The Relationship Between Economic Freedom And Political Freedom: An Example From My Capitalism, Socialism, & Democracy Course

I plan to post this over on my Economic Way of Thinking blog some time next week:

Considering both economic theory and the historical record, it is reasonable to believe that if a society tries to abolish the market economy it will find that it abolishes the wealth-generation and long-run growth that only a market system can provide, and, on top of that, it will become more undesirably statist and lead to severe reductions in human freedom.  If people cherish rights of speech, assembly, association, dissent, freedom of choice, freedom of religion, and so on, if they cherish that kind of liberty in general, it can only come about by having private property rights in the means of production – in the printing presses, the bookstores, the communications networks, and in most other scarce resources. They won’t get it when the state, the planning board, the party – whatever you want to call it – is in control of those resources.

When the state, in the name of “the people,” holds exclusive property rights -- a monopoly! -- over those scarce resources, people will be at the mercy of the state officials.  The state officials will now hold ultimate responsibility for what is produced, how things are produced, and for whom things are produced.  It doesn’t matter whether they’re Soviets, North Koreans, or Latin American military dictatorships.  It doesn’t matter what language they speak, what culture they’ve emerged from, what race or gender the individuals themselves may be. In the name of “the people,” the state officials must decide, for example, which authors, which ideas, which books, which magazines and newspapers, are “socially worthy” of production and distribution, and which should not be produced.

In a market system these decisions are given to anybody who owns the means of production – and those private owners of the means of production will stay in control of the means of production only if they serve the demands of consumers. Only in a market system do we see millions of bibles being produced and purchased as well as hundreds of thousands of books that criticize religion and perhaps support atheism.  Privately-owned publishers in the U.S. produce both books on the free market economy and Marx’s own radical books that attack the whole idea of our market and political institutions, as well as all views in between! 

These decisions are not left up to some government bureau. They are not placed on some “democratic” political ballet for “society” to decide what should be produced.  Instead, individuals cast their “dollar votes,” purchasing among an array of goods and services as each sees best fit.  Joseph Schumpeter, an Austrian economist, once emphasized that, in a very practical sense, the market system is more “democratic” than a political system:  cast your vote for a president, and you might or might not get what you voted for.  You get only what the majority had voted for.  But spend your dollar on a good or service, and you do get what you asked for.  The majority of citizens out there probably detest, for example, old fashioned “jug band” music.  But it is nevertheless produced on compact disk – and thereby enjoyed by what is obviously a minority of citizens – because some have found a way to serve that minority profitably.  This would not occur if the decision to produce jug band music was left up to a democratic vote in a political process.  There, the majority view wins. When the means of production are privately owned, producers will be encouraged to produce whatever they believe will be profitable to produce, seeking the “dollar votes” of consumers. Such freedoms allow not only for an enormous array of physical goods and services, reflecting all kinds of common and uncommon and even outright strange tastes and preferences, they also allow for the possibility of a civil sphere with different ideas, viewpoints, stances on religious and cultural matters, debates, websites, blogs, and so on to flourish.

Comments

[michael webster]

And where would you like to located the coercive force needed, at times, to enforce property rights?

[Dave Prychitko]

Michael, I'm not sure why you raised that question. My discussion above is fully consistent with government enforcement of private property rights. In fact, it is a classical liberal argument.

Now, I should say, I am a sentimental (or philosophical) anarchist. I am quite open to well-thought-out arguments that private-property anarchism could lead to the enforcement of private property rights (which I don't want to argue about in a blog setting), but my case above holds for a market economy with a state that is constrained in its scope.

[raivo pommer-]

Raivo Pommer
raimo1@hot.ee

Wachstums Kurse

Trotz des weltweiten Wirtschaftsabschwungs bleiben Staatsfonds einer neuen Studie zufolge auf Wachstumskurs. Die staatlichen Investment-Gesellschaften verwalten inzwischen ein Vermögen in Höhe von 3,22 Billionen Dollar. Dies entspricht einem Zuwachs von 6 Prozent gegenüber dem Vorjahr. Das geht aus einer Studie des britischen Datenanbieters Preqin hervor (siehe Grafik).

Zwar konnten sich die staatlichen Kapitalsammelstellen den Folgen der Finanzkrise nicht entziehen - so musste mancher Fonds auch Verluste hinnehmen. Doch weil neue Staatsfonds hinzugekommen sind, erhöhte sich der Einfluss der Branche weiter. So stufen die Londoner Preqin-Forscher auch die China SAFE Investment Co. nun als einen Staatsfonds ein, nachdem die SAFE Investment Co. in jüngster Zeit mehrere Investitionen getätigt hatte.

Die neuen Preqin-Zahlen belegen zudem, dass Staatsfonds andere bedeutende Investoren wie etwa die Private-Equity-Gesellschaften deutlich übertrumpfen können. Die private Beteiligungsbranche verwaltet rund 1,3 Billionen Dollar und leidet stark unter der Finanzkrise. Die Zeit der kreditfinanzierten Übernahmen - mit immer größeren Deals - ist längst vorbei. Nun stehen Staatsfonds immer öfter bereit und sind wegen ihrer guten Kapitalausstattung etwa auch in der Lage, Private-Equity-Transaktionen zu finanzieren.

[Doug Thorson]

Dave - I love the fact that you are making connections in a "simple" manner between economic and political freedom. I think more folks will listen to these concepts than most and this then becomes a means to move the "middle" further down the road to thinking about economics.

May I re-post this on our bolg www.forfreedomssake.com? We will give all the credits to the original post site and add a bio.

Thanks and let me know.

DCT

[Rafe Champion]

A state that enforces rules is very different from a state that issues directions.

It is most unfortunate that classical liberalism went into serious decline for much of the 20th century and when it revived it was subjected to fierce attacks from radicals and many conservatives as well. A few suggestions:
1. Indicate the full scope of the liberal agenda - the suite of freedoms, property rights, rule of law and a robust moral framework including honesty, compassion, enterprise and community service. That means that there has to be a cultural agenda that links us in some ways to cultural conservatives who are notoriously short on economics.
2. Don't fall into the left vs right trap, that plays into the hands of the left by confusing the issues and putting us under a blanket that includes fascists, anarchists and the Religious Right. It has even been suggested the left-right dichotomy was invented by the Fabians for their rhetorical purposes.
3. Point out that wherever in the world things are getting better for people (in the way of peace, freedom and prosperity) one or more of the principles of classical liberalism are doing the heavy lifting, regardless of the other policies that are in play and the labels that are applied.

Jan Lester has a really strong argument for free market anarchism in "Escape from Leviathan" but the road to the zero state has to pass through the minimum state and the idea of the minimum state is easier to sell to most people. Easier, not easy:)

[Matt R.]

I just read in this article that Schumpeter was an Austrian economist, but many other publications, websites, blogs, etc. say that he wasn't, but that he was a great contributor to economic thought. Why the disagreement?

[Rafe Champion]

Schumpeter's position has been hotly debated in Austrian circles because he had one foot in the philosophy of "scientism" and Walrasian equilibrium theory and the other foot was in the more dynamic theory of progress by "creative destruction" (of jobs, enterprises, etc). Maybe you need to specify a time or a particular work because he changed his mind on key issues. For example in an early work he may have invented the term "methodological individualism" but later he did not even want the book translated into English because he had renounced that position.

If you try to locate his "essential" position in a simplistic way you will probably end up in the bind of "essentialism", that is, the attempt to give a final and definitive answer to a question that has no single answer, (like the definition of a word). Essentialism is a pervasive error in the soft social sciences, playing a "spoiling" or obscurantist role rather like scientism in the social sciences that try to emulate a false model of physics.

[Rafael Guthmann]

Austrian, because he was from Austria, or Austrian because he was from the same tradition as Mises and Hayek?

I think that his view of the market as a process of entrepreneurial innovation and disequilibrium is the closest we can get to Austrian economics proper.

[Roger Koppl]

Here is what Minniti and I say in“Market Processes and Entrepreneurial Studies,” in Acs, Z.J. and D.B. Audretsch, ed. Handbook of Entrepreneurial Research, Kluwer, 2003.

Schumpeter was an Austrian national and a student of Menger’s great disciple, Boehm-Bawerk. He was thus an ‘‘Austrian economist’’ by both national origin and intellectual heritage. He was not, however, an ‘‘Austrian economist’’ in the most current sense of the term. First, Schumpeter put Walras’s system of general equilibrium at the center of modern economics and denied to Menger the central role that modern Austrians attribute to him. Second, Schumpeter predicted the collapse of capitalism from within and its replacement by socialism. This argument contradicted Austrian arguments for the impossibility of a workable socialism. Finally, Schumpeter’s theory of market process was quite different from that of modern Austrians. He had a theory of disruptive innovations ( Schumpeter, 1934 ) . For modern Austrians, however, the core of market process theory explains how individual adjustments to changing circumstances tend to produce market equilibrium and to restore it when equilibrium is disrupted. (Objecting to the term ‘‘equilibrium,’’ some Austrians would substitute the word ‘‘coordination.’’) In this sense of the term, Schumpeter did not have a theory of the market process.

[Peter Boettke]

Roger,

This is going to sound strange coming from me in relation to you, but I think you are being too restrictive in your definition of "Austrian school" in this discussion of Schumpeter. First, let me agree with you. Schumpeter distanced himself from his teachers very early on --- methodologically, method, applied theory, and application. He was in this sense the "terrible child" of Bohm-Bawerk. On second thought though, for the same reasons you give none of us are truly "Austrians" anymore. James Buchanan, Kenneth Boulding and Gordon Tullock, were every bit as much my teachers and influential on my thought proceses as my "Austrian" teachers Sennholz, Lavoie, and then Kirzner. My effort throughout my student days and since was to synthesize what I thought was the best in these teachers. That act of conceptual synthesis, application to new empirical puzzles in the world, and engagement with modern philosophical discussions on the nature of the social sciences, constitutes a "break" with the Austrian school in the same sense you are discussing Schumpeter. I think we could tell a similar story about your intellectual path.

Yet, both you and I are also as legitimately "Austrian" as any set of modern economists in our deep affinity with the classic works from Menger thru Mises and the effort to bring that tradition alive today in relation to modern developments in economics.

So I think Schumpeter's fate is just that of a creative guy who was trying to make his way. He was an Austrian prior to Mises's development of the Austrian school. In this sense, he is prior to Mises/Hayek transformation of the school. In some sense, this is also true of Machlup, Habeler, Morganstern, etc. Are they members of the "Austrian school"? Certainly in one sense, and certainly not in another. It gets complicated.

I do agree with your assessment about Schumpeter's fascination with Walras. But the way I read his work, is that he flips the Friedman direction of the curtsy and the characters --- Friedman said we "curtsy to Marshall, but we walk with Walras", I guess I see Schumpeter as "curtsy to Walras, but think with Menger/Bohm-Bawerk."

This leads him astray (as Hayek pointed out in Use of Knowledge), but we can read him more "productively" than that.

The real issue is whether he was on to something in his discussion of entrepreneurial innovation and creative destruction, or in his analysis of the political process, or in his examination of economic growth, or in his discussion of vision and analysis in the development of economic theory, etc. I would not rank Schumpeter in my top 10, but he would be in the top 20 or 30 I guess. And I think, as I said, his fate within the Austrian tradition is similar to that of Machlup, Habeler, or Morgenstern. Morgenstern is probably the best case to point to as similar for the next generation.

What we do have to recognize is just how fertile the ground for economic thought was in Vienna between 1880-1930. Just amazing the thinking that went on. And the question we should ask is why? Robert Leonard is probably the best historian of thought on that for economics; but as you know discussions by Johnnson (The Austrian Mind) and Toulmin (Wittgenstein's Vienna) are extraordinary as well thought not specifically about economics.

So we have an assessment of ultimate truth value to make about Schumpeter's contributions, and a recognition of the amazing array of economic ideas bouncing around Vienna.

Your point about disruptive and coordinative is spot and VERY Kirznerian --- AND CORRECT --- but I think Schumpeter has a point, just as Lachmann had a point about entrepreneurship and endogenous change. Wouldn't a truly "modern" theory of the market process have to somehow integrate arbitrage (Kirznerian entrepreneurship), innovation (Schumpeterian entrepreneurship) and endogenous change (Lachmannian empirics)?

Long winded way for me to ask you a question.

[Roger Koppl]

Pete,

Yes, it is kind of funny that you would criticize me for construing “Austrian economics” too narrowly. And I’m going to hold my ground, too!

As you know, I completely agree with you about integrating various influences, not being narrow, and so on. Thus, I fully agree that “a truly ‘modern’ theory of the market process [would] have to somehow integrate arbitrage (Kirznerian entrepreneurship), innovation (Schumpeterian entrepreneurship) and endogenous change (Lachmannian empirics).” My BRICE thing is all about such integration. Come to think of it, so was my old 1992 paper on invisible-hand explanations, which I summarized for your wonderful _Elgar Companion_.

If we disagree, it’s strictly on the best way to characterize “Austrian” from a history of thought perspective. Is there a principled way to draw a line around what is “Austrain” and distinguish it from what is “not Austrian”? Maybe not. It might be that “Austrian economics” is an empty term or a strictly sociological category. I wouldn’t be bothered if that should prove true. It would not change my scholarly practice. But it seems to me that there is such a demarcation criterion. I think “Austrian economics” identifies everything that comes out of the Mises Circle. Thus, I rate Machlup a full-on Austrian. (He called himself an Austrian economist in the 1980s.) By my proposed criterion Schumpeter is out, even if you can see “Austrian” characteristics in his work. Similarly, my demarcation criterion puts Morgenstern in, at least until his collaboration with von Neumann. In fact, I think it is helpful to recognize the “Austrian” issues at work in Morgenstern’s writings even after the publication of _Theory of Games and Economics Behavior_ in 1944. For example, I think his JEL paper on 13 critical problems in economic theory can be profitably viewed in that light.

I think my demarcation criterion makes good sense from the perspective of the history of economic thought. I also think it embeds Austrian economics in the intellectually exciting milieu of inter-war Vienna. That context helps you see what the fight was all about on issues such as methodological individualism and apriorism. I think it also tends to discourage the very sort of narrowness your comment rightly cautions us against.

[Dave Prychitko]

Thanks, Doug. And yes, you can re-post.

This is a good debate here. I will jump into it once I get some of my committee work done. Hopefully soon.

[Dave Prychitko]

In fact, I think I will add to the comments my criticism of Schumpeter as a Walrasian economist.

[Dave Prychitko]

I will instead start a new post on the subject of this debate.

[M]

Looking for freedom in private property rights or other material concepts is futile. Man is not an economic cog in a productivity engine looking to gain more goods. Rather, he is seeking eternal life, and that is found in transcending the mere material artifacts. Don't chase this foolishness which has been designed by men far more clever than yourselves as a simple means of you adding to their comfort.

[Jon Gee]

Dear dave,
You seem to link economics and politics too heavily. This is a trap that Marx fell into as well, one with far too many extraneous factors and variables to turn into a precise science.

When you suggest that government officials are solely interested in power and not what is best for the people, remember that they are doing what is best for the majority of people. While this can turn into a tyranny of the majority, when the minority rules, things usually end up worst off for a majority of the people. This is classic utilitarianism, and a government that follows the minority would, today, be seen as oligarchic or elitist.

You also fail to mention the importance that profit motives play in this environment. Even if state officials are totally obsessed with power, then it is just as fair to say that private business owners are solely interested in profit. This renders your whole argument moot, as business owners would be bound by no ethical or moral obligations.

When you mention that the owners of the means of production are bound by the demand of consumers. This is merely a half-truth; large corporations (and especially the media) control, to a large extent, what it is exactly that the populace is demanding. If the producers control the demand, then how can this be seen as "free-market"?

My background is much more strongly political than economic, but you seem to be misrepresenting the motivations and realities underlying both economic and political society.

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All this is good in general, but there are a lot of failures in details, in every person's life

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Being bound to work restricts freedom. Don’t you sometimes feel like running away from the hassles of work? Does marriage also restrict freedom? I think many married people feel that their freedom has been restricted.
Is it not possible to not to be bound to anyone or anything and live life on day to day basis and do whatever, whenever and wherever you feel like doing (here I am not talking about insane things). Do you feel sometimes trapped by modern forms of slavery like mortgage etc?