrong. I am waiting for your comments.
Have a nice day.

[dglesvic]

Again, with the details that don't change the fact that there are burdens and benefits, and the only question is whether the market will partly, fully, or over-compensate for them.

Can you never get to the point?

[Anon]

Dr Boettke

Please can you ban Mr Lesvic. He is out of his depth discussing grown-up economics. Perhaps you can send him off the sandbox to play.

His comments above reveal that he has no idea what lump-sum taxation is and he clearly does not fathom the seriousness of the questions that Pareto raises about Austrian capital theory.

Best wishes

A loyal reader

[matthew mueller]

Another interesting argument against wealth redistribution is to be found in Rothbard's The Ethics of Liberty. Rothbard correctly notes that one finds in Mises the best case for market capitalism. However, what if people continue to insist that government intervention is necessary, despite the powerful forces of the market? What if they ignore the benefits of capitalism and call for immediate equality? Well, according to Rothbard, the argument becomes a political one. No longer is one able to make his case for capitalism on utilitarian grounds, but is now forced to make a libertarian defense of individual liberty and private property. Most democrats have good reason to remain ignorant of economics.

[Peter Boettke]

Dear Mr. Parteo (I would much prefer a real name):

Excellent questions, but not as devastating to the theory of marginal productivity as you might believe. First, the question you raise, though not identical, is similar I would argue to the one that Alchian and Demsetz sought to solve in dealing with team production. So I would point you to their paper on that --- found in Alchian's Economic Forces at Work. Market mechanisms sort these imputations of value through the structure of production and the interconnectedness and intertemporal coordination ... we move from I, Woolen coat, to I, Pencil, to I, Car, to I, Computer ... as we get more and more complex processes of production.

Second, and this is a further elaboration on the market mechanism issue, of course in the world we are never at the limit theorems of optimal conditions, so the exhaustion theorem of factor pricing doesn't hold completely. But does that mean it needs to be rejected? I don't think so, what it suggests instead is that there are tendencies that market processes exhibit, but that there are always intervening changes that cause redirection, etc. What you have are filter processes at work --- in the area of factor pricing I would say those are opportunity cost and the marginal revenue product of the asset (labor, capital, etc.). We are postulating a price searching model (not price taking), and the supply curve for labor is a function of the opportunity cost of labor services, and the demand curve is a function of the marginal revenue product. In the limit, at any one point in time, the bidding process will push to that point where the opportunity cost and the marginal revenue product are equated --- the value of the marginal product will equal the wage rate paid. While we cannot say that in a market at any slice of time this is in fact the condition, we can say that markets left to their own devices will exhibit this tendency strongly. No worker will accept a job for a wage lower than their opportunity cost, and no firm will higher a worker for a wage greater than their marginal revenue product. Of course mistakes are made in labor markets, just as in any other factor market all the time, but the "beauty of the market system" is that such mistakes are 'detected and corrected' either by the entrepreneur in question, or more to the point OTHER entrepreneurs competing in the marketplace.

Pete

[dglesvic]

What, you're not going to burn me at the stake?

I'm insulted.

[Peter Boettke]

To Mr. Lesvic,

Why would I do that?

First, at least you use your real name in debate and also try to state propositions which people can either agree or disagree with.

Second, I have nothing but great respect for laymen who love the discipline of economics and the policies of economic freedom. I don't share your disdain for all of academic economics.

Third, I view Mises (and Hayek) as heroic figures historically, but I don't believe their choices (especially Mises's) were always prudent and the question one has to ask is whether more prudent choices in personal affairs could have been made without sacrificing the content of the message. In short, you don't have to be pushed outside of the establishment in order to be a consistent advocate of sound economic reasoning and the policies of laissez faire.

Fourth, I sense a genuine desire to learn economics from you, even though you have an initial skepticism. On the question of supply and demand and quantity supplied and quantity demanded, I would just point to my principles textbook (which I inherited from Paul Heyne), The Economic Way of Thinking. This book is, I would argue, the most quasi-standard textbook on the market that is consistent with Austrian economics through and through. It is published by a major publishing house --- Prentice Hall --- and it maintains the coordination theme throughout the discussion of micro and macro. This has little to nothing to do with me, and everything to do with Paul Heyne --- who told his readers that his approach was influenced by Hayek and Buchanan more than any other contemporary thinkers in economics. But relevant to your discussion this issue, the approach developed in that book for establishing supply schedules the approach is that of Wicksteed --- supply reflects the alternative demands for the good or service. This is the subjectivist approach.

Anyway, there are technical issues in economics which for many of the questions you want to address you need to study more closely. But for many issues the general picture you have from your self-study is probably sufficient for you to feel intellectual comfortable with your position.

However, I do think many laymen (and even some academic) Austrians make a huge mistake in understanding the link between the Austrian focus on subjectivism and market process, and the neoclassical focus on maximizing and equilibrium properties. The neoclassical model is NOT logically wrong. The mathematics of it are NOT confused. If the world was frozen, the optimality conditions would fall out from the situation so described in the model. In fact, Mises is clear in his endorsement of the equilibrium model (ERE). BUT, it is only the limit theorem when change has ceased, and the purpose of economics is to understand the processes of adjustment that emerge due to changing circumstances. The market exhibits strong tendencies in the direction of the world so described by equilibrum models of optimality, but we never get there because of change. Rejecting all of neoclassicsm is a mistake that cannot afford to be made by any economist, just as assuming a mechanical realization of the equilibrum properties destroys our ability to understand how real markets work.

Perhaps a great way to think about this with regard to Mises is to look at his discussion in The Theory of Money and Credit concerning the Quantity Theory of Money. Against monetary cranks, Mises would uphold the Quantity Theory, but against mechanical interpretations of the Quantity Theory, he stressed the non-neutrality of money and the disruptive capabilities of the inflation process through ragged relative price adjustments. Again, he didn't reject the principles of the quantity theory, but he interpreted them in a more sophisticated manner than a mechanical interpretation would produce. I would say that this is true of several principles of equilibrium states that were derived by the fundamental work of economic theorist during the neoclassical period of 1900-1950.

Pete

[leftist]

In the Boettke framework is involuntary unemployment possible?

[dglesvic]

Prof. Boettke,

That comment about burning me at the stake was not directed at you. Were the rest of the profession like yourself, I would certainly have to change my evaluation of it. But I still fear that you are more the exception than the rule.

I have just skimmed through your comments above, and can only respond preliminarily.

I submit, with Mises, of course, and with you as well, no doubt, that economics is a practical science aiming at practical and reasonable assumptions, and that inexorable chaos and the futility of human action is not one of them. To act, we must assume order in the universe, and, as economists, the interdependence of market phenomena, as Mises put it, or laws of the market, and, where there are violations of them, corrective action by the market. To deny that is to deny economics altogether, and purposeful human action with it.

Denial of the Invisible Hand, or tendency toward equilibrium, is not an option for economists. For they have no other way to explain the market process. If economics is to proceed at all, it must be from the assumption that the market tends toward equilibrium.

Before sending me off to the library, tell me at what point I have proceeded incorrectly.

The question, as Mises put it: would the poor be better off in absolute terms with the larger proportion of the smaller cake or smaller proportion of the larger cake.

Even if my theory, that they wind up with a smaller proportion of the smaller cake, collapsed, and we could no longer prove that redistribution made the poor poorer, couldn't we still make the other side prove that it didn't, that the larger proportion of the smaller cake was not smaller in absolute terms?

And do we really need to go to the library for that?

[Gilberto]

"Before sending me off to the library, tell me at what point I have proceeded incorrectly."

And this is exactly what is wrong with blog comments. A crackpot with no economic training deigns to ignore Prof. Boettke's suggestion of an excellent into text because he knows he - and he alone - is master of the TRUTH.

[Gilberto]

Boettke: "Fourth, I sense a genuine desire to learn economics from you ... On the question of supply and demand and quantity supplied and quantity demanded, I would just point to my principles textbook (which I inherited from Paul Heyne), The Economic Way of Thinking"

Lesvic:"Before sending me off to the library, tell me at what point I have proceeded incorrectly."

I wonder if Dr. Boetkee stands by his original view. I bet he does not allow that kind of dogmatic "I have no need to read anything" attitude from his first year undergrads in intro econ.

[Sergei]

I find it rather sickening to see a professional economists of Peter Boettke's stature 'sucking up' (for want of a better word) to an old fool who sees no reason why he should learn the basic analysis of supply and demand from the wonderful Heyne textbook.

Would that the degree of respect was in anyway reciprocated?

Shame on you Dr. Boettke. Prof. Horwitz had the right idea in earlier posts. More power to his elbow I say.

[Brian Pitt]

I do not remember which one of Mises' writings explicate this, but he avers that if agriculture were the sole method of caring for oneself and her family, then land redistribution would be a worthwhile policy discussion. However, with manifold opportunities to earn and learn in the twenty-first century (acknowledging that there are disparate ontological situations, which influences one's opportunity set), the interruption of the outcomes of the market structure by the political structure may be dangerous.

Btw, Mr. Lesvic, Thomas Sowell's "Affirmative Action Around the World" and "Knowledge and Decisions" are wonderful texts that explore the nature of redistribution sans the jargon of contemporary economics.

[dglesvic]

This comment is not directed to Prof. Boettke, who wouldn't need it.

As an emissiary of the public to the profession, and trying to create a bridge between the two, I am offering to meet you half-way, and then some.

But, if you won't even explain a simple thing like the difference between quantity supplied and supply, I have to doubt that you will ever meet me any part of the way.

This is your opportunity to either reach out to the public, or remain forever cloistered and irrelevant.

The choice is yours.

[dglesvic]

After examining Prof. Boettke's comments more closely, I think I understand what's at the bottom of this whole dispute.

"On the question of supply and demand and quantity supplied and quantity demanded," he said.

But that wasn't the question at all.

The question was of the difference between quantity supplied and supply.

Saying that I don't understand the difference between quantity supplied and supply is not saying that I don't understand the difference between quantity supplied and quantity demanded.

I've simply had my words twisted, and been held responsible for something I never said.

Others may insist that there is a difference between quantity supplied and supply, but I guarantee you that Prof. Boettke will never say that.

[Gustav]

""On the question of supply and demand and quantity supplied and quantity demanded," he said.

Saying that I don't understand the difference between quantity supplied and supply is not saying that I don't understand the difference between quantity supplied and quantity demanded"

To not understand one is to not understand the other. Please please please go look at an intro undegrad text and read the early chapters.

Dr Boettke has ignored the high opportunity cost of his time and gone well out of his way to try and educate you. Why not treat him with some respect and go look at the text he suggested you?

[Gustav]

"Others may insist that there is a difference between quantity supplied and supply, but I guarantee you that Prof. Boettke will never say that."

I assure you that Dr. Boettke says just that in his intro to econ classes and in his textbook.

Care to confirm this Dr B? I learnt my intro from you book so I hope you step up to the plate.

[dglesvic]

You mean to the guillotine.

[Steve Horwitz]

Mr. Lesvic's other mistake is claiming that "the invisible hand" and "a tendency toward equilibrium" are the same thing. I would argue that the properly understood Lachmannian position is that markets create unintended order (i.e. the invisible hand) but need not show a strict tendency toward equilibrium.

The irony of Lesvic's position is that it is NEOCLASSICAL economists who claim that general equilibrium theory is the equivalent of the invisible hand.

Now, having responded to our friend, at least indirectly, might I suggest that those who find him to be a problem simply ignore him. I find it as frustrating as others that he refuses to take up the suggestions we have made for further reading, and find it utterly silly that he thinks Pete would "never" say there's a difference between quantity supplied and supply. Go to the tape as they say - look in his textbook. You can't DO economics without that distinction.