F.A. Hayek as a Political Economist

Economic Analysis and Values

THIERRY AIMAR, Jack Birner, Pierre Garrouste

• Publisher: Taylor & Francis
• Year: 2013
• Print ISBN: 9780415226226
• eBook ISBN: 9781134694617
• Edition: 1
• Topic: Business
• Subtopic: Business General
• Index: Business

Whilst some of Hayek's contributions to economics are purely analytical, others are inspired by a broader vision that could be characterized as political economy. In this authorative volume, some of the world's leading Hayek scholars examine the link between these two essential components of Hayek's thought, and consider them against a wider background of thought in the Austrian tradition.

Part I

Hayek in France

1 Hayek and the French engineers

Robert F. Hébert

It is probably no exaggeration to say that every important advance in economic theory during the last hundred years was a further step in the consistent application of subjectivism.

(Hayek, 1952)

Introduction

In his provocative book, The Counter-Revolution of Science (1952), Hayek draws a distinction between the “objective” nature of science and the “subjective” nature of social studies. The object of science is to study things independently of what people think or do about them; whereas the object of social studies is to understand all that people know and believe about themselves, about other people, and about their external world – everything that determines their actions, including science itself. The misappropriation of the method of science to the study of social science is what Hayek calls scientism. Hayek identifies scientism with “the characteristic outlook of the engineer, whose conceptions of ‘efficiency’ constitute one of the most powerful forces through which this attitude has affected current views on social problems” (1952, p. 92). Scratch an engineer, in other words, and you will find a central planner underneath. According to Hayek, the potential mischief that the engineer can wreak in the social sphere is practically boundless, because:

So far as the solution of his engineering problem is concerned, he is not taking part in a social process in which others may take independent decisions, but lives in a separate world of his own. His technique, in other words, refers to typical situations defined in terms of objective facts, not to the problem of how to find out what resources are available or what is the relative importance of different needs. He has been trained in objective possibilities, irrespective of the particular conditions of time and place, in the knowledge of those properties of things which remain the same everywhere and at all times and which they possess irrespective of a particular human situation.

(Hayek, 1952, pp. 168–9)

It is this capacity for mischief that provided the subtitle to Hayek’s book: “Studies on the abuse of reason.”

Hayek traces the roots of modern socialist thought to nineteenth-century France. His most pointed criticisms are reserved for Claude-Henri Saint-Simon and Auguste Comte. Saint-Simon is said to have inspired the École Polytechnique, a training ground for state planners. Comte, who served as Saint-Simon’s secretary and collaborator, is credited with the pernicious doctrine that the entire social order can be changed through revision of the law of property. Together, these two writers launched a kind of social physics that encouraged socialism and other forms of centralized control.

As an examination of the evolution of modern socialism that focuses on the French roots of interventionist thought, The Counter-Revolution of Science is a tour de force. But as a balanced presentation of the “engineering mentality,” a concept that occupies a central role in Hayek’s argument, it leaves much to be desired. Hayek’s portrait of the engineering profession in nineteenth-century France, and of the influence of French institutions of technical learning that shaped the professional cadre of state engineers, is curiously one-sided. It tars all members of the profession with the same brush. Furthermore, it offers a blanket indictment of an institution, the École Polytechnique, as the breeding ground of socialist thought. It overlooks an opposite intellectual tradition in economic analysis and policy mat coexisted alongside the train of thought criticized by Hayek. This other tradition sprang from the same French roots, but was more respectful of the competitive market order. It could be found among the ranks of a select group of state engineers who were associated with the École Nationale des Ponts et Chaussées, the postgraduate school for civil engineers. Key writers among this group of state engineers practically invented microeconomics a generation before the respective efforts of Menger, Jevons and Walras combined to form what we call the neoclassical “revolution.” The leader of this small group of proto-neoclassicals was Jules Dupuit. He was the most capable and prominent – but by no means the only – member of an econo-engineering tradition in which state engineers systematically forged new tools of microeconomic theory. Robert Ekelund and I have explored this neglected, micro-analytic tradition in a book entided Secret Origins of Modern Microeconomics (1999), recently published by the University of Chicago Press. In this chapter I would like to review some of the findings of this book and set them against the characterization that Hayek presents in his “Studies on the abuse of reason.”

Menger and Dupuit: was there a French Connection?

Hayek is the putative heir of Menger, the founder of Austrian economics. Any connection, therefore, between Menger and the French econo-engineering tradition may illuminate the genesis of Austrian economics and also bring into sharper focus Hayek’s assessment of nineteenth-century French influences on economic method. Surprisingly, the possible filiation between Dupuit, the state engineer, and Menger, the founder of the Austrian School, has never been explored systematically or thoroughly. I am unaware of any citations of Dupuit in Menger’s writings, yet Menger was mindful of efforts by Dupuit and his fellow engineers to advance economic theory and policy. At least there is strong circumstantial evidence to that effect. Menger’s personal library, which now resides at the University of Hitotsubashi in Japan, contains a number of books by prominent French engineers of his era, including Dupuit.¹

Dupuit and Menger both founded subjective traditions in value theory. Menger’s seed fell on fertile ground and blossomed into what we now call Austrian economics. By contrast, Dupuit was known chiefly to specialists within the state corps of civil engineers in Paris, and to the members of the Sociéeté d’Économie Politique, whose preoccupation with the polemics of free trade made them indifferent to Dupuit’s contributions to pure theory. As a result, Dupuit had a limited audience for his ideas and he attracted no disciples of any consequence. Unlike Menger, his works were never translated into English – except for fragments of his pioneer treatment of demand and marginal utility – and this inaccessibility of his writings in English has retarded a complete appreciation of Dupuit’s position in the development of economic theory.

The essence of the Austrian approach

The essence of the Austrian approach to economics, and its contrasting stance to orthodox neoclassicism, has been recently outlined by Huerta de Soto (1998), whose main points are these: (1) Economics is a theory of action rather than a theory of decision. (2) As a theory of human action, economics is necessarily based on subjectivism, which establishes our understanding of costs as well as demand. (3) Entrepreneurship is the leading force in economic theory, i.e. competition is a process of rivalry between entrepreneurs. (4) Mathematical formalism is inappropriate to economics, inasmuch as economics consists of human action. (5) The relation of economics to the empirical world is limited and tenuous because the “observing” scientist cannot obtain the practical information that is constantly being created and discovered in a decentralized way by the “observed” actor-entrepreneurs.

Most of these points are consistent with the microeconomic theory invented and advanced by Dupuit and his cohorts in the state corps of engineers. Like Menger, Dupuit advocated a subjective theory of value, a dynamic concept of economic activity, a theory of entrepreneurship that emphasized demand discovery, and a conceptualization of competition as a process of rivalry. His economic analysis also repudiated the idea of a single equilibrium price because it stressed uncertainty and imperfect competition. The basic points of departure consist of Dupuit’s notion of cost – which is less systematic and less radically subjective than Menger’s – and his view of the relation of economic analysis to the empirical world, which is more elastic than Menger’s.

Despite his brilliant originality in developing a theory of demand linked to marginal utility, Dupuit did not develop a robust theory of costs. His writings reveal a basic understanding of opportunity costs, but, in general, Dupuit treated costs more in the manner of Marshall than of Menger, i.e. he thought of costs as objective and measurable. Indeed, attempting to measure the costs of public works was a major undertaking of the state engineers. Moreover, Dupuit advocated the introduction of mathematics to economic analysis, although, as we shall see below, he resisted the purely mechanistic method embraced by Cournot and Walras.

Common roots

It should be noted at the outset that Dupuit’s economics and Austrian economics shared common roots. Both trace their heritage to J. B. Say.² The impetus to Dupuit’s formal treatment of consumer behavior was a desire to correct the errors of his fellow engineers, who tried to apply Say’s demand theory to the economic evaluation of public works. In particular, ponts engineers, adopting a literal interpretation of Say’s utility measure of value, attempted to gauge the utility of new public works by differences in the cost of transportation introduced by a new mode of transport (e.g. canal, road, etc.). Dupuit argued, in contrast, that the proper measure of utility is the difference in costs of production rather than in costs of transportation. Moreover, Dupuit asserted that the increases in quantity taken at lower prices do not take on the same value, but are valued discretely according to the law of diminishing marginal utility. These two insights put him at the cusp of modern demand theory and should have banished forever the classical confusions about value-in-use and value-in-exchange.³

Another stark reminder of the similarities between Dupuit and Menger can be found in Dupuit’s examples of demand involving a hierarchy of wants. One example in particular illustrates how economic and engineering considerations frequently merge. To drive home his point about diminishing marginal utility, Dupuit cited a hypothetical case involving a city on a hillside, to which water must be pumped from below.

Imagine a city situated at a great height, which has difficulty supplying itself with water. Assume that because of its circumstances, the inhabitants pay a daily rate of 50 francs per hectoliter by annual subscription. It is quite clear that every hectoliter of water consumed under these circumstances has a utility of at least 50 francs. [Suppose that] after recovery of the expenses of putting the pumps in place, the cost of the same quantity of water falls to 30 francs. What happens next? The first effect is that the person who previously bought a hectoliter will continue to do so, and will realize a benefit of 20 francs on the first hectoliter purchased; but it is likely that the reduction of price will induce him to increase his consumption; instead of using water parsimoniously for his personal use, he will use it for needs less essential and less pressing, the satisfaction of which he values … somewhere between 30 and 50 francs. If new and improved pumps lower the price to 20 francs, the same individual may purchase 4 hectoliters, and wash his house daily; give him water at 10 francs, he may buy 10 hectoliters, so as to irrigate his garden every day; at 5 francs, he may purchase 20 hectoliters in order to feed an ornamental pond; at 1 franc, he may wish to buy 100 hectoliters to supply a fountain that flows continuously, etc. Thus, every product consumed has a different utility, not only for each consumer but also for each of the needs he is seeking to satisfy.

(Dupuit [1853], 1933, pp. 174–5)

It is but a short logical step from this passage to Menger’s famous hierarchy-of-wants approach, in which he outlined the subjective theory of consumer behavior (cf. Menger [1871], 1981, pp. 131–2).⁴

The primary role of the entrepreneur

The centrality of the entrepreneur within Austrian economics is well known. Almost totally overlooked is the extent to which Dupuit’s subjective theory of utility led him to a similar theory of entrepreneurship. Establishing utility as the central feature of his economics, Dupuit gave the entrepreneur a pivotal role in the competitive marketplace. Dupuit described the entrepreneur’s role as that of demand discovery, which he conceived as a two-stage process. In the first place, the entrepreneur must devise winning combinations of various utility-laden features, or characteristics, that together constitute a desirable product or service.⁵ In the second place, the entrepreneur must estimate the utility that consumers assign to certain goods or services and establish a pricing scheme that will induce consumers to pay in proportion to the utility they receive.

In a clear anticipation of Lancaster’s contemporary modification of demand theory, Dupuit argued that competition is not merely about price but also about the nature of the product itself. The notion that the entrepreneur faces price uncertainty is one that had been emphasized by a long line of Continental thinkers, such as San Bernardino, St Antonino, Cantillon, Turgot, and Say. Dupuit stretched the idea of entrepreneurial uncertainty in a way that opened the entrepreneur’s decision nexus to all manner of product variations: quality, location, space, time, and so forth. Acknowledging the price uncertainty stressed by earlier writers, Dupuit also emphasized the uncertainty of the product itself. He maintained that it is the entrepreneur’s function to make consumers pay as much as possible for the utility they receive. In order to succeed, the entrepreneur must continually manipulate price and product, experimenting to find profitable combinations of elements that will induce consumers to buy, thereby increasing the consumer’s utility and the entrepreneur’s profit. This “process” view of competition took product differentiation for granted, a fact made clear in the following passage, in which Dupuit outlined a common sales strategy.

The same merchandise, disguised in different shops under various forms, is often sold at very different prices to the rich, the well-off, and the poor. There is the fine, the very fine, the extra fine, and the super fine, which, although drawn from the same barrel, offer no real difference other than a better label and a higher price. Why? Because the same thing has a very different utility for the consumer. If the goods were sold merely at the average price, all those who attached less utility than that measured by this price would not buy, and thus would incur a loss; and the seller would lose because many of his customers would be paying for only a very small part of the utility they receive.

(Dupuit [1853], 1933, p. 177)⁶

This passage underscores Dupuit’s thoroughly subjective notion of utility, which is to be found in the consumer’s mental state. Dupuit asserted that product differences may be real or imagined, and his utility arguments embraced implicit as well as explicit markets. For example, he used utility to explain the rationale of intellectual and artistic productions, prizes and awards, and even marriage. “It is a serious mistake,” he said, “to believe that man attaches a price only to material things” (Dupuit [1853], 1933, pp. 172–3). To Dupuit, all “goods” produce (public) utility, whether real or imagined, tangible or intangible. Menger was a bit more restrained. He refused to grant goods-status to imaginary goods (e.g. love potions, etc.), but he nevertheless included useful actions (e.g. friendship, love, etc.) in his definition of goods. “All goods,” Menger wrote, “can, I think, be divided into the two classes of material goods (including all forces of nature insofar as they are goods) and of useful human actions (and inactions), the most important of which are labor services” ([1871], 1981, pp. 53, 55).

Other interesting contrasts involve qualitative differences in goods and how such differences affect value. From the outset Dupuit treated quality as an essential ingredient of each product, an element conveying utility to each purchaser. Describing the nature of technical improvements in transport, for example, Dupuit proclaimed: “Rarely does a cost-reducing change in production not also change the quality of products … they become better or worse, larger or smaller, lighter or heavier, faster or slower, and so on … all these qualities have a value that can be measured by the calculation of utility” ([1844], 1952, p. 54). Menger, too, was concerned with the effect of quality differences on value (Streissler, 1972). Thus he wrote: “If the differences, as to type or kind, between two goods are to be responsible for differences in their value, it is necessary that they also have different capacities to satisfy human needs. In other words, it is necessary that they have what we call, from an economic point of view, differences in quality.” After careful deliberation, Menger conclude...

Table of contents

• Front Cover
• F. A. Hayek as a Political Economist
• Title Page
• Copyright
• Contnets
• List of contributors
• Preface
• Introduction
• PART I Hayek in France
• PART II Economic analysis
• PART III Order
• PART IV Philosophy of law
• PART V Norms from facts?
• Index