5. More Advances in Economic Theory: The Logic of Action

MORE ADVANCESIN ECONOMIC THEORY:
THE LOGICOF ACTION

Rothbard’s masterly work, Man, Economy, and State, was far from exhausting his contributions to economic theory. Rothbard’s main papers in this area are available in the posthumously published two-volume collection The Logic of Action.⁴⁶

A constant theme echoes again and again throughout Rothbard’s papers. He found it essential to separate the distinctive Austrian approach to economics from competing views, not least from movements within Austrian economics that he believed were misguided. One motive for this essential work of clarification is that economics is a strict science; as such, it must be purged of all that does not properly belong to it. In particular, ethical judgments do not form part of economic analysis: “[E]ven the tritest bits of ethical judgments in economics are completely illegitimate.”⁴⁷ Rothbard held this view not because he thought ethics a matter of arbitrary whim. Quite the contrary, in “Praxeology: the Methodology of Austrian Economics” (1976),⁴⁸ he calls himself an Aristotelian Neo-Thomist, and this school ardently champions natural law. But whatever the scientific status of ethics, economics is an independent discipline.

And the issue is more than one of conceptual economy and elegance. Though ethics need not be capricious, many economists do in fact lack any rational basis for their ethical views. By importing their unsupported preferences into their work, they throw science overboard. “[I]t is the responsibility of any scientist, indeed any intellectual, to refrain from any value judgment whatever unless he can support it on the basis of a coherent and defensible ethical system.”⁴⁹

This statement itself expresses a value judgment; but since the statement can be coherently supported, Rothbard has not contradicted himself by asserting it.

But how can the offending economists commit so gross a fallacy? Are they not aware that the ethical premises they use throw into question the standing of their work as scientific? Rothbard offers an answer in “Toward a Reconstruction of Utility and Welfare Economics” (1956),⁵⁰ one of his most brilliant essays. Conventional welfare economists reasoned in this way: Ethical judgments are, admittedly, arbitrary. But surely there exist noncontroversial judgments—truisms that everyone will accept. In particular, if a policy maximizes welfare, ought it not to be adopted?

But, as mainstream economists recognized, no solution lay here in sight. Comparisons of utility among different persons, it was almost universally agreed, could not be made; how then could one determine whether a proposed measure did advance welfare better than any available alternative? And was the goal of maximum welfare genuinely uncontroversial? Nearly every policy will make some better off, while harming others. Even if welfare could be measured, on what scientific basis can one say that the losers should give way to the winners?

Ever resourceful, the so-called new welfare economists thought they had discovered a solution. Suppose a policy makes at least one person better off, while worsening no one. Could one not then endorse this policy without making any controversial value judgments? A rule that no one can rationally controvert, the Pareto criterion, offers a foothold for a scientific welfare economics.

But the conclusions of the new welfare economics, in line with the dominant interventionism of twentieth-century social science, brought little comfort to supporters of the free market. Market imperfections, stemming from positive and negative externalities, required the state constantly to intervene.

Rothbard will have none of this. In a veritable tour de force, he argues that the assumptions of welfare economics, if correctly interpreted, lend support to the free market. An economist, acting in his purely scientific capacity, can take account only of consumer preferences demonstrated in action. And if he abides by this restriction, he will of necessity condemn every governmental interference with voluntary trade.

As the same essay illustrates, Rothbard took nothing for granted in ethics. Much of conventional welfare economics depends on the detection of positive externalities. Rothbard, with his characteristic jump to the essence, inquires, why are positive externalities a social problem?

A and B decide to pay for the building of a dam for their use; C benefits though he did not pay.... This is the problem of the Free Rider. Yet it is difficult to understand what the hullabaloo is all about. Am I to be specially taxed because I enjoy the sight of my neighbor’s garden without paying for it? A’s and B’s purchase of a good reveals that they are willing to pay for it; if it indirectly benefits C as well, no one is the loser.⁵¹

In “The Fallacy of the Public Sector” (1961),⁵² he exposes the central mistake in the external benefits argument in even more memorable fashion:

A and B often benefit, it is held, if they can force C into doing something.... [S]uffice it to say here that any argument proclaiming the right and goodness of, say, three neighbors, who yearn to form a string quartet, forcing a fourth neighbor at bayonet point to learn and play the viola, is hardly deserving of sober comment.⁵³

Let us pause to grasp the revolution involved in Rothbard’s query. Before him economists assumed without much thought that beneficiaries of positive externalities ought to pay for them. Once Rothbard had raised the question, one cannot help but wonder, why should the conventional premise be assumed without argument? When Robert Nozick made a similar point in Anarchy, State, and Utopia,⁵⁴ philosophers were quick to take notice. But Rothbard was there long before.

Some might respond to Rothbard by arguing that it maximizes efficiency for beneficiaries of positive externalities to pay for them. Rothbard blocks this move with a challenge to the entire concept of efficiency.

Everyone knows that the free market is the most efficient economic system; Milton Friedman and his many disciples build their defense of the market largely on this consideration. One might expect that Rothbard, second to none as a champion of the market, would join in lauding its efficiency. Instead, he asks a fundamental question: does the concept of efficiency mean anything?

Let us take a given individual ... in order for him to act efficiently, he would have to possess perfect knowledge of the future.... But since no one can ever have perfect knowledge of the future, no one’s action can be called “efficient.” ... [I]f ends change in the course of an action, the concept of efficiency—which can be defined as the best combination of means in pursuit of given ends—again becomes meaningless.⁵⁵

Murray Rothbard viewed the logical positivists with alarm; but as the example just given shows, he used with great skill a favorite tactic of theirs. He asks: what is the operational definition of a concept under discussion? If none can be provided, the concept—in this instance, efficiency—must be eliminated from science.⁵⁶

Rothbard did not contend that he had offered a value-neutral defense of the market. Rather, he turned the weapons of the interventionists against themselves; in so doing, he showed how important it is to be on the alert for ethical judgments assumed without argument. But to say that ethics must be separated from economics of course leaves open a major issue: what is the correct method of economics?

Rothbard’s answer was of course that economics proceeds from simple, common sense axioms, in particular the “axiom of action.” His work in economic method won the praise of Friedrich Hayek, who remarked: “Professor Rothbard’s writings are undoubtedly most helpful contributions to a great tradition.”⁵⁷

The deductive method of procedure, exemplified in Mises’s praxeology, must battle two principal adversaries. The first of these rightly takes economics as a science, but has an overly constricted view of scientific method. To positivists, physics is the model science, and economics must ape that discipline’s use of testable hypotheses. Rothbard, in his classic essay “The Mantle of Science” (1960), condemns this approach as a “profoundly unscientific attempt to transfer uncritically the methodology of the physical sciences to the study of human action.”⁵⁸ By seeking to force economics into the Procrustean bed of physics, as conceived of by positivists, the proponents of scientism ignore free will.

However dangerous scientism may be, its blandishments are unlikely to attract those sympathetic to Austrian economics. Rothbard issues a call to arms against a more immediate threat in “The Present State of Austrian Economics” (1992).⁵⁹ As everyone knows, Austrian value theory is subjective: Austrians explain prices through individual preferences and reject the Marxist labor theory of value and other such accounts. But some professed Austrians have gone too far. To them, everything is subjective and economics as a science dissolves. Following Ludwig Lachmann, they stress the radical uncertainty of the future. Austrian economics, as Rothbard practices it, must not be equated with the endless repetition of the words “subjectivism” and “uncertainty.”

As mentioned in the discussion of Man, Economy, and State, Rothbard made important contributions to the socialist calculation argument; and the collection adds several essential papers on the topic. In “The End of Socialism and the Calculation Debate Revisited” (1991), he notes, against Hayek and Kirzner, that “the central problem [of socialism] is not ‘knowledge’.”⁶⁰ No doubt, as Hayek emphasized, there is a knowledge problem under socialism; a centrally planning agency cannot amass the incredibly complex information required to run a modern economy. But, to reiterate, the key problem is not, how do you obtain knowledge? Rather, it is what do you do with the knowledge, once you have it? And here calculation, and with it the market, plays its indispensable role.

In “Lange, Mises, and Praxeology: The Retreat from Marxism” (1971),⁶¹ Rothbard appends an amusing footnote to the calculation debate. The most famous socialist opponent of Mises and Hayek was the Polish economist Oskar Lange. Yet toward the end of his life, Lange, though unwavering in his commitment to socialism, wound up as a champion of praxeology. In an effort to separate his views from those of his great antagonist Mises, Lange endeavored to combine praxeology with Marxism—surely an unstable compound.

The reader of “Applications and Criticism from the Austrian School,” volume II of The Logic of Action, will carry away an overwhelming impression of the variety of topics in which Rothbard was interested; and only a few essays can be singled out here for mention. Just as in the first volume. Rothbard’s insistence on conceptual clarity is everywhere to the fore.

In “The Fallacy of the Public Sector,” he demolishes John Kenneth Galbraith’s polemic against capitalism with a single question that strikes to the jugular. Galbraith endeavored to answer the standard argument that capitalism best serves the needs of consumers. No doubt, Galbraith conceded, a free market provides an abundance of goods—but is this not just the problem? These goods do not meet the genuine needs of consumers, but desires for them are whipped up artificially through advertising. Rothbard inquires, “Is everything above subsistence ‘artificial’?”⁶²

So much for Galbraith. In “The Myth of Tax ‘Reform’” (1981),⁶³ Rothbard uses his analytical tools to lend clarity to an issue of dominant concern. The essential point about taxation, Rothbard again and again stresses, is that it is coercive: it is a compulsory exaction of resources from the productive sectors of the economy. Many economists view taxation as if it were a voluntary agreement for the provision of so-called “public goods.” Reverting to a point made in his fundamental essay on welfare economics, Rothbard refuses to countenance in economic science alleged preferences not expressed on the free market. Genuinely voluntary action, not the counterfeit of “voluntary” taxation, can provide for defense and protection.

He extends his criticism of voluntary taxation to the most famous text of the influential Public Choice School, James Buchanan and Gordon Tullock’s The Calculus of Consent,⁶⁴ in “Buchanan and Tullock’s The Calculus of Consent.”⁶⁵ To support their odd notion that likens the state to a club, these authors appeal to unanimous action. If everyone agrees to be taxed, is not the enforcement of this agreement in accord with popular will? Rothbard unerringly locates the fallacy of this contention. Buchanan and Tullock in fact retreat from complete unanimity in their constitutional requirements, owing to transaction costs. If so, they cannot rightly appeal to that very unanimity in their attempt to turn coercion into freedom. Rothbard located this crucial fallacy in The Calculus of Consent before it was published, in comments on the manuscript.

He elaborated his objection in “Toward a Reconstruction of Utility and Welfare Economics.” Buchanan’s attempt

to designate the State as a voluntary institution ... is based on the curious dialectic that majority rule in a democracy is really unanimity because majorities can and do always shift! The resulting pulling and hauling of the political process, because obviously not irreversible, are therefore supposed to yield a social unanimity. The doctrine ... must be set down as a lapse into a type of Hegelian mysticism.⁶⁶

Rothbard’s procedure is a simple one. He asks: what does the voluntary state amount to? And given Buchanan’s characterization of it, Rothbard goes on to ask: is this what we ordinarily mean by “voluntary”? As it obviously is not, this conception of the voluntary state cannot stand.

Ever alert for semantic evasion, Rothbard maintained that it is inaccurate to refer to tax “loopholes.” A “loophole [assumes] all of everyone’s income really belongs to the government.”⁶⁷ People are accused of using trickery to evade payment, when they in fact are attempting to defend what belongs to them. And in a comment of considerable contemporary relevance, Rothbard notes: “[T]he flat tax would impose an enormous amount of harm and damage to every American homeowner.”⁶⁸

In the course of the volume, Rothbard continues his pursuit of a revolutionary question: People have usually looked at an issue in a certain way, but why should we do so?

Thus, an influential approach to welfare economics endeavors to minimize transaction costs. In “The Myth of Neutral Taxation” (1981), Rothbard is ready with an iconoclastic query:

What is so terrible about transaction costs? On what basis are they considered the ultimate evil, so that their minimization must override all other considerations of choice, freedom, and justice?⁶⁹

If one responds that reducing these costs has some, but not overriding importance, Rothbard’s question compels one to specify exactly how much, and why, they are to count.

Fortunately for our society, support among economists for the free market is widespread. For almost any government activity, one can find an economist to argue that the market will provide the service in a better fashion. Yet who but Rothbard would think to ask, why should the government be allowed to collect information?

He makes a simple but devastating point: absent statistical data, the government could not interfere with the economy:

[S]tatistics are, in a crucial sense, critical to all interventionist and socialistic activities of government.... Statistics are the eyes and ears of the bureaucrat, the politician, the socialistic reformer. Only by statistics can they know, or at least have any idea about, what is going on in the economy.... Cut off those eyes and ears, destroy those crucial guidelines to knowledge, and the whole threat of government intervention is almost completely eliminated.⁷⁰

Perhaps the clearest proof of Rothbard’s analytical acumen occurs in an essay on Joseph Schumpeter. As is well known, Schumpeter had a peculiar conception of the entrepreneur. He viewed the great entrepreneurs as virtual forces of nature, exempt from explanation by science. Rothbard shows how Schumpeter’s economics forced him to this view. He “den[ied] the role of time in production altogether”⁷¹ and operated with static equations. There was no room for innovation in his unchanging Walrasian prison house: he could deal with radical change only by a total exit from his system. Though a firm defender of deductive method, Rothbard knew very well that a theory must be true to the facts; and his brilliant analysis of the way Schumpeter’s conceptual toolkit led him astray is a classic contribution to the history of economics.

Rothbard views deconstructionism with little favor. Deconstructionists claim that texts lack a fixed meaning: the apparent meaning of a text is always accompanied by countervailing patterns. A reader must then “deconstruct” a text rather than take it to have coherent sense. Rothbard raises the key point: why bother? “If we cannot understand the meaning of any texts, then why are we bothering with trying to understand or to take seriously the works or doctrines of authors who aggressively proclaim their own incomprehensibility?”⁷²

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⁴⁶The Logic of Action I: Method, Money, and the Austrian School (Cheltenham, U.K.: Edward Elgar, 1997). The Logic of Action II: Applications and Criticism from the Austrian School (Cheltenham, U.K.: Edward Elgar, 1997. The two volumes are included in Edward Elgar’s series Economists of the Twentieth Century. A new and expanded edition will be published by the Ludwig von Mises Institute in 2007.

⁴⁷Logic of Action I, p. 22.

⁴⁸Ibid., pp. 58–99.

⁴⁹Ibid., p. 82.

⁵⁰Ibid., pp. 211–54.

⁵¹Logic of Action I, p. 251.

⁵²Logic of Action II, pp. 171–79.

⁵³Ibid., p. 178.

⁵⁴Robert Nozick, Anarchy, State, and Utopia (New York: Basic Books, 1974), pp. 93–94.

⁵⁵Logic of Action I, pp. 266–67.

⁵⁶Another instance of the same technique may be found in the search for an operational definition of monopoly price in Man, Economy, and State. I suspect, but cannot prove, the influence of his teacher Ernest Nagel for this technique.

⁵⁷F.A. Hayek, “Foreword” to Rothbard’s, Individualism and the Philosophy of the Social Sciences (San Francisco: Cato Paper No. 4), p. x.

⁵⁸Logic of Action I, p. 3.

⁵⁹Ibid., pp. 111–72.

⁶⁰Ibid., p. 425.

⁶¹Ibid., pp. 384–96.

⁶²Logic of Action II, p. 177.

⁶³Ibid., pp. 109–20.

⁶⁴James M. Buchanan and Gordon Tullock, The Calculus of Consent: Logical Foundations of Constitutional Democracy (Ann Arbor: University of Michigan Press, 1962).

⁶⁵Logic of Action II, pp. 269–74.

⁶⁶Logic of Action I, p. 252.

⁶⁷Logic of Action II, p. 116.

⁶⁸Ibid., p. 110.

⁶⁹Ibid., p. 88.

⁷⁰Ibid., pp. 182–83.

⁷¹Ibid., p. 230.

⁷²Ibid., p. 277.