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Wednesday, May 18, 2011

More on Caplan and Welfare Economics

We continue our discussion of what Caplan wrote in section 2.4 of  his "Why I Am Not an Austrian Economist"
He tells us about a serious flaw in AE:
There is however a more serious flaw in Rothbard's welfare economics - a flaw which again flows from his behaviorist insistence that only preferences demonstrated in action are real. Thus, Rothbard rejects the argument that the envy of a third party vitiates the principle that voluntary exchange increases social utility: "We cannot, however, deal with hypothetical utilities divorced from concrete action. We may, as praxeologists, deal only with utilities that we can deduce from the concrete behavior of human beings. A person's 'envy.' unembodied in action, becomes pure moonshine from a praxeological point of view... How he feels about the exchanges made by others cannot be demonstrated unless he commits an invasive act. Even if he publishes a pamphlet denouncing these exchanges, we have no ironclad proof that this is not a joke or a deliberate lie."[22]

Truth be told, I'm also a bit sceptical about that last line of Rothbard's. I would go with an argument like this: Say Bill Gates sells a copy of Windows to Smith. Gates gets money, Smith gets a useful tool , and both benefit. Jones, who watches this transaction, is smitten with jealousy. He either wants the money, or a free copy of Windows, or both. He publishes a pamphlet denouncing exchanges. Lie detector tests show he is truly envious unto death. Jones was the breadwinner for his large family, so twenty people starve because of his demise. Has not the transaction harmed society, killing off 21 innocent bystanders?

I would say no. It's not the transaction that killed off Jones. He would have been just as envious if Gates kept the copy of Windows and Smith kept the $100.

One may wonder about the situation where Jones is jealous not of the money and the copy of Windows, but of the gain to each party from the transaction? After all, AE assumes both sides always benefit in a voluntary exchange. What if Jones doesn't mind if Gates keeps the Windows and Smith the money, but is envious of their improved situation after the transaction?

We see the whole thing is getting ridiculous. If we think of the parties involved in the transaction as two people getting married, and Jones having the envy of "Either I get the pretty girl or nobody will", things become crystal clear. The bride and groom have no responsibility to Jones. The correct response to his envy is to tell him, "Deal with it." In other words, envy of an outsider to a transaction should not enter into our economic calculations in the first place.

That's how I would deal with the question of envy. Rothbard had a different approach, to wit: Maybe he's not envious. Maybe he was lying or joking when he wrote the pamphlet. It is to this approach that Caplan slings his arrows of gentle sarcasm:
Indeed, Rothbard could have taken this principle further. When two people sign a contract, do they actually demonstrate their preference for the terms of the contract? Perhaps they merely demonstrate their preference for signing their name on the piece of paper in front of them. There is no "ironclad proof" that the signing of one's name on a piece of paper is not a joke, or an effort to improve one's penmanship.

That one is easy to clobber. We are talking about a normal society, where contracts are enforceable in some kind of court. So that when one signs a contract, he reveals his intent to abide by it or get sued. As opposed to writing pamphlets, which has no legal consequences.

Caplan goes on, giving Rothbard a gently sarcastic compliment:
Rothbard's refusal to acknowledge unobserved preferences would have to impress even B.F. Skinner. What possible reason could we have to believe that utility is "moonshine" unless expressed in concrete actions? At every moment, by introspection we are aware of preferences unrevealed by our behavior. Figuring out the mental states of other people is obviously more difficult, but that hardly shows that their mental states do not exist.

Oh dear. Here Caplan swings in the opposite direction from what we discussed in the previous blog

In that one, he took the nonexistent and thought it exists but is not known. Here he is doing the opposite. He is taking the unknown and pretending Rothbard was saying it does not exist. All I can say is "Tsk, tsk."

[And by the way, even after Caplan totally misunderstood what Rothbard was saying, there was no reason for him to reject Austrian Economics. He could instead have said that he thinks Rothbard is wrong, but Mises is right. Mises admits that there are unobserved valuations, and that they are real and exist.
Here's a quote from Mises in Theory and History, Chapter 1:

It may happen that the judging individual considers both things or conditions envisaged as equal. He is not concerned whether there is A or B. Then his judgement of value expresses indifference. No action can result from such a neutral disposition.]

At any rate, Caplan then delivers what I am guessing he considers the knockout punch:
The statist could easily reverse Rothbard's objection, and claim that since there is no "ironclad proof" that third parties do not object to other people's voluntary exchanges, it is impossible to say whether that they increase social utility. Thus, Rothbard's welfare economics terminates in agnosticism about not only the benefits of intervention but the benefits of voluntary exchange. 

Note that here he does an about face, assuming that unacted upon emotions are unknown, but that they do exist.
The same two rebuttals mentioned in the previous blog apply here as well.Since we learn things best by repitition, I'll copy them here, suitably modified:

It's clobbering time. I see a couple of flaws in his reasoning.
1. Rothbard is comparing two systems. System A is always voluntary; System B always involves violence and coercion. System A always benefits the two principal parties, with unknown results to third parties; System B always harms one party, benefits the second one, and has unknown results for third parties.

Which system is clearly the superior one? Is it not clear that System B deserves our rejection compared to A, not our agnosticism? Of course it is. What's Caplan going on about?

2. There is a more subtle error here as well. As an example of what I mean, let me ask which is a deeper shade of green, Justice or Mercy? The answer is not "We don't know because they are both invisible". The answer is, "No scale of greenness can be applied to these concepts. They are incommensurable with respect to greenness."

As an example for those who know a bit of math, when a mathematician is asked, which is the larger number, 1 or zero, he says 1.
Asked which is larger, 1 or some unknown number X, he answers "Unknown."
Which is larger, 1 or i [=the square root of minus one], he answers "They cannot be compared. The very concept of 'larger than' does not apply to these two numbers with respect to each other."

If Rothbard was saying that Mr Smith's benefit cannot be measured against Mr Jones' loss, just as 1 and i cannot be measured against each other, then we are left with a System A that causes benefit to Smith and Jones and has unknown results for everyone else [=two things in its favor], and System B that causes Smith harm and Jones gain and unknown results for everyone else [= one thing against the system and one thing in favor of it]. Clearly, System A is the superior one. Nothing agnostic about it.

Whew, it's gotten long. Tune in next blog for the third and final article on this topic.


  1. Again, I point to the comment I made on the previous one. "Social utility" is bunk - and Rothbard made it quite clear why.

    In fact, he even argued thus:

    "In the first place, there might well be one or more people in existence who dislike and envy A or B, and who therefore experience pain and psychic loss because the object of their envy has now improved his lot. We cannot therefore conclude from the mere fact of an exchange that "everyone" is better off, and we can therefore not simply leap to the valuational idea of social utility."

    In other words, it is quite obvious that Rothbard recognizes that an unknown level of envy can exist, even if it cannot be demonstrated as such, and USES IT TO ARGUE AGAINST the social utility doctrine Caplan holds to.