Defending Austrian Economics: An Interview with Walter Block |
Walter Edward Block is an American Austrian School economist and anarcho-libertarian
theorist. He currently holds the Harold E. Wirth Eminent Scholar Endowed
Chair in Economics at the J. A. Butt School of Business at Loyola
University New Orleans. He is a senior fellow of the Ludwig von Mises
Institute in Auburn, Alabama. He is best known for his 1976 book
Defending the Undefendable.
Grégoire Canlorbe:
It is often argued (especially in Catholic circles and even more
broadly, conservative ones) that the mistake of libertarian thought is
to overlook the “community” dimension of the human being and to thus
reduce man to an economic actor, in turn reducing interpersonal
relationships to mere market relationships. The anthropological model of
libertarians does not take into account the natural membership of human
beings in many circles, from the family to the city, circles which
assign man rights and duties. The model reduces the human being to a
mere dealing animal and forgets that he is also a political animal. Is
this reasoning sound, at least in part, in your opinion?
Walter Block: Not sound. It misunderstands libertarianism. That
philosophy is, solely, a theory of the just use of violence. It says
that violence may be used only in defense or retaliation, but never
initiated against innocent persons or their legitimately held property.
If anything, this objection is better launched at Austrian economics,
not libertarianism. But even there, it fails, abysmally. For Austrian
economics is a theory of cause and effect, and claims that human
purposes are the fountainhead of economic activity. Where this criticism
makes the most sense is when launched not against Austrianism or
libertarianism but mainstream economics. The neoclassicals buy into this
crazy notion of economic man, or homo economicus, and perfect
competition. But even here, most of the mainstream economists are not
quite as bad as depicted above; particularly the ones involved in
political economy. They know, pretty much, that man is a political
animal. Certainly, the Public Choicers in particular cannot reasonably
be accused of this fallacy.
Grégoire Canlorbe: Frédéric Bastiat wrote: “If mankind is
improving, this moral growth is due, not to the producer, but to the
consumer. Religion understood this perfectly when it severely admonished
the rich man—the great consumer—in regard to his tremendous
responsibility. From a different point of view and in different language
political economy arrives at the same conclusion. It affirms that we
cannot prevent supplying what is demanded; […] that, therefore, it
behooves the one who voices the desire and makes the demand to accept
the consequences, whether beneficial or disastrous, and to answer before
the justice of God, as before the opinion of mankind, for the good or
evil end to which he has directed the labor of his fellow men.” (Economic
Harmonies, chapter XI) To what extent do you share this point of
view?
Walter Block: I disagree with this. William Hutt and Ludwig von
Mises were guilty of holding this erroneous view. Murray Rothbard
corrected both in his Man, Economy and State. The error was
“consumer sovereignty.” What about the producer? Is he not sovereign
too? Ayn Rand’s character in the Fountainhead was a good example
of this. As far as he was concerned, it was his way or the highway. He
had a vision of good architecture, and he was willing to shove it down
the throats of his clients. If they didn’t like his vision, he wouldn’t
work for them. Ditto for Mozart, Einstein, Mises and Hutt themselves.
Grégoire Canlorbe: For which reasons and under which
circumstances did you come to espouse Austrian economics and anarcho-libertarian
philosophy? Did you become an Austrian libertarian abruptly or did you
experience a long, progressive and surreptitious transition toward this
worldview?
Walter Block: When I met Murray Rothbard in about 1966, I was a
limited government monarchist libertarian. This was mainly based on the
reading of Henry Hazlitt’s Economics in One Lesson, Rand’s Atlas
Shrugged, and under the tutelage of Nathaniel Branden and Ayn Rand.
It took Murray about 10 minutes to convert me to the anarcho-capitalist
position. He convinced me that the arguments I used against government
post offices and highways, lack of competition applied also to courts,
armies and police. It took me several years, under the tutelage of
Murray Rothbard and Walter Grinder, to see my way clear to Austrian
economics. I was enmeshed in logical positivism. I couldn’t get it
through my thick head that there was such a thing as a synthetic a
priori statement. I thought that if something were absolutely true, it
could not be truth of the real world; it had to be a tautology. And, if
it did apply to reality, we could only know its truth provisionally,
empirically. Ah, well, I was young and stupid.
Grégoire Canlorbe: Two views seem to be in opposition within
Austrian economics. The first view considers the market economy to be
perpetually spurred toward the general equilibrium model, that model
helping understand the reason for profits and losses by entrepreneurs
along the equilibrating process on the one hand, and the long-term
outcome of this process on the other hand. The second perspective, as
promoted by Guido Hülsmann, argues that there is no trend toward any
equilibrium, and that the scope of the general equilibrium model is
simply counterfactual: It describes the situation that would emerge
should no entrepreneur commit any mistake. Of those two antagonistic
views, which one has you preference?
Walter Block: I am known, far and wide, as Walter “Moderate”
Block; well, at least in my own mind. I am a moderate on this question,
in any case. Why can’t I embrace both? As it happens, I do indeed
embrace each of these. Certainly, I am a strong Hulsmannian on this
issue. I think Guido’s work on counterfactuals is nothing short of
magnificent. It is this sort of thing that enables us to say to those
such as Krugman who doubt that governmental increases in the money stock
lead to inflation: We content ourselves with maintaining that prices are
higher than they otherwise would have been without all of this
quantitative easing. As this is a correct praxeological statement, it is
necessarily true, and cannot be refuted with any evidence, any more than
can be the Pythagorean Theorem. Similarly, we can respond to the
Stiglitzes of the word who assert that minimum wages do not lead to
unemployment for unskilled workers. In like manner, the unemployment
rate of those with discounted marginal revenue products below the level
stipulated by this legislation is higher than otherwise it would have
been.
But, I also think that we are always tending toward equilibrium (for me,
a synonym would be “full cooperation,” not only with each other but with
all the laws of the universe), but never reaching it. This, too, is a
praxeological law. It simply cannot be denied, empirically, that there
are “tendencies” in this direction. Of course, at any given time, we are
not in general equilibrium (whatever, precisely, that would mean), but
this is not a refutation of that claim, any more than is the fact that
profits are positive and unequal across industries a rejection of the
view that profits tend to be the same in all industries (when due
allowance is made for risk), and will be zero in the evenly rotating
economy. By the way, the ERE is a contrary to fact conditional. It is a
heuristic device that helps us think more clearly about the economy. No
good Austrian, certainly not Mises or Rothbard, ever used this concept
as a stationary state that could realistically describe any real world
economy.
Grégoire Canlorbe: A crucial debate focuses on the question of
whether Friedrich A. von Hayek can be classified as a praxeologist, or
at least, as an Austrian economist. How do you position yourself in
relation to this problem?
Walter Block: No. Hayek specifically and unambiguously said
something to the effect that “I can’t (or don’t) follow Mises” into
praxeology, the embracing of the synthetic a priori.
Here are Hayek’s exact words: “I must admit that I myself often
initially did not think his arguments to be completely convincing and
only slowly learned that he was mostly right and that, after some
reflection, a justification could be found that he had not made
explicit. And today, considering the kind of battle he had to lead, I
also understand that he was driven to certain exaggerations, like that
of the a priori character of economic theory, where I could not follow
him.” (Source: Hayek, FA. [1977] 2009. “Introduction” in Mises, L. 2009
Memoirs, Auburn: Ludwig von Mises Institute.)
So, by his own admission—the last six words of this quote say it
all—Hayek cannot be characterized as a praxeologist. This is a grave
problem for me. For on the one hand, I often use the two words
“praxeologists” and “Austrian” (in this context of course) as synonyms.
At the very least, if not identical, praxeology is by far the most
important characteristic of Austrian economics as far as I am concerned.
I am sorely tempted to say that anyone who does not accept praxeology,
let alone rejects it, cannot be an Austrian economist. But, equally
surely, Hayek has made more and greater contributions to Austrian
economics than any man alive, with the possible exception of people such
as Menger and Bohm-Bawerk, and certainly Mises and Rothbard. Who am I,
whose contribution to Austrianism is an insignificant fraction of
Hayek’s, to deny this appellation to him? I could say that he has
himself denied this. I could say that it matters not my own input into
this science; even were it zero, or negative, I could still be correct
in this assessment of him. But none of this is fully satisfactory to me.
|
“When I met Murray Rothbard in about 1966, I was a
limited government monarchist libertarian. [...]
It took Murray about 10 minutes to convert me to the anarcho-capitalist
position.” |
I would rather make an exception to Hayek: assert that no one else
who disavows praxeology can be an Austrian economist. This, too, is not
fully satisfactory. In an attempt to get out of this position where I
have located myself, between a rock and a hard place, let me say the
following: Defining Austrian economics is sort of like defining a chair.
We all know what the paradigm case of it is: a flat surface, with four
legs and a back. But, what about a three legged stool with a back? What
about with no back? What about with one leg, as in the case of the bar
stool? What about a bench? A shelf? A couch? A sofa? The point is the
definition of a chair is slippery. It is a continuum. Some things are
clearly chairs, some things are clearly not (dogs, apples), and with
regard to others, we are not sure, it is a grey area. I suggest that
Austrian economics operates in a similar manner, and that Hayek is in a
grey area. He has made magnificent contributions (e.g., business cycles,
subjectivism), but rejects what I consider the single most important
element of this science.
Grégoire Canlorbe: Generally speaking, and especially in the
field of monetary economics, how do you sum up the main differences
between the Austrian School of Economics and the mainstream movement, as
well as the main fallacies of neoclassical economics?
Walter Block: The monetarists are alright on inflation. When
government creates money, prices rise higher than would otherwise be the
case (note the Hulsmannian counterfactual influence here). But, they
don’t follow the Austrians in realizing that this also creates the
business cycle. Also, the chief monetarist, Milton Friedman, is widely
known for his Free to Choose television series. But for him, this
does not apply to money, for whenever people were relatively free to
choose their monetary medium, they invariably chose gold (sometimes
silver). But Friedman was a rabid opponent of gold as money.
There are numerous other differences between the Austrians and the
neoclassicals, and in all such cases, I think the latter’s views are
fallacious and those of the former correct. However, let me start out on
a positive note. Traditional economists are not all bad. Most of them
are pretty good on things like the minimum wage, rent control, free
trade, occupational licensure, Luddite-ism, price controls, etc. They
are not Marxists, and eschew the labor theory of value. Virtually all of
them are free of the broken window fallacy.
Let me now mention a few cases of divergence. The mainstream are in the
logical positivist tradition, and maintain that prediction is the test
of economic theory. For them, there is no such thing as economic law;
there are only hypotheses, which much be empirically, econometrically
tested and only provisionally accepted, when the results yield the right
signs for the coefficients and are statistically significant. Austrians
are praxeologists who assert that econometrics may be useful in
illustrating economic law, but cannot test it. Austrians are
subjectivists who maintain that cost curves are a snare and an objective
delusion; costs are opportunities forgone, and thus cannot be depicted
graphically. Austrians reject mathematical economics since their
calculus requires infinitesimally small units, and human action is
discrete, not smoothly curved. The mainstream revels in these
techniques. Austrians adhere only to ordinal utility; neoclassicals
embrace both ordinal and cardinal utility and interpersonal comparisons
in the latter case. Austrians see the boom in the business cycle as the
problem, and the bust as a cleansing process, bringing back the economy
to coherence; the mainstream, Keynesians to a man, take the very
opposite point of view. Austrians see interest rates as based on time
preference; their colleagues in the profession accept, in addition,
productivity theories.
Grégoire Canlorbe: Most critics of the free-market economy
point out the fact that, in accordance with the so called “law of supply
and demand,” the market does balance supply with solvent demand but
never balances supply with the insolvent needs of the poor.
“Differentiate or die” is considered to be the principle at the very
heart of a free-market economy, and the law of supply and demand to be
simply another appellation for the law of the strongest. What is your
opinion of this commonly held view?
Walter Block: The market economy necessarily, apodictically,
praxeologically, benefits all participants. But some cannot enter the
market (children, the infirm, etc.), and hence they are insolvent. Yet
the market benefits them too, albeit indirectly, since such people are
far better off in a free society than in a socialist one. These critics
should ask themselves, where would they be better off, in a place like
Hong Kong, Switzerland, Singapore, which have relatively free economies
and everyone is rich, or in some other less free place where people are
less wealthy. Private charity varies with wealth and income; the freer
the country, and the richer, other things equal, the more charitable.
But, would it not be even better for the poor to live in a
relatively unfree semi-socialist country such as the U.S., with a vast
welfare system? No. These programs do not enrich the poor, they
impoverish them. How so? They break up the family, as Charles Murray has
demonstrated in his book Losing Ground, and intact families are
among the best cure for poverty. Indeed, the poverty rate for intact
families is in the single digits; impoverishment is mainly a function of
broken-up or never-formed families, and this in turn is due to statist
welfare programs.
Grégoire Canlorbe: According to the followers of Say’s law,
general overproduction crises are impossible because any overproduction
in a specific sector coincides with an underproduction of equal
magnitude in value in another sector. Two cases then arise: If certain
products do not find an entry into the market, it can be caused by the
lack of means in order to buy these products; and if money is in short
supply, it comes from underproduction in a given sector. Production in
sector A is insufficient in order to buy up the whole production in
sector B. If certain products remain unsold, it can mean that the
clients can afford to buy these products but they prefer to buy the
products in another sector of activity, the latter being now urged to
push up production in order to meet the needs and wants of the clients
coming from the first sector. There is too much production in sector A
and too little in sector B.
In a nutshell, if certain products remain unsold, this is due to the
fact that there are no other products to offer in exchange, money
playing the role of a simple intermediary between the producers without
any demand for itself. The money that is not spent on consumption goods
is held in an account and funds producers’ investments; there is no
liquidity preference and therefore no money-hoarding outside the
economy. At least since Keynes, a common retort to Say’s law is that, if
certain products remain unsold, it can come from neither the public’s
poor means nor from its preference for other products, but it can simply
arise from the public’s preference to hoard money in specie instead of
spending it on consumption goods or holding it in an account. The
mechanism according to which any overproduction in a given sector
corresponds to an underproduction of equal magnitude in value in another
sector (as a cause or a consequence) is thus eliminated. It may happen
that each sector is in overproduction simultaneously, and this because
of cash hoarding due to the “liquidity preference” principle in a
context of uncertainty. What is your opinion in defence of Say’s law and
in order to refute these common assumptions?
Walter Block: The easiest refutation of this is the real
balance effect. If people hoard money, stick it in their mattresses or
like Scrooge McDuck in their money bins, they render everyone else’s
money more valuable. As I state in my book Defending the Undefendable,
the hoarder is actually a hero, since he is greatly reviled by
Keynesians (pretty much all economists other than Austrians),
journalists, pundits, commentators, and is actually a benefactor to
people in general, by increasing the value of their monetary holdings.
What the Keynesian criticism of the hoarder comes down to is that they
think some people have too great a demand for cash balances. But, they
offer no criterion whatsoever as to what level would be optimal.
Grégoire Canlorbe: It is often heard that one of the
side effects of trade globalization is the explosion of unemployment and
income inequalities in the “developed” countries because in the context
of trade globalization between countries with different wage rates, the
higher the minimum income (determined by market forces or imposed by
law) in the developed countries, the more that imports from low-wage
countries are favoured. These imports indeed find their counterpart in
value via exports. Nevertheless, the competition between workers in
developed countries with workers in low-wage countries necessarily
destroys jobs unless employers find a way to push down employment costs.
Thus, trade globalization leads to either an increase in unemployment in
case of rigid wages or to a race to the bottom in salary policy (and
therefore to an explosion of income inequalities) in case of flexible
salaries. This being said, thanks to delocalization and imports from
low-wage countries, consumers can buy products at lower prices. In
exchange for lower prices, consumers must nevertheless suffer from the
loss of their jobs or from lower wages.
To this first side effect, a second one can be added: the loss of
food production autarky, which puts the security of developed countries
in jeopardy in the long term. And there is a third side effect: the
disappearance of certain activities in developed countries owing to the
present comparative costs, though costs vary as time goes by and the
disappearance of these activities could turn out disadvantageous
tomorrow.
What is your opinion about these three side effects
anti-globalization advocates often bring up?
Walter Block: I think these people are economically
illiterate. Unemployment does not come about because of free trade.
Rather, it emanates from government interference with the free
enterprise system, mainly by artificially boosting real wage rates above
productivity levels (minimum wage laws, union pay scales) and by
subsidizing it (generous unemployment benefits which compete with
marginal revenue productivity of workers).
Income (and wealth) inequalities stem from two sources, one
legitimate, the other not at all so. The former is the fact that people
have different skill sets, work ethics, in a word, productivity levels,
again, not from free international trade. The latter is corporate state
or crony capitalism: Some people gain government favours, others have to
pay for them.
The libertarian in me cries out for an end to the latter and to
allow the former to operate freely. Yes, if the U.S. engaged in full
free trade with Bangladesh, it is quite possible that some low-skilled
workers in the former countries would suffer from lower wages. But this
is part and parcel of the international division of labour, and is not
all that likely. When the automobile replaced the horse and buggy, and
the computer the typewriter (think of these innovations as imports from
a country called “the future”) it was not typically the low skilled
workers who swept the floors of the car and typewriter factories who
lost out to any great extent; rather, it was the highly skilled
blacksmiths and horse trainers who did so.
The laws of comparative advantage indicate that there are gains to
be made from free trade on the part of all countries who open their
borders. Yes, the banana growers in Canada (think greenhouses) and the
maple syrup industry in Costa Rica (think very large refrigerators) will
take a hit when trade opens up between these two countries. But this is
just the market’s way of indicating that if there is to be any modicum
of economic efficiency, the northern country should specialize in the
cold weather crop and the southern in what can be effectively grown in
the tropics.
Grégoire Canlorbe: Our interview comes to its end. Would you
like to add a few words?
Walter Block: It was a pleasure to try to wrestle with these
very important, well-articulated, and complicated questions.
I am honoured to be part of your program
*First published on December 29, 2014,
on the Institut Coppet website.
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