June 2, 2006

Economic Thoughts, Part XIII: It is Individuals - Not the Society, Government or Market - Who Think & Act

This posting is Part XIII in a series of postings about economic thoughts.

Professor Don Boudreaux of George Mason University, who hails from New Orleans, recently published an article entitled Triumph of the Individual at Tech Central Station in which he discusses Nobel Laureate Friederich Hayek's contribution to our understanding about how it is individuals - not government or markets - that make things happen in any society:

…Hayek spent most of his career watching the worship of power supplant the love of liberty. Nazism and Stalinism were the two most grotesque forms of this power-worship, but as Hayek warned in his most famous book, The Road to Serfdom (1944), even milder forms are surprisingly dangerous.

…the source of Hayek's fundamental contributions to our understanding of society comes from the method of doing social theory that he learned from [Austrian economists Carl Menger and Ludwig von Mises].

This method is one of rigorous adherence to the tenets of "methodological individualism" -- a fancy name for recognizing that the only units in society who think and act are individual persons. Society doesn't think or act; the market doesn't think or act; the United States government doesn't think or act. Only individuals think and act…

Whatever the topic -- war, economic growth, government regulation -- the only way to achieve genuine understanding of what's going on is to trace all actions back to the individuals who take them. The fact that individuals often act in concert -- say, as voters -- still requires those of us seeking to understand the outcomes of elections to understand the incentives and the constraints that confront the individuals who make up these groups.

Failure to be a consistent methodological individualist leads to misunderstanding. Consider, for example, that politicians and pundits frequently go on about how "we as a nation" did this, or how "we as a nation" must not do that.

"We" who make up the American nation number 300 million people, each with our own preferences, beliefs, and expectations. It's only an illusion that "we" act -- or can act -- as one. It's no less an illusion that "we" act when government acts in our name.

Should "we as a nation" rebuild New Orleans? Asked this question unawares, the typical person says "Yes." But the student of Hayek responds that a city can be rebuilt only by individuals. Success at such efforts might require the concerted actions of many individuals. But understanding this fact, the Hayekian is instantly aware that successful rebuilding efforts must give each individual an incentive to rebuild -- must give each individual appropriate knowledge to perform his part of the rebuilding task effectively -- must give each individual the information and ability necessary to coordinate actions with those of countless other individuals.

The Hayekian also understands that the individuals who make up government are spending other people's money for yet other people's benefit. So these officials lack both the incentives and the knowledge to spend this money wisely.

…The Hayekian isn't misled by romantic talk of "we as a nation" rebuilding New Orleans (or doing any other task) because the Hayekian never forgets that only individuals choose and act -- and that the market is the only means of harnessing individual knowledge and effort for the greater good.

Part XIV to follow...

For previous postings on Economic Thoughts, refer to:

Part I: What is Economics?
Part II: Myths About Markets
Part III: Why Policy Goals are Trumped by Incentives They Create & the Role of Knowledge in Economics
Part IV: The Abuse of Reason, Fallacies & Dangers of Centralized Planning, Prices & Knowledge, and Understanding Limitations
Part V: The Relationship Between Economic Freedom and Political Freedom
Part VI: More on the Relationship Between Economic Freedom and Political Freedom
Part VII: The Role of Government in a Free Society
Part VIII: The Unspoken, But Very Real, Incentives That Drive Governmental Actions
Part IX: More on the Coercive Role of Government
Part X: The Power of the Market
Part XI: Prices
Part XII: I, Pencil - A Story about the Free Market at Work

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Howdy, Mr Hawthorne. I sure hope you didn't think that you had scared me off with your devastating rebuttals. It is fun, to some extent, to come over and try to provide a realist's perspective, but I gotta say it's not quite at the top of my list. So silence doesn't imply consent; it means I have a life.

Can I ask a question? Is there like a point to all of these posts? Instead of regurgitating a bunch of hooey from an Ayn Rand fantasy camp, why not go and read some real history?

I mean, theory is great; if you want something for the bottom of the bird cage. However, since the conditions you advocate existed for much of human history, why not go read to find out how it all REALLY turned out?

Until the early part of the 20th Century, economic transactions were barely regulated, if they were regulated at all. Have any idea what that led to? Why did we create something like the SEC? Because gov't liked to usurp power? Or because stock brokers regularly swindled the public, on a very large scale?

And individualism sure sounds all very fine and good. However, we are social creatures. Humans do not operate solo. Right from the get-go, we have lived in social bands, like chimapanzees. And what happens when an individual is face-to-face with a corporation? Why is it that corporations don't act as 'individuals'? Because they have a whole lot more power as a corporation.
Do you really think that any individual, with the possible exception of a Bill Gates, stands any kind of chance in a dispute with a corproration?

Let's say my swimming pool drain is defective, and it sucks the intestines out of my child's rectum. What do you think would happen if I had to get restitution from a corporation as an individual? Awful, eh? Thank God no company would ever do something like that.

Let's say a drug company put a product on the market that had the annoying little side effect of increasing the risk of heart attack. Acting as an individual, what sort of recourse do you think any of us would have against that drug company? Again, awful. Thank God no company would ever do something like that.

And before you say that there is recourse, I will point out that the recourse exists because we have a legal system in place that gives me recourse. This legal system didn't just happen. The structure of individual protections was built up, piece by piece, not out of some abstract usurpation of power, but in reaction to specific and very real acts perpetrated by corporations.

What do you think would have happened had either of my horrible examples had happened in 1896?

So, sure, act like an individual, and god help you if anything goes wrong.

Let's take the Depression. Now, regardless of the cause, let's look at the effect. In a country with 25% unemployment, what sort of prospects did the vast majority of the population have to help themselves? And Herbert Hoover was perfectly willing to sit back and let all the 'rugged individuals' find their own bootstraps to pull themselves up. Is that the sort of society you're advocating? In the face of disaster, whether natural (Katrina) or economic (Depression), or man-made (Triangle Shirtwaist Fire), what chance does the individual stand?

Not much.

Individualism, like libertarianism is all fine and good after you've lived in a society that provides protections and opportunities and allows you to make your fortune. After that, sure, I can act as an "individual" because I've got millions of pictures of Dead Presidents backing me up. Then 'individualism' works very well.

And let's not forget that America is becoming MORE socially ossified. It's becoming harder to move up-- or down-- in social class. So sure, those manly-man individuals on top don't want to be bothered having to be concerned about the collective rabble down there. So let's talk about how little people have to take personal responsibility while those 'individuals' on top fix the system to work in their favor.

Now, let's talk about your response to this. First, can you please can the name-calling? It doesn't hurt my feelings, but it's a tad childish, and calling me names doesn't advance the debate in any reasonable manner.

Second, if you are going to respond, do it logically. Spouting more theory does not constitute a response. My argument is simple: We tried it your way. It didn't work. As evidence, I offer all of human history. Pick up a book about any time, any place--with the exception of the US 1933-1978)and what you will find is the strong preying on the weak.

In order to logically refute my points, you have to show that either we didn't try it your way, that there weren't huge chunks of history where the strong (rich, powerful, all synonyms) didn't work the gov't to their advantage. If the rich can buy a large gov't like the one we have today, they sure as heck can buy a smaller one, like they did up to 1932.

Or, you have to prove that your way did work. That conditions in, say, the 1890s (i.e., prior to the Progressive Movement led by Teddy R) were some sort of utopia for the great mass of the people, and not just for those who owned the mansions in Newport and used them as summer cottages.

And 'prove' means provide evidence, as in specific, concrete examples of time periods when your conditions existed and we lived in the Garden of Eden. Hey, now there was a lightly-regulated environment. Don't eat the fruit from one tree. And that sure turned out well, didn't it?

OK, you're up. Now, remember the rules!

Posted by: klaus at June 3, 2006 3:48 PM


I am afraid you take yourself far too seriously.

Why would I waste the time developing new postings in response to any of your comments? No, this is a series of postings I outlined before you ever made your first comment.

This series has presented commentary from some of the greatest thinkers of the last century - including 3 Nobel Laureates - on the important topics of core economic principles, political freedom, the role of government, and economic freedom - topics which have been debated for centuries as people with different philosophical world views come to different policy conclusions. They are relevant to today's public policy debates just like they were in the past because the fight for liberty is an ongoing battle against those who seek to consolidate power that limits the freedom of others - whether they are corporate or governments.

On the other hand, all I have read from you are lengthy postings with one-off anecdotes which offer neither a worldview nor a meaningful alternative.

So, even if I had not already developed this series, there is nothing to be gained by responding to a mish-mash of endless words. The series will continue as planned.

Posted by: Donald B. Hawthorne at June 3, 2006 6:24 PM

OK, I take myself too seriously. Fine. I can live with that. However, nice to see that your first reaction is to try to make me the topic, rather than your postings.

And sure, these are Nobel Laureates. But what you are posting are their musings on how society is supposed to work. The circumstances that, in their opinion, would make things all warm and fuzzy and wonderful.

My question is: how is this relevant to anything? Basically, you are presenting a case for low taxes and small gov't. The latter would result, necessarily, in minimal gov't regulation of business, commerce, industry, etc. In effect, you are advocating a return to conditions as they existed in the 1890s, before the Progressive Movement began in ernest.

In other words, the conditions you advocate did exist. We tried that way. It didn't work. Why, on earth, should we return to a set of circumstances that didn't work? At least, they did not work for the very very vast majority of the population. They did work very well for those few and privileged souls at the top of the pyramid. Recall that the 1890s was more or less the period when the Newport Mansions were built and occupied, and that these mansions were SUMMER COTTAGES.

Are you so eager to get a job as a servant in one of these places?

So, Mr H, that is not "one-off" anecdotes. These are references to History, as it happened. You know, reality? Do you have a response for that?

Posted by: klaus at June 5, 2006 9:48 AM