Sunday, October 28, 2012

Mises on Rational Economic Planning under Syndicalism and “Economic Calculation” in Keynesian Economies

In the socialist economic calculation debate (Mises 1935 [1920]), Mises argued that “rational economic calculation” was impossible in a planned, command economy, because the lack of market prices for capital goods eliminated those markets which produce prices for the means of production, and capitalists need these prices to calculate profit and loss.

But what is most curious is Mises’s view of a syndicalist economy (see Mises 1924 and 2002):
“ … [sc. Mises found] Polanyi’s concept of … [sc. syndicalism] as nebulous as that of the Guild Socialists. The ‘body politic’ is to be the ‘owner’ of the means of production, but it does not have the right of use (‘usus’) over them. That is reserved for the producers ‘association’; chosen by the workers on a sectoral basis. This ownership arrangement resembles the Yugoslav property system.

Von Mises considers the basic flaw of this construction to be the vagueness by which it seeks to evade a crucial question: Is the system supposed to be socialist or syndicalist? Polanyi first assigns the means of production to society as a whole, the ‘commune’; and thus seeks to absolve himself from the charge of ‘syndicalism’ (which must have been quite a crime among Austrian Marxists in the early 1920s) But von Mises states, ‘Property is the right of use, and if that is assigned to the production associations, then these are the owners and then we are dealing with a syndicalist society’ (N.B., p. 491). A choice must be made: there can be no reconciliation between socialism and syndicalism. This strict distinction between the two (which von Mises had in common with all Marxist socialists of the time – and perhaps of today), he made on the basis of a theory of property rights. Property rights over the means of production must be assigned to some concrete body: if neither the ‘commune’ nor the production associations have the final say in their allocation, then the system is not viable. If final decision-making power rests with the commune (the political organization of the community), then one is dealing with a ‘zentrale Verwaltungswirtschaff’; a centrally administered economy such as Soviet Russia’s. Polanyi agrees that rational economic calculation is impossible here. If the final power rests with the production associations, then there exists a syndicalist commonwealth.

Polanyi’s confusion on this point make him suggest a pseudosolution to von Mises’s problem. His associations engage in mutual exchange relations, they give and receive as if they were the owners of the goods, and thus a market and market prices are created. Polanyi does not notice that this is irreconcilable with the essence of socialism, von Mises agrees that rational economic calculation is possible under syndicalism or under any other producer cooperative-based system where the cooperative bodies are the owners of the means of production. Thus, there is some kind of group-collective private ownership, what the Maoists during the Chinese cultural revolution used to criticise as Yugoslav group-capitalism. Group-capitalism is also capitalism and allows rational calculation.” (Keizer 1987: 113–114).
Mises’s ideas have some interesting consequences: a syndicalist system where “associations engage in mutual exchange relations, [sc. and where] they give and receive as if they were the owners of the goods” would actually be a certain type of capitalist system!

Such a syndicalist system would, then, be perfectly capable of engaging in rational economic calculation.

It also has another consequence: a capitalist economy merely with Keynesian macroeconomic management is also free from the original and strict “economic calculation” problem defined by Mises: lack of market prices for capital goods eliminating producers’ goods markets needed by capitalists to calculate profit and loss.

A capitalist system with Keynesian policy is an economy where the overwhelming, vast majority of capital goods are owned, produced and sold privately on markets, and the vast majority of all production is private. As in a syndicalist system, it would be free from Mises’s original economic calculation problem.

I say this because confused internet Austrians are both ignorant and clueless on this issue. Time and again, these vulgar Austrians wave the original socialist economic calculation debate around as if it constitutes a serious argument against Keynesian economics.

The Austrian argument against Keynesian economics on the basis of alleged “economic calculation or miscalculation” problems involves quite different issues, as follows:
(1) the alleged miscalculation problems caused in the Austrian business cycle theory (ABCT) (or what other Austrians refer to as the “theory of intertemporal discoordination”). The ABCT is one of economic miscalculation and malinvestment. The ABCT is one part within the broader Austrian theory of economic coordination and discoordination, but it remains a flawed and false theory.

(2) the assertion that government spending, or other interventions, causes price distortions. Yet virtually all spending can potentially cause “price distortions” from what they would otherwise have been. Whatever “distortion” government causes is no more or less severe than what the private sector itself imposes. For example, it is absurd to believe that the millions of agents offering goods and services get their prices right in terms of demand/supply dynamics. Many corporations and business are in fact price setters/administrators: they set their prices according to production costs and then a profit markup, then leave them unchanged for significant periods of time, even when demand changes. The prices are not fundamentally set by supply/demand dynamics at all: they are set by central planners in corporations. A market economy at any one moment has a vast number of “wrong” prices. But this does not mean that the market collapses: it still achieves investment, production and economic growth over long periods.

Supposedly, government deficit spending, price controls, subsidies, income policies, and so on, will also impair economic calculation on the market by impairing prices, presumably in some disastrous, destabilising way. But it is not difficult to see how the Austrians have a view here that sees the market as ridiculously feeble. For example, does the existence of some minor government subsidies cause an Austrian trade cycle? Would they impair the ability of the private sector to engage in production of commodities with rising real output? Would they distort the market so badly that nobody could engage in “economic calculation”?

The idea that the normal types of government spending cause some severe problems of “economic calculation” leading to market chaos is patent nonsense. The alleged price “distortions,” either public or private, don’t cripple capitalist economies, and it is doubtful whether they are harmful at all, in the way imagined by Austrians. They don’t prevent vast and successful private production of wealth and investment. In the case of price setting, the empirical literature suggests that it has benefits they outweigh costs: stability of profits and the prevention of disastrous price wars between businesses, for example.

(3) on some occasions Austrians point to Cantillon effects, but this argument does not work as I have shown here.

(4) Some of the more ignorant internet Austrians point to this quotation from Hayek, alleging that it contains other economic calculation issues and “simple basic [sc. Austrian] concepts that … all the other anti-Austrians refuse to comprehend”:
The primary cause of the appearance of extensive unemployment, however, is a deviation of the actual structure of prices and wages from its equilibrium structure. Remember, please: that is the crucial concept. The point I want to make is that this equilibrium structure of prices is something which we cannot know beforehand because the only way to discover it is to give the market free play; by definition, therefore, the divergence of actual prices from the equilibrium structure is something that can never be statistically measured.” (Hayek 1975: 6–7).
Yet the central concept here is nothing but the notion of a tendency to a price vector that will clear all markets (with flexible wages clearing the labour market). This is not an “Austrian” idea at all: it is a Walrasian or neo-Walrasian neoclassical idea, straight from general equilibrium theory. The Austrians did not invent this, but simply borrowed it from Walrasian neoclassicals.

Anyone who denies that markets have a real world tendency to general equilibrium can easily refute this argument: for the notion that markets are coordinated in this way at all is nothing but a myth.

BIBLIOGRAPHY

Hayek, Friedrich A. von. 1975. A Discussion with Friedrich A. von Hayek. American Enterprise Institute, Washington.

Keizer, W. 1987. “Two Forgotten Articles by Ludwig von Mises on the Rationality of Socialist Economic Calculation,” Review of Austrian Economics 1.1: 109–122.

Mises, L. von. 1924. “Neue Beiträge zum Problem der sozialistischen Wirtschaftsrechnung,” Archiv für Sozialwissenschaft und Sozialpolitik 51.2 (December): 488–500.

Mises, L. von. 1935 [1920]. “Economic Calculation in the Socialist Commonwealth,” in F. A. von Hayek (ed.), Collectivist Economic Planning: Critical Studies on the Possibilities of Socialism. G. Routledge & Sons, London. 87–131.

Mises, L. von. 2002. “New Contributions to the Problem of Socialist Economic Calculation,” in Richard Ebeling (ed.), Selected Writings of Ludwig von Mises: Between the Two World Wars: Monetary Disorder, Interventionism, Socialism, and the Great Depression. Liberty Fund, Indianapolis.

Mises, L. von. 2009 [1951]. Socialism: An Economic and Sociological Analysis (new edn; trans. J. Kahane). Ludwig von Mises Institute, Auburn, Ala.

27 comments:

  1. Freshly Squeezed CynicOctober 28, 2012 at 9:16 AM

    Is it just me who finds Mises' description of collectively-owned enterprises as "group-capitalism" utterly perplexing? A co-operative is a different organisational structure from a capitalist firm and in an all co-operative economy I think the (market?) dynamics would be very different from a capitalist economy.

    It also ignores that one of the important critiques of capitalism articulated by many socialists is the concentration of private power (and potential abuse of same) under the capitalist. It does not make sense to assume that the kind of distributed, collective power in a syndicalist or co-operative commonwealth is the same as that exercised by an individual shareholding capitalist.

    However, it does make the libertarian viewpoint on socialism a little easier to understand. Claiming that socialist economic ideas that don't rely on central planning are in fact some kind of form of capitalism makes it easier to swallow the nonsense that there is no such thing as non-statist socialism. If statism is a necessary component of socialist ideology, libertarian arguments make a lot more sense. Unfortunately for them, it isn't, although it is a dominant tendency within historical socialist thought.

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  2. We see administered prices all over the place, as in rents and wages written into contracts.

    And why didn't the Coca Cola company in the U.S. cause economic chaos by selling its product from vending machines at 5 cents a bottle for decades, even as its costs of manufacture fluctuated throughout that time?

    I'd also still like to know why the Mises Institute itself doesn't cause economic chaos by digitizing its literature and giving it away for free over the internet, in defiance of price signals.

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    1. "And why didn't the Coca Cola company in the U.S. cause economic chaos by selling its product from vending machines at 5 cents a bottle for decades, even as its costs of manufacture fluctuated throughout that time?"

      Doesn't this in fact prove that they could not have been using mark-up pricing, if they kept the price at 5c as their costs changed ?

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    2. I don't get your point rob. Price markup is a theory in explaining why prices remain the same over a given period of time, even when costs change during that period of time

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    3. I had assumed that "Price markup" meant that price were calculated based on input costs plus a profit margin. Whenever I have seen it discussed that has been implicit in the discussion, but I guess I have never really dug into it.

      As I'm curious now: Can you point me to anything that explains this theory in more depth.

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  3. "why the Mises Institute itself doesn't cause economic chaos by digitizing its literature and giving it away for free over the internet, in defiance of price signals."

    I suspect that the only reason that the Von Mises Institute gives its literature away for free, is that most sensible people realize that "austrian" school economics is an essentially worthless political ideology rather than a serious attempt to understand economics (note that I am referring to the current state of the austrian school, especially the Walter Blocks and Hans Hermann Hoppes and their ilks). Because "austrian" economics is worthless, no one really wants to pay for their propaganda and so they have to offer it for free; otherwise their fancy propaganda isn't read at all.

    I suspect that many Austrian school "economists" never go to a shop, instead they will send their wifes or probably more accurate their moms, for their daily groceries. But everyone who regularly goes to a shop, knows that the shop owner (or responsible manager) actually sets the prices as he/she sees fit. Such owner/manager will only change his prizes when he is losing clients to competitors, but if his/her client are loyal to him/her even if there are cheaper competitors, he/she has no incentive to change his/her prices.

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    1. Yet you can also find ebook versions of Austrian propaganda for sale on Amazon's website. Contrast the free version of one of Rothbard's books with the Kindle version Amazon sells for a market price. If the people who run the Mises Institute took their own propaganda seriously, they would realize that they run the risk of triggering economic chaos with every download they give away "for free," like the distribution of certain goods in a Soviet-style system, without taking price signals into consideration.

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  4. Reading these comment - I'd like to coin the phrase "internet post-Keynesian"

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    1. Markets are so robust they are indestructible, unavoidable, and spontaneous. No theory or regime has ever succeeded in destroying the market. Preventing people from openly trading a valued item simply drives an illegal and more lucrative trade in that item. An items price is determined by a subjective value assesment of the purchaser and its marginal utility. The costs of its component parts are thus determined by the price of the final item. It is the exact opposite of what is commonly thought!

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  5. wikipedia:

    "Another criticism is that the claim that a free market is efficient at resource allocation is incorrect. Alec Nove argues that in "Economic Calculation in the Socialist Commonwealth" von Mises "tends to spoil his case by the implicit assumption that capitalism and optimum resource allocation go together",[10]

    Economist Joan Robinson argues many prices in modern capitalism are effectively "administered prices" created by "quasi monopolies", thus challenging the connection between capital markets and rational resource allocation.[11]

    It has also been argued that the contention that finding a true economic equilibrium is not just hard but impossible for a central planner applies equally well to a market system; As any Universal Turing machine can do what any other Turing machine can, a system of dispersed calculators (i.e. a market) has no in principle advantage over one central calculator.[15]

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    1. Markets are the only way to get the price. Prices are market phenomena. You can ask for a higher price but you might not find enough buyers. You could pay less but will find your supply dwindle. Efficiency is probably not the right descriptor. Markets don't find the price most efficiently they simply find THE price. Any other system may use something called "the price" but these are not market phenomenon they are people's wishes and aspirations. Prices are not based on thoughts but on actions. A central planner may wish prices wages and cost to conform to certain ratios but this will inevitably lead to shortages surpluses and discordination of society.

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  6. One criticism is that proponents of the theory overstate the strength of their case by describing socialism as impossible rather than inefficient.[16]

    Economist Bryan Caplan and wrote a piece explaining why he 'is not an Austrian economist'. In it, he discusses the economic calculation debate, and, while admitting that it is a problem for socialism, denies that Mises has shown it to be fatal, or that it is this particular problem that led to the collapse of the socialist states.

    "Austrians have overused the economic calculation argument. In the absence of detailed empirical evidence showing that this particular problem is the most important one, it is just another argument out of hundreds on the list of arguments against socialism. How do we know that the problem of work effort, or innovation, or the underground economy, or any number of other problems were not more important than the calculation problem?W[17]

    Joan Robinson argues that in a non-growth economy there would be an effective abundance of means of production, and so markets would not be needed.[18] Von Mises acknowledged such a theoretical possibility in his original tract:

    "The static state can dispense with economic calculation. For here the same events in economic life are ever recurring; and if we assume that the first disposition of the static socialist economy follows on the basis of the final state of the competitive economy, we might at all events conceive of a socialist production system which is rationally controlled from an economic point of view."[1]

    He contended, however, that stationary conditions never prevail in the real world. Changes in economic conditions are inevitable; and even if they were not, the transition to socialism would be so chaotic as to preclude the existence of such a steady state from the start.[1]

    Some writers have argued that with detailed use of real unit accounting and demand surveys a planned economy could operate without a capital market in a situation of abundance.[19][20] The purpose of the price mechanism is to allow individuals to recognise the opportunity cost of decisions: in a state of abundance, there is no such cost. Which is to say that in situations where one need not economize, economics does not apply, e.g. areas with abundant fresh air and water. So long as there is a limited supply, e.g. desirable land, economics does apply.

    Paul Cockshott and Allin Cottrell in Towards a New Socialism,[21] Information and Economics: A Critique of Hayek, and Against Mises have argued that the use of computational technology now simplifies economic calculation and allows central planning to be implemented and sustained. As Cockshott and Cottrell have stated:

    "Neither the theoretical arguments put forward in the West, nor the fact of the collapse of Soviet socialism, historic landmark as it undoubtedly is, warrant the belief that socialist economic planning tout court is an untenable notion whose time has passed. Indeed, modern developments in information technology open up the possibility of a planning system that could outperform the market in terms of efficiency (in meeting human needs) as well as equity."

    http://en.wikipedia.org/wiki/Economic_calculation_problem#Criticisms

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  7. Also see:

    http://mises.org/daily/5590

    for more on Mises on this subject

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  8. Mises went back on "syndicalism" as a form of "capitalism."

    He admitted that it was "misleading" to call syndicalism workers' capitalism, although "the workers are the owners of the means of production" it was "not genuine socialism, that is, centralised socialism", as it "must withdraw productive goods from the market. Individual citizens must not dispose of the shares in the means of production which are allotted to them." Syndicalism, i.e., having those who do the work control it, was "the ideal of plundering hordes"! (Socialism, p. 274fn, p. 270, p. 273, p. 275)

    Rothbard said the same thing when he urged the state to impose private shares onto the workers in the former Stalinist regimes of Eastern Europe as ownership was "not to be granted to collectives or co-operatives or workers or peasants holistically, which would only bring back the ills of socialism in a decentralised and chaotic syndicalist form." (The Logic of Action II, p. 210)

    And I should note that the correct term is mutualism as most syndicalists were and are libertarian communists (but Mises does not seem very keen to find out much about what he is attacking). These days it is called market socialism, in the main (with a sadly all to obvious ignorance of the history of socialism).

    As for the notion that commonly owned workplaces cannot exchange goods is refuted by von Mises himself. Here he is discussing the large corporation:

    "the entrepreneur is in a position to separate the calculation of each part of his total enterprise in such a way that he can determine the role it plays within his whole enterprise. Thus he can look at each section as if it were a separate entity and can appraise it according to the share it contributes to the success of the total enterprise. Within this system of business calculation each section of a firm represents an integral entity, a hypothetical independent business, as it were. It is assumed that this section 'owns' a definite part of the whole capital employed in the enterprise, that it buys from other sections and sells to them, that it has its own expenses and its own revenues, that its dealings result either in a profit or in a loss which is imputed to its own conduct of affairs as distinguished from the result of the other sections. Thus the entrepreneur can assign to each section's management a great deal of independence . . . Every manager and submanager is responsible for the working of his section or subsection. It is to his credit if the accounts show a profit, and it is to his disadvantage if they show a loss. His own interests impel him toward the utmost care and exertion in the conduct of his section's affairs." (Human Action, pp. 301-2)

    So a mutualist system of co-operatives is perfectly possible -- each workplace "owns" a part of the commonwealth just as von Mises argues individual workplaces do within a corporation.

    Like Marxists, von Mises tries to excommunicate libertarian socialism (as associated with Proudhon, Bakunin and Kropotkin) from the socialist tradition. Modern propertarians do the same but, worse, they also steal the good name "libertarian" from the left"

    I discuss this in An Anarchist FAQ (volume 2 just published!).

    Iain
    An Anarchist FAQ

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  9. Lord Keynes,

    This is off topic. I seem to remember you doing a post some time ago giving a list of instances stretching back 50 years or so where Austrians were predicting hyperinflation by this time next week. Could you give me the URL of the post, as I’d like to have the list to throw at Ausrtians when appropriate. Thanks.

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    1. To be honest, I am not sure which one you mean. Perhaps this one?:

      http://socialdemocracy21stcentury.blogspot.com/2011/12/austrians-predicted-housing-bubble-but.html

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  10. Mises himself argued, in more places than I can count, that interventionism is not socialism, because in interventionism, the government's interventions take place amidst an otherwise functioning market. So indeed, by Mises's own explicit statement that interventionism is not socialism, the economic calculation problem of socialism does not arise under interventionism.

    Nevertheless, I believe one could argue that interventionism produces a degree of a calculation problem. In Mises's Bureaucracy, Mises notes that public agencies cannot economically calculate, because their products are never sold. Even if their inputs are priced by the market, their outputs are not. Similarly, the Soviet Union had some degree of economic calculation, because it could use world prices. So it would seem that Mises implicitly - but not explicitly - argues that the economic calculation issue can be an analog one, i.e. with a continuum, not a binary/digital "socialism or not" issue. I would therefore argue, for example, that assuming the ABCT is true, then central-bank manipulation of interest rates gives rise to an economic calculation issue with respect to anything involving interest rates, to the degree that they involve interest rates. Similarly, if the government provides water but purchases the copper to make pipes from the market, then there is an economic calculation problem with respect to the output but not the input.

    In short, when dealing with interventionism and mixed economies, one must be precise in one's language, and explicitly specify where the precise problem of calculation is, and where it is not. Under pure socialism, you cannot calculate, period. But under a mixed economy, there may be times where you can calculate and times where you cannot, depending on the situation.

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    1. Also, we should remember that the whole economic calculation debate is an economic one, i.e. choosing appropriate means for given ends.

      Therefore, whenever we say there is an economic calculation problem, we must specify what the ends are, for which appropriate means cannot be calculated.

      For example, assuming ABCT, then when the central bank lowers interest rates, this certainly does not pose a problem for the government which wishes to borrow money to cover its deficits. From the government's perspective, there is no calculation problem at all. The problem arises for the rest of the society, which wishes savings and investment to be equal to each other, and for those investments to be invested wherever consumer demand dictates they ought to be. According to ABCT, this where the calculation problem would arise.

      Mises emphasized that the calculation problem was that the planner cannot plan even to his own satisfaction, given his own ends. Therefore, when speaking of an interventionist/mixed economy where economic calculation is impaired, we must specify which and whose ends cannot be calculated, because not only may only certain sectors of the economy be affected (e.g., public water poses a calculation problem for water, but not for other resources), but only certain actors in that sector may have a calculation problem (e.g., farmers who receive subsidized water and politicians who buy votes via this subsidy, will both get exactly what they want, and their ends are thus being satisfied, and so for them, there is no calculation problem).

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  11. Freshly Squeezed CynicNovember 1, 2012 at 10:00 AM

    "farmers who receive subsidized water and politicians who buy votes via this subsidy"

    A remarkably simplistic and entirely erroneous view of why water was first municipalised and then nationalised in the 20th century.

    Even assuming the most laughably childish version of public choice economics, it would not be rational for politicians to buy the votes of farmers, because farmers are a tiny subsection of voters. Too much money for too little gain, even if people - even politicians! - did actually think like dessicated calculation machines.

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  12. "A remarkably simplistic and entirely erroneous view of why water was first municipalised and then nationalised in the 20th century."

    I made no claim about municipalization and nationalization. I made a claim about below-cost pricing. The two are totally separate.

    " it would not be rational for politicians to buy the votes of farmers, because farmers are a tiny subsection of voters. Too much money for too little gain"

    Too much money? But WHOSE money. It is not the politicians' money! For the politician, it is FREE to offer subsidies to farmers. So it is a small gain for almost no cost at all. So it would certainly be economically rational, to get something for nothing, even if that something is small.

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  13. Freshly Squeezed CynicNovember 3, 2012 at 8:14 AM

    "It is not the politicians' money"

    True. It is the state's, raised by taxes, under a consensual, implicit social contract whereby we pay taxes in order to receive government services that we deem appropriate. The politicians are those whom we elect, democratically, to run the machinery of the state, with our consent.

    "For the politician, it is FREE to offer subsidies to farmers"

    This is untrue. There may be substantial political costs (if we are assuming votes are "bought" - as I note, dubious in itself - then we have to ask what is actually "bought"). A rational politician would ask to what extent a subsidy for one section of society will anger another section, or whether that would remove a subsidy for another section of society. Or if it would be beneficial to the country as a whole; after all, if we are assuming a rational politician wants to be re-elected, he will have an easier time being re-elected when a country is doing well than when it is doing poorly. These are costs too, and there are always trade-offs, so no-one, especially not the politicians, are getting "something for nothing".

    This is also why the fanciful libertarian idea that democracy is doomed to fail since the poor will just vote all the money of the rich into their own pockets bears no resemblance to how modern polities actually work, not least because that is not actually how societies work; the atomised self-made man earning all income by the sweat of his own brow is also a convenient fiction.

    Plus, you are still assuming people act entirely economically rationally, especially in the political arena. This is a dubious assumption.

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  14. "implicit social contract"

    Where is this social contract written? The funny thing about social contracts is that they always say what the government and its supporters want it to say. The social contract is somewhere never on the side of those who disagree with what the government does. Very convenient for the government and its supporters.

    "The politicians are those whom we elect, democratically, to run the machinery of the state, with our consent."

    With "our" consent? I believe methodological individualism would put into question whether "we" consent to the government.

    Furthermore, Public Choice's "rational ignorance" and Bryan Caplan's "rational irrationality" would put the entire notion of democratic elections into serious question.

    "A rational politician would ask to what extent a subsidy for one section of society will anger another section"

    Rational ignorance means that those who would oppose the subsidies, won't even know about them; the only people who will know about them are those who support them. Concentration of benefits and diffusion of costs.

    "he will have an easier time being re-elected when a country is doing well than when it is doing poorly."

    Except that as Bryan Caplan shows, voters are systematically wrong on economics, so politicians are compelled to do precisely the opposite of what economics tells them to do, if they want to be elected. A politician who practices good economics is guaranteed to lose.

    "Plus, you are still assuming people act entirely economically rationally, especially in the political arena. This is a dubious assumption."

    No, that is YOUR assumption, as your own response shows. I oppose this assumption of the rational voter.

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  15. Freshly Squeezed CynicNovember 4, 2012 at 5:38 AM

    "Where is this social contract written? The funny thing about social contracts is that they always say what the government and its supporters want it to say. The social contract is somewhere never on the side of those who disagree with what the government does. Very convenient for the government and its supporters."

    Not all contracts have to be written, that is what "implicit" means; when you order at a restaurant, for instance, you have made an implicit contract with the restaurateur to pay your bill. You didn't need to have a contract explicitly written up there, either.

    In any case, there is, usually, a written itemisation of what a responsible government should do, which forms part of the social contract between government and citizens. It's known as a "Constitution".

    Your assumption that the social contract is always "in favour of what the government does" is simply untrue. Locke's assumption of a social contract, for instance, rests on the consent of the governed, and explicitly outlines a right of the citizenry to reject a government that does not respect the social contract.

    "I believe methodological individualism would put into question whether "we" consent to the government."

    Good thing most people are not (always) methodological individualists, then; especially since the intentionalism of that analysis makes one susceptible to accepting action-theoretic perspectives which might not be borne out by the data.

    "Furthermore, Public Choice's "rational ignorance" and Bryan Caplan's "rational irrationality" would put the entire notion of democratic elections into serious question."

    Both these concepts assume rationally maximising self-interested individuals, which is where the issues of time-preference comes in. The only problem with that is that we are not, in face, rationally maximising self-interested individuals, as repeated experimentation suggests (at best, we have bounded rationality). Even celebrated public choice theorists like Buchanan caution against using their research as a "theory of politics", because their assumptions about rationality are too strong to fully explain voter and political motivations; it is very clear that political "ignorance" ebbs and flows and is a function of much more than just the time-preference of the average voter. There are also society-wide issues that affect these things.

    It is also very clear the contempt that libertarians have for the ordinary individual (despite their supposed individualism!) when they go on and on about how ignorant the ordinary individual is about everything except shopping and how they cannot possibly be trusted with being involved in choosing a government. That's just how people are. They love their baubles, but have no interest in government, and that has always been and will never change (which is patent nonsense, if you look at the historical record; you would think Chartism and Suffragetteism never happened)

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  16. Freshly Squeezed CynicNovember 4, 2012 at 5:52 AM

    "Rational ignorance means that those who would oppose the subsidies, won't even know about them; the only people who will know about them are those who support them. Concentration of benefits and diffusion of costs."

    And my point (despite the simple fact that rational ignorance is nonsense), is that *even* if I take your assumptions that all politicians are completely rationality-maximising, that is *even* if we assume that the people who "know" what is going on only have self-interest at heart, your view would still be wrong, as it does not take into account the political cost of not providing a benefit to a wide interest rather than a narrow interest, which makes no sense if you assume politicians just want to be re-elected.

    And, no matter how ignorant a voter is, "rationally" or otherwise, he will not continue to vote in a politician or government who has presided over a weak economy, etc. That is, if we assume a rationally-maximising, "rationally ignorant" voter, they would still use some kind of proxy or aggregate, such as the health of the economy, or his own pocketbook, which does not take up a lot of time to find out about, especally the latter.

    So, my point is, even on your own terms, your arguments fail to make sense.

    "Bryan Caplan shows, voters are systematically wrong on economics, so politicians are compelled to do precisely the opposite of what economics tells them to do, if they want to be elected. A politician who practices good economics is guaranteed to lose."

    No, Bryan Caplan shows that voters do not agree with Bryan Caplan's economics. I'm sorry to have to tell you, but Bryan Caplan does not, in fact, have all the answers.

    A politician who practices the kind of economics that Bryan Caplan and yourself consider "good" would, indeed, be guaranteed to lose, because (especially right now) the kind of policies you endorse lead to inequality, economic stagnation, financial market bubbles and crashes, and prolonged depressions, as Lord Keynes has made entirely clear in his blog here. Indeed, it would not make sense otherwise. If the kind of society Caplan wanted provided prosperity, and a government instituted those kinds of policies, why on earth would even a "rationally ignorant" voter vote them out? There are very few voters who are so completely, blitheringly unaware that they would not notice an improvement in prosperity and economic growth. It's not as if there have been no governments willing to institute such policies, especially over the past 30 years or so. It's just that it's quite clear now that they have been unadulterated failures.

    "No, that is YOUR assumption, as your own response shows. I oppose this assumption of the rational voter."

    As do I. It should be clear I do not believe in rationality-maximising individuals. I was just point out that even in your world of rationality-maximising individuals, there are clear issues regarding even those who are meant to "know" what is going on that you have missed that makes your simplistic view of politics more complex. I, personally, would add even more layers of complexity, since I do not believe that the what we know about humans suggest they are rationality-maximising and entirely self-interested.

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  17. "Locke's assumption of a social contract, for instance, rests on the consent of the governed, and explicitly outlines a right of the citizenry to reject a government that does not respect the social contract."

    And Locke's social contract permitted only a minarchy. When people like Locke said "consent of the governed", they meant "consent", and when they said "social contract", they meant "contract". In other words, their goal was to make government resemble, as much as possible, a private business, in which contracts and consent are real. This can only result in minarchy.

    "he political cost of not providing a benefit to a wide interest rather than a narrow interest"

    You provide both the wide AND narrow interests, and you just monetize the resulting debt.

    "he will not continue to vote in a politician or government who has presided over a weak economy, etc."

    But he has no knowledge of what an actually weak economy is or what causes it, because he is ignorant of economic science. So his vote will be systematically biased against the candidate he ought to vote for, as Caplan shows.

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  18. "f the kind of society Caplan wanted provided prosperity, and a government instituted those kinds of policies, why on earth would even a "rationally ignorant" voter vote them out? There are very few voters who are so completely, blitheringly unaware that they would not notice an improvement in prosperity and economic growth."

    Because the growth would take TIME, and there would be relative winners and losers during the adjustment. Remember, this is long-term versus short-term. In the long-run, free-trade benefits all, but in the short-term, the worker in a tariff-protected industry loses his job.

    This is precisely why Schumpeter, discussing creative destruction, thought socialism inevitable. Even though creative destruction means benefits for everyone in the long-term, it hurts a few in the short-term, and the voters will not tolerate this, and so they will vote for socialism, which helps them in the short-term but hurts them in the long-term.

    This is not just a function of high time preference, but also a function of the fact that voters do not know economics, and so do not even know they are making a temporal transfer at all.

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