Commentary on Political Economy

Tuesday 6 September 2011

Individualism and Market Equilibrium

Another reward to our loyal friends: These are notes for the chapter in Krisis devoted to the Austrian School, Hayek particularly. I hope you enjoy this. Cheers.

THE STATE OF EQUILIBRIUM: Historical Antecedents of ‘Supply-Side Economics’ in the Austrian School – Individualism and Market Equilibrium – Part 5
Individualism and Economic Order; Prices and Production. There is a fine geometrical proportion between these four concepts in Hayek’s work. The problem of economics for Hayek is the co-ordination of individual ‘free choice’, represented by prices, with the efficient distribution of production, which is the essence of economic order. The raison d’etre of the economic order is the “exchange” of goods and services through their marginal utilities. The “subjectivity” involved in this concept, the reason why “individuals” are involved in an “exchange” of anything with one another, is that they “specialise” so that there is a “division of labour” (Smith’s famous reference to “the innate tendency to truck and barter” and Loasby’s reference to Smith). But the insurmountable difficulty with “the division of labour”, as Hayek surely perceived, is that once “individuals” start “to divide their labour” it becomes impossible to parcel labour, which is a social process, into “individual labours”! Even with all the “specialisation” in the world, the “division of labour” in the productive process necessitates “the co-operation” of individual workers so that it becomes impossible to assign proportionate “prices” to their “labour” or “utility” inputs.
Neoclassical theory always has to assume that the “co-ordination of exchange” exhausts the entire sphere of economic activity. But before “individuals” can “exchange” their “endowments”, these “endowments” have to be “pro-duced”! Thus, not only can neoclassical theory not explain (as Dobb argues) “how” individuals came into possession (have property rights) of their “endowments”: it cannot even explain “how” these “endowments” can be produced “economically” now and in future!
 The paradox is that if the “economic order” is to have legitimacy, it must be “the best possible” (not necessarily ‘optimal’). But the only way we have of judging and ensuring this outcome is to ensure that “pricing” is “the best possible”, which means that “individuals” have to make “free competitive choices” (that is why Schumpeter insightfully calls prices “coefficients of choice” or “coefficients of transformation”). But how do we know that “individuals” are choosing “freely”? Even if we assume that “competition” is the answer to this question, the problem is how to ensure that “self-interested individuals” observe the rule of competition. In that case, “perfect competition” would need to be perfectly policed/enforced, which is why Loasby calls it “perfect slavery”.
Yet even assuming this problem away, as Demsetz has argued, “perfect competition” amounts to “perfect decentralisation”. If economic decisions are “perfectly decentralised”, the fresh difficulty arises that now “individuals” resemble Leibniz’s “windowless monads” that can only act in “perfect synchronicity” and in “pre-established harmony”. What is certain is that “perfect decentralisation” precludes any notion of “division of labour”. If indeed we prevent “individuals” from co-operating in the labour process, which is the only way we may eliminate “specialisation” in the “division of labour”, then at this point, given the “separation” of individuals from the process of production, rather than talk of the “exchange” of goods and services, we may well talk about “the exchange of individual plans” or the “division of information”, as Hayek proposed, and substitute “prices and production” with “plans and assumptions”, as Hahn has suggested, in determining “equilibrium”.

In conclusion I want for a moment to go back to the point from which I started and restate the most important conclusion in a more general form. Competition is essentially a process of the formation of

opinion: by spreading information, it creates that unity and coherence of the economic system which we presuppose when we think of it as one market. It creates the views people have about what is best and cheapest, and it is because of it that people know at least as much about possibilities and opportunities as they in fact do. It is thus a process which involves a continuous change in the data and whose significance must therefore be completely missed by any theory which treats these data as constant,” (I&EO, p.105).

The difficulty with this formulation is, again, that now the concept of “equilibrium” is transmuted from one of “marginal utilities” to one of “information” so that “prices” can be fixed: in the absence of “perfect information” then we have to assume that “existing” information exchange (“formation of opinion”) is the best available. Worse still, introducing “information” (about subjective “utility”) only makes the manipulation of “the competitive market” even easier and “competition” almost impossible to enforce – contrary to “prices and production” where “physical quantities of goods” are much easier to observe! It is clear that in that case the policing/enforcement of “competition” would be ever more intrusive, at one end, and ever more “monadic/atomistic/incommunicable”, even anarchical at the other end. (Of course, this is precisely the difficulty with Schumpeter’s “coefficients of choice” apt to show how a “socialist economy” becomes a “market economy”. What is completely forgotten here is that “information” or “production” in a capitalist economy is subsumed to antagonistic interests.)
Once more, the “absurdity” of this “subjective utility” neoclassical theory is that “production” is simply “spirited away” (!) so that it becomes a simple “exchange”, not even of “products” anymore but rather of…”information” or “data”! (Schumpeter gives a very vacuous and lame riposte to this criticism in ‘EconDoct&Meth’ where he reviews marginal utility theory, limiting himself to reasserting the “irrelevance” of the criticism – which is correct, if one regarded it as an “internal” critique sharing its substantive “utilitarian” assumption, but certainly not when it is clearly an “external” one, one that challenges the entire legitimacy, political and moral as well as “scientific”, of neoclassical doctrine.)
The end result is that “individuals” cannot achieve “production”, and “prices” cannot achieve “economic order”, anymore than “individuals” can ensure “economic order”, and “prices” ensure “production”. The problem with neoclassical theory is that, if we assume ex ante “equilibrium” (the Walrasian synchronic type), then we have a tautology. If, instead, we attempt “equilibrium” ex post (Hayek’s “intertemporal equilibrium”), then we have a petitio principii because we cannot claim that the “prices” we have after exchange are “equilibrium prices” unless we postulate (as an article of faith) that they represent the “free choices” of “individuals”. But we will not know that “individuals” have chosen “freely” (competitively) unless we know that final “prices” are “equilibrium prices”!
What Hayek is forced to do then is to propose that the only way to ensure that “the market economy” delivers on its claim to be “the best possible” economy – indeed, the very foundation of “economic science” – is “politically”, by ensuring that there is no “political interference” with the operation of “the free market” made up of “freely-choosing individuals” in “competition” with one another. But we have just shown that this is not possible on the basis of either a “division of labour” or a “division of information”. (See quotations below from “Individualism” that amply illustrate this summary.)| Options
There is no discussion, detailed or otherwise, in Hayek’s or even Schumpeter’s work, about the historical origins of “the market mechanism”. What we find is a certain faith in “economic analysis” (especially in Schumpeter) and a faith that “economic equilibrium” is the natural state of society. Indeed, that is the real basis of “economic science”:- the immutable, ineluctable tendency of “free societies” to develop “market institutions”. And we find also, references to the precursors of “individualism” in Hayek and to “economic analysis” in Schumpeter. Here I simply note Hayek’s encomiastic tribute to Mandeville, where he totally fails to grasp the “differences” with Smith, especially the Hobbesian “pessimism” and the overriding “paradox”.
After a series of qualifications and admonishments about misconstruing the classic “individualism” of Mandeville, Ferguson and Smith, Hayek proposes a “Burkean” conservative-traditionalist version of it. This is a re-statement of “the market mechanism” not as the locus of narrow “economic” choice but rather as the best social institution for “decentralised” decision-making – a “democracy” founded on his account of “the division of information”. As he puts it,

To the accepted Christian tradition that man must be free to follow his conscience in moral matters if his actions are to be of any merit, the economists added the further argument that he should be free to

make full use of his knowledge and skill, that he must be allowed to be guided by his concern for the particular things of which he knows and for which he cares, if he is to make as great a contribution to the common purposes of society as he is capable of making. Their main problem was how these limited concerns, which did in fact determine people's actions, could be made effective inducements to cause them voluntarily to contribute as much as possible to needs which lay outside the range of their vision. What the economists understood for the first time was that the market as it had grown up was an effective way of making man take part in a process more complex and ex-


Individualism: True and False

tended than he could comprehend and that it was through the market that he was made to contribute "to ends which were no part of his purpose."

Thus, Hayek reasserts his belief in the ability of the market mechanism to secure a form of “democracy” based on the “independent free choices of individuals”. But this position runs against the same insuperable objections that we raised above with regard to the notions of Walrasian and intertemporal equilibrium, namely, that the first is a tautology and the latter is a petitio principii!

The antirationalistic approach, which regards man not as a highly

rational and intelligent but as a very irrational and fallible being,

whose individual errors are corrected only in the course of a social

9. Cf. Schatz, Ope cit., pp. 41-42, 81, 378, 568-69, esp. the passage quoted by him

(p. 41, n. 1) from an article by Albert Sorel ("Comment j'ai lu la 'Re£orme sociale,'"

in Relorm~ social~, November 1, 1906, p. 614): "Quel que fut mon respect, assez commande

et indirect encore pour Ie Discours de la methode, je savais deja que de ce

fameux discours il etait sorti autant de deraison sociale et d'aberrations metaphysiques,

d'abstractions et d'utopies, que de donnees positives, que s'il menait a Comte it avait

aussie mene a Rousseau." On the influence of Descartes on Rousseau see further

P. Janet, Histoire de la sci~nce politiqu~ (3d ed., 1887), p. 423; F. Bouillier, Histoir~

de la philosophie cartesi~nne (3d ed., 1868), p. 643; and H. Michel, L'ldh d~ fetat

(3d ed., 1898), p. 68.


Individualism: True and False

process, and which aims at making the best of a very imperfect material,

is probably the most characteristic feature of English individualism.

lts predominance in English thought seems to me due largely

to the profound influence exercised by Bernard Mandeville, by whom

the central idea was for the first time clearly formulated.10

The best Hayek can manage really is his “empiricist” appeal to “time-tested social institutions” that have proven their worth in preserving democratic government and “free societies”. What Hayek’s “empiricism”, based on Mandeville’s “pessimism”, neglects is that (from Ferguson to Burke), this is the lamest apology for preserving the status quo and fails to derive any parameter to guide “human action” (an irony on von Mises’s title). It is also an appalling misrepresentation of the history of predominantly British “parliamentary democratic institutions” which, as we know, and particularly when we consider the role of these institutions in the development of capitalism, do not trace a “linear” or indeed a “pacific” history but are replete with the most abominable repression and violence.
Perhaps the most powerful argument that militates against Hayek’s version of “Individualism” is that its theoretical framework is both “aporetic”, as we have seen in “Civil Society”, and confuted by the “Mandeville” that he invokes in his favour. An analysis of Locke’s notion of “civil society” and its “natural rights” leads us in fact and inexorably back to Hobbes! Again, assuredly a “pessimistic” view as Hayek perceives, but one that leads ineluctably to conclusions diametrically opposed to Hayek’s! (This “genealogy” we have dealt with in our “Civil Society”. The “dis-continuity/crisis” will be considered in connection with Schumpeter’s ‘Theorie’.)
(Note also Hayek’s diatribe against “socialism/collectivism” that he attributes to “Cartesian rationalism” [as against Popper’s “nominalism”] and bundles together with “false individualism”, like Rousseau’s and Descartes’ in the guise of Bentham and Mill, whereupon he laments the growing role of the State in “society” - see quote below.)

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