Liberalism against Liberalism

Javier Aranzadi

• Publisher: Routledge
• Year: 2006
• Edition: 1
• eBook ISBN:
  9781134215638
• Topic: Business
• Subtopic: Business General
• Index: Business

The defence of the market and economic freedom have been the main objectives of the investigations by liberal thinkers such as Milton Friedman, Gary Becker, F Hayek and L Von Mises. Bearing in mind that the first two economists are the maximum exponents of the Chicago School and the last two of the Austrian School, it is often concluded that the theories of both schools are similar. This book demonstrates that in reality, there is no convergence or complementariness to be found between both schools of thought.

The anthropological categories, contributed by Mises, allow us to understand all human phenomena from the view of the man who acts. In this view, economics is part of a philosophical system whose core is the creative capacity of people. Becker's work, on the other hand, is concentrated on the generalization of the homo economicus as the basis for explaining all human behaviour. He generalizes the maximizing principle to explain all human reality, and extends the scope of the application of a so-called scientific and technical view of the world.

In this key volume, an important read for those in the fields of economic theory and political economy, Javier Aranzadi argues, in essence, that the tradition of Hayek and Mises encourages a humanistic liberalism, whereas the Chicago School proposes only a technical humanism.

1 Two economic approaches to human behaviour in liberalism

The object of economic study

There exists a general idea as to what phenomena are the proper object of economic science. Many people agree that the aim of this branch of knowledge is to investigate market phenomena, that is, to enquire into the nature of the types of exchange that exist between the various goods and services. The difficulties of economic analysis do not come from any uncertainty over precisely what the object of the study is: the problems arise when we try to explain what constitutes the economic behaviour which causes these market phenomena. On the other hand, the explanation of economic behaviour allows us to delimit the area in which the economic phenomena originate.

Although it is true that economics began with the study of market phenomena, it was necessary to go beyond the sphere of the market itself and of mercantile transactions in order to explain these phenomena. The marginal revolution supposed a generalization of the field of economics as a result of an enlargement of the anthropological basis which supports the explanation of economic behaviour. The most important and radical advance has been to confirm that all economic behaviour is based on the same elements that conform any action. The explanation that we give of economic behaviour will allow us to include within the scope of economics many types of behaviour that are not market exchanges, since when we talk about economic behaviour we are dealing with concepts of preference, valuation, choice, ends and means. These are all concepts that are present in the explanation of any human behaviour. This coincidence, which seems to be obvious but is often overlooked, determines the scope and potency of economic science, depending on the response that is given to the following three questions:

1 If, in order to explain the phenomena of the market, it is necessary to go beyond market transactions, what is the scope of economics? Does economics include mercantile and non-mercantile transactions?

2 If, as we have said, the basic elements of economic behaviour are to be found in every action, is it permissible to ask ourselves what the difference is between market phenomena and non-mercantile phenomena?

3 Very closely linked to the second question, we can ask, can all human behaviour be reduced to market transactions?

The scope of economics

In this book we are going to analyse the work of two authors, Ludwig von Mises and Gary Becker, because, from their different schools, they give consistent answers to these three questions. We shall choose the theories that are based on the study of the market. These schools are often called ‘liberal’ for their defence of the rule of law and market economics. In this book we are going to focus on the study of the second defining characteristic of liberalism – market economics. The best-known school for the defence of the market is the Chicago School, as it is this university which has created a group of researchers dedicated to the study and diffusion of the theories for the defence of the market. There exists another school research group, the Austrian School, which offers alternative theories. Generally, the ideas of the two schools are often interchanged, so that they can be grouped together under the name of market defenders, without taking into account the theoretical and methodological differences between them.

This confusion increases when we observe that leading members of both schools belong to the same societies and foundations which promote the ideas of market economics. Thus the economic policy objectives of these societies penetrate into the world of economics and into public opinion in general, so that the theoretical differences of the members of these organizations do not matter. Authors like M. Friedman, G. Becker, R. Coase and F. Knight belong to the Chicago School and mix with L. Mises, F. Hayek and I. Kirzner, who belong to the Austrian School. People tend to consider that the arguments of Friedman or Becker are compatible with those of Hayek and Mises, but this idea is entirely false and causes much confusion. To demonstrate this, we must analyse the works of the two authors of these schools who have contributed the most important theoretical and methodological work to resolve the three questions we have already posed. The economist from the Austrian School is Ludwig von Mises, the one selected from the Chicago School is Gary S. Becker.

Both Mises and Becker consider that the scope of economics includes the whole of human behaviour, although the characteristics of economic behaviour which support this statement are different in the two authors. We must distinguish two subjects in their work which are very closely related to the three questions presented previously: (1) the justification of the end pursued together with the enlargement of the scope of economics; and (2) the theory provided for such an end that is the characterization of economic behaviour. The theoretical doctrine which each author offers determines a different method of economic analysis. In this section, we shall see how Mises and Becker respond to the first question; in the next section, we will analyse their theoretical responses to the two remaining questions.

Mises’ and Becker's motive for enlarging the scope of economics is their dissatisfaction with the current theories. Mises (1981a) deals with the criticism of the principle of economic rationality of the classical school of economics because it does not take into account those motives that cannot be expressed in money terms. He argues that economic theory has become an objective science by enlarging the subjective base of economic behaviour. The characteristic that defines economic behaviour is the unchangeable reality of having to make choices between scarce means and alternative ends. Therefore, for Mises the scope of economics includes every action where the human agent chooses between different alternatives in order to change his current situation. Mises establishes the fact that the end pursued does not characterize the economic principle or the means that are used (Mises 1996). The essence of economic behaviour is the unchangeable choice between different alternatives created in the action. He rejects the following lines of research:

1 It is a vain effort if we start from the study of market phenomena, and if we try to delimit its scope by appealing to the motives which impel men to act, or to the nature of the objectives which the action may pursue in each case. In Mises’ words: ‘the classification of actions according to their various motives may be momentous for psychology and may provide a yardstick for a moral evaluation; for economics it is inconsequential’ (Mises 1996: 233).

2 Another line of research that is destined to fail is that of limiting the field of economics to those human actions whose objective is to provide people with tangible, material goods from the external world. Mises argues:

the advice of a doctor, the instruction of a teacher, the recital of an artist, and other personal services are no less an object of economic studies than the architect's plans for the construction of a building, the scientist's formula for the production of a chemical compound, and the author's contribution to the publishing of a book.

(Mises 1996: 233)

These two lines of research do not allow us a better understanding of market phenomena because the essence of economic behaviour is neither the nature of the end pursued, nor the nature of the means used. The economist's only responsibility is to confirm the existence of a dissatisfaction which motivates the person to act, and that the agent perceives or realizes that certain goods, be they material or immaterial, may serve him as a means.

These considerations that Mises makes about the theoretical paths that must be abandoned, are also present in the work of Becker: (1) economic access to reality, according to Becker, normally finishes when it bumps up against tastes. So, ‘in the traditional vision, an explanation of economic phenomena reaches its limit when it meets the difference in people's tastes’ (Stigler and Becker 1977: 76). In the face of this traditional vision, Becker offers an alternative vision, in which ‘the economist continues the search for differences in prices or income, in order to explain any difference or change in behaviour’ (Stigler and Becker 1977: 76). The essence of economic behaviour is not based on the motives or tastes which define the end that is pursued, (2) neither is economics restricted to the study of material goods. The economic means may be both material and immaterial. The following paragraph by Becker is explanatory:

The definition of economics in terms of material goods is the narrowest and the least satisfactory. It does not describe adequately either the market sector or what economists ‘do’. The production of tangible goods now provides less than half of the market employment in the United States, and the intangible outputs of the service sector are now larger in value than the outputs of the goods sector. Moreover, economists are as successful in understanding the production and demand for retail trade, films or education as they are for autos or meat.

(Becker 1976: 4)

For both authors economic behaviour is based neither on the ends nor on the means. The definition of economics in terms of scarce means and alternative ends presents the following problem, which has been posed accurately by Becker:

This definition of economics is so broad, that it is often a source of embarrassment rather than a source of pride to many economists, and usually, it is immediately qualified to exclude the greater part of non-market behaviour. [This definition] simply defines the scope [and does not tell us] one iota about what the ‘economic’ approach is.

(Becker 1976: 4)

Where must we look for the essence of economic behaviour? The nature of the economic problem cannot be resolved by studying the ends and means that are used in the market. The area in which actions are produced, based on the scarcity of means and the need to make choices, exceeds the area of market phenomena. Both Mises and Becker are fully aware that in all human behaviour there is a choice between different courses of action. In other words, every choice supposes a benefit and implies a cost: therefore the scope of economics includes for both authors many more phenomena than those of the market. Becker has pointed out different phenomena which do not relate to the market but in which a choice is produced:

Scarcity and choice characterize all resources allocated by the political process (including which industries to tax, how fast to increase the money supply, and whether to go to war); by the family (including decisions about a marriage mate, family size, the frequency of church attendance, and the allocation of time between sleeping and waking hours); by scientists (including decisions about allocating their thinking time, and mental energy to different research problems); and so on in endless variety.

(Becker 1976: 4)

It is clear that enlarging the scope of economics poses the second and third questions asked at the beginning of this chapter. It is necessary to determine exactly what is understood by economic behaviour because the two problems, already mentioned, are presented here:

1 If economics includes and goes beyond market phenomena, what distinguishes the monetizable problems from the non-monetizable problems? In other words, what distinguishes market phenomena from the rest of human phenomena?

2 Based on whatever the definition of economic behaviour may be, is it possible to reduce all human phenomena to market phenomena?

The characterization of economic behaviour

The objective of this book

Depending on how we treat the constitution of the means, the generation of ends and the evaluating system, we are offered two alternatives for distinguishing between monetizable and non-monetizable phenomena.

The first line of theoretical development is based on explaining the elements that constitute any human action. The starting point is an analysis of the categories implicit in any action; from there we proceed to explain the economic behaviour which gives rise to market phenomena as a particular case. In this approach, the enlargement of the anthropological basis of economic behaviour converts economics into a general theory of action. This line of development was explored and established by Ludwig von Mises, whose mature work is Human Action: A Treatise on Economics (Mises 1996), which starts with the study of the elements that constitute any action and ends as a study of market phenomena as a particular case. In the first part of the book, called Human Action, he establishes the categories necessary for the study of any human action. He goes on to analyse the elements which characterize market phenomena as a special area within the general theory of action: action in the social framework, which allows him to analyse the theory of the market in the fourth part of the book.

The work of Mises offers clear answers to the second and third questions. The second question is answered by saying that economics is converted into a general theory of action in such a way that the principle of economic behaviour is converted into a principle of action. This conversion allows him to distinguish within the general theory of action between economic actions and non-economic actions, the former being understood as constituted by market phenomena and the latter as being constituted by social interactions. If we use Mises’ terminology, the first actions are called catallactic market actions and the second praxeological or social interactions.¹ The response to the third question is negative. It is impossible to reduce all human behaviour to economic behaviour, if we understand economic behaviour as what can be expressed in monetary terms. As Mises enjoyed mentioning, praxeology or general theory of action includes the catallactics or theory of the market.

Gary Becker, a winner of the Nobel Prize for economics, offers another theoretical proposition. In the book written in his maturity, The Economic Approach to Human Behavior (Becker 1976), he establishes the assumptions which define economic behaviour. In his own words, ‘the combined assumptions of maximizing behavior, market equilibrium, and stable preferences, used relentlessly and unflinchingly, form the heart of the economic approach’ (Becker 1976: 5). These three assumptions, which define economic behaviour, are enough to reduce all human behaviour to economic behaviour. There are no doubts as to the object that Becker is proposing:

I do not want to soften the impact of what I am saying in the interest of increasing its acceptability in the short run. I am saying that the economic approach provides a valuable unified framework for understanding all human behavior.

(Becker 1976: 14)

Becker contributes a specific determinant of economic behaviour, called homo economicus, which allows him to respond affirmatively to the third question, about it being possible to reduce all human behaviour to homo economicus.²

With their growing interest in non-market phenomena, economists are often accused of ‘economic imperialism’ for trying to include areas traditionally reserved for other social disciplines. This accusation can be understood in two ways as referring to the enlargement of economics or to the definition of economic behaviour.

If we are referring to the scope of economics, the accusation of economic imperialism has no basis. The confirmation that the categories that we deal with in economics, the ends, the means, value, preference, choice, are present in all human behaviour, offers a reasonable argument to seek a common basis for all the sciences which study human behaviour.³ On this point both Mises and Becker agree in pointing out the unchangeable reality of choice, which exists in all human behaviour. But the enlargement of economics raises the second and third questions. The two characterizations of economic behaviour which we have presented as possibilities of theoretical development are completely different. If w...

Table of contents

• Front Cover
• Liberalism against Liberalism
• Foundations of the market economy
• Title Page
• Copyright
• Dedication
• Contents
• List of illustrations
• Preface and acknowledgements
• 1 Two economic approaches to human behaviour in liberalism
• PART I The economic approach of Mises: praxeology
• PART II The economic approach of Becker: The generalization of homo economicus
• Notes
• Bibliography
• Index