Thursday, February 28, 2019

Problems With Bryan Caplan's "Why I'm Not an Austrian Economist" (Part 4)

By Robert Wenzel

It has been some time since I visited Bryan Caplan's essay "Why I'm not an Austrian Economist" and the problems with it but there are a few more points I want to cover.

In this comment, I will discuss his perspective on Murray Rothbard and Welfare Economics.

Caplan writes:
While Rothbard and Mises had similar objections to mainstream utility theory, Rothbard went one step further by "reconstructing" welfare economics along Austrian lines. His main conclusions are simple and austere: every market transaction benefits all participants, while every act of government intervention benefits some people at the expense of others. Rothbard goes on to make a seemingly stronger claim: "If we allow ourselves to use the term 'society' to depict the pattern of all individual exchanges, then we may say that the free market 'maximizes' social utility, since everyone gains in utility." This claim might be re-phrased to say simply that each voluntary exchange benefits all participants, and the free market permits the implementation of all desired voluntary exchanges.

Hans-Hermann Hoppe, arguing for Rothbard's approach, makes a subtly stronger claim: "Pareto-optimality is not only compatible with methodological individualism; together with the notion of demonstrated preference, it also provides the key to (Austrian) welfare economics and its proof that the free market, operating according to the rules just described, always, and invariably so, increases social utility, while each deviation from it decreases it." (emphasis mine) Strictly speaking, however, Rothbard could only claim the welfare effects of government intervention upon "social utility" are indeterminate; i.e., since the victim loses and the intervener gains, it is impossible to say anything about social utility without making a verboten interpersonal welfare comparison. This is an important point, because it shows that Rothbard's welfare economics provides a much weaker defense of the free market than usually assumed. In particular, Rothbard's own theory strips him of the ability to call any act of government "inefficient." By denying the ability to endorse state action in the name of efficiency, Rothbard also implicitly denies the ability to reject state action in the name of efficiency. This is no logical flaw in Rothbard's theory (although it does reveal a logical flaw in Hoppe's presentation of Rothbard's theory), but it's political implications are rather different than commonly assumed: Rothbard's welfare criterion justifies agnosticism about - not denial of - the benefits of statism.
Caplan does have a point here, however, he fails to develop the point in the correct direction. That is Rothbard in his perspective here is not showing a weakness in Austrian economics but rather an incompleteness in extending out Austrian theory of society in an even more subjective fashion. That is, he does not extend out subjectivism and the nature of society in the fashion that I do in Foundations of Private Property Society Theory: Anarchism for the Civilized Person

As Dr. Walter Block has stated:
There are very few who initiate a whole new philosophy, utilitarianism or libertarianism or anarcho-capitalism or whatever it is, with this book, "Foundations of Private Property Society Theory: Anarchism for the Civilized Person," Wenzel is now one of them.
In Foundations, I take the view that there are weaknesses in the foundational approach of both Mises' utilitarian perspective and Rothbard's natural rights take and that the best-constructed society (for most) is a society based on our own individual subjective ranking perspective about society given what we, as individuals, understand about the nature of man.

In other words from my perspective, Caplan's correct observation "Rothbard's welfare criterion justifies agnosticism about - not denial of - the benefits of statism," is not a problem from my more extreme methodological subjectivism about the nature of society.

Thus, Caplan is correct in spotting a weakness in the perspective of Rothbard here, but rather than going more Austrian (more individualist subjectivist) he appears to hug a more statist anti-Austrian perspective direction. 

In other words, on this point, if he were to draw out theory in the correct direction, this part of his theory would have been titled: "Why I Am Even More of An Austrian Than Murray Rothbard."

The full "Problems With Bryan Caplan's 'Why I'm Not an Austrian Economist'" series is here.

Robert Wenzel is Editor & Publisher of and Target Liberty. He also writes EPJ Daily Alert and is author of The Fed Flunks: My Speech at the New York Federal Reserve Bank and most recently Foundations of Private Property Society Theory: Anarchism for the Civilized Person Follow him on twitter:@wenzeleconomics and on LinkedIn. His youtube series is here: Robert Wenzel Talks Economics. More about Wenzel here.

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