David Gordon of the Mises blog has reviewed a book – Peter Ubel’s “Free Market Madness: Why Human Nature Is At Odds With Economics — And Why It Matters.” Gordon writes-
Ubel, a physician trained in economics and psychology, uses behavioral economics to advocate restrictions on the free market. The market, he thinks, has its place: he quotes Adam Smith on the benefits of the division of labor and enthusiastically agrees. But market fanatics have gone too far. They defend the shocking contention that people should be free to choose as they wish, so long as they do not use or threaten force against others. Accordingly, these misguided people defend an unlimited free market: in it, the choice of consumers determines what will be produced.
Ubel agrees, at least to a large extent, that the market does exactly this. (Like most economists except Austrians, he makes an exception for public goods and externalities, but his attack on the free market in this book lies elsewhere.) But he dissents from the view that this justifies the free market. It would do so only if people chose rationally in their self-interest, and this by no means always holds true.
Science, Ubel tells us, has demonstrated people’s irrationality beyond reasonable doubt. Ubel’s tale here has three principal heroes: the psychologists Daniel Kahneman and Amos Tversky, who performed pioneering experiments that show how unreasonably people decide, and the economist Richard Thaler, who developed similar ideas and brought the work of these psychologists to the attention of the economics profession. Their research explodes market fundamentalism
How does it do so? For one thing, our heroes say, people often make mistakes in reasoning. If people reason wrongly, how can they hope to get what they really want?
[…]
Regardless of its causes, though, obesity unquestionably poses health risks to many people, and Ubel wants to bring in the state to rectify matters. If you object to him that people ought to be free to decide how much to eat, or whether to smoke, for themselves, he will answer that their choices, marred by cognitive mistakes, cannot be considered the outcome of rationally self-interested deliberation. This contention, I have endeavored to show, he has failed to prove.
But he also says something else. Why, he asks, should one exalt freedom as the supreme political virtue? Must not freedom be balanced against other components of the good life? Ubel invokes Aristotle, who
viewed one of the major functions of society as being to create an environment that develops virtuous actions in its citizens. We could do worse than to follow his advice. (p. 224)
Ubel for once is right. In order to decide on correct social policy, one must posses a sound philosophy of ethics and politics, one that will consider how various goods can be achieved. Despite this bow to philosophy, though, Ubel shows no awareness that state paternalism is a controversial issue. For him, once we know that a choice has bad results, we can at once legitimately ask what the state can do to improve matters. To think otherwise makes a fetish of freedom; and he quite readily describes his proposals as paternalist.
This is a dangerous – very dangerous – position to take, and is a classic “positive liberty” position (S.E.P) – claiming that people are not “really free.” And that society or government should adopt paternalism and become a “nanny state” to guide people. From the Stanford Encyclopedia of Philosophy article-
[B]erlin, himself a liberal and writing during the cold war, was clearly moved by the way in which the apparently noble ideal of freedom as self-mastery or self-realization had been twisted and distorted by the totalitarian dictators of the twentieth century — most notably those of the Soviet Union — so as to claim that they, rather than the liberal West, were the true champions of freedom. The slippery slope towards this paradoxical conclusion begins, according to Berlin, with the idea of a divided self. To illustrate: the smoker in our story provides a clear example of a divided self, for she is both a self that desires to get to an appointment and a self that desires to get to the tobacconists, and these two desires are in conflict. We can now enrich this story in a plausible way by adding that one of these selves — the keeper of appointments — is superior to the other: the self that is a keeper of appointments is thus a ‘higher’ self, and the self that is a smoker is a ‘lower’ self. The higher self is the rational, reflecting self, the self that is capable of moral action and of taking responsibility for what she does. This is the true self, for rational reflection and moral responsibility are the features of humans that mark them off from other animals. The lower self, on the other hand, is the self of the passions, of unreflecting desires and irrational impulses. One is free, then, when one’s higher, rational self is in control and one is not a slave to one’s passions or to one’s merely empirical self. The next step down the slippery slope consists in pointing out that some individuals are more rational than others, and can therefore know best what is in their and others’ rational interests. This allows them to say that by forcing people less rational than themselves to do the rational thing and thus to realize their true selves, they are in fact liberating them from their merely empirical desires. Occasionally, Berlin says, the defender of positive freedom will take an additional step that consists in conceiving of the self as wider than the individual and as represented by an organic social whole — “a tribe, a race, a church, a state, the great society of the living and the dead and the yet unborn”. The true interests of the individual are to be identified with the interests of this whole, and individuals can and should be coerced into fulfilling these interests, for they would not resist coercion if they were as rational and wise as their coercers. “Once I take this view”, Berlin says, “I am in a position to ignore the actual wishes of men or societies, to bully, oppress, torture in the name, and on behalf, of their ‘real’ selves, in the secure knowledge that whatever is the true goal of man … must be identical with his freedom” (Berlin 1969, pp. 132-33). (all emphasis mine)
The idea of positive “liberty” is crazy, and so are its proponents – negative liberty is the way to go – the absence of coercion. To the Ubels of the world (his book is after all an attack on capitalism first), Ludwig von Mises had this to say-
If one rejects laissez faire [capitalism] on account of man’s fallibility and moral weakness, one must for the same reason also reject every kind of government action.
One more thing – Aristotle is not the final word on ethics or politics; for example, in his Politics, he presents a (n unconvincing) defense of slavery.
Aristotle The Geek 
Comments
Amartya Sen also makes the same contention in his “Rationality and Freedom” – that people who are not rational do not deserve to be free.
But, as Hayek points out in the opening chapter of his “Fatal Conceit: The Errors of Socialism,” human beings in a free market operate “between instinct and reason.” That is, we have overcome the instinct to plunder, to snatch and grab, and we now peacefully trade instead, but we have not reasoned why.
This, of course, is an insight that goes back to Adam Smith, who wrote that “the division of labour, from which so many advantages are derived, is NOT the product of any human wisdom, that foresees the general opulence to which it gives occasion… ”
In other words, the market, which is not the product of reason or “common will,” cannot be substituted for my deliberate reason – as in the case of the central planner.
We say the central planner’s reason is defective.
They naturally retort that our reasoning is defective.
You decide!
“but we have not reasoned why.”
Why not? Trading is not a new phenomenon is it? Be it barter, or 21st century markets, or explorers dealing with native tribes, trading has always been part of civilization. We trade because we find mutual benefit in trading. That is the reason.
“This, of course, is an insight that goes back to Adam Smith”
I haven’t read Smith; I did borrow a copy of his “Wealth of Nations” from the British Library a few years back, but never found the time to read it through. I am firmly on the Randian side of the line on this one though – every philosopher and economist over the last couple of millenia has tried to defend trade – free markets – capitalism – on every ground other than natural rights. No one bothered to assert that man, on the whole, is “rational animal,” that he has the “moral right” to lead his life in his own way, and that such a right included the right to trade.
About Smith, and I linked to the same article on an economist’s blog some months back, Rothbard has written about him; and this is what R says about division of labor-
Trade is the product of reason; the more knowledgeable people become, the more advanced trading becomes. And just because some one chooses to do something which appears on the face of it to be “irrational” does not mean that he has not weighed the consequences of his actions – that he is not rational. Not asserting these facts allows “positive libertarians” to take the high ground. And that is not acceptable.
I have read Rothbard on Smith. And was quite disappointed. The key point in Smith is “order without design.” Mises calls the trading order – the catallaxy – a “product of human action but not human design.” It has not been “planned” by any rational means. This is what Hayek means by “between instinct and reason.” Our trading is powered by a “sense of gain” – which we all possess – but no “common will” has created the catallaxy. Mine is a limited point – that the catallaxy, which is not the product of reason, cannot be substituted for by the “rationality” of any socialist planner.
To answer your point, man does not trade because he has seen the advantages of the division of labour. If he did, he would laugh at Gandhian notions of “self-sufficiency.” Man trades because he has learnt, through imitation, that trading is the only moral way of obtaining desired objects. Trading has been going on for millennia, but we have economists understanding it only recently. Smith’s “Wealth of Nations” is dated 1776 – the birth year of the American Republic. Trade is older than civilization.
The whole idea of Ubel, and people like him, is this – people don’t behave rationally all the time. So they need to be “controlled.” And this is the idea that needs to be challenged.
If you say catallaxy is a “product of human action but not human design,” (I haven’t read Mises’ Human Action either, but a search of mises.org says that this quote is Hayekian) what does that mean? What I am saying is – individuals trade with each other because they “know” that trading benefits them. I am referring to individual actions here, and the fact that these actions are based on “reason.” I am not saying that individuals have planned the entire market structure and its operations; the market is made up of millions of individual transactions and therefore cannot be “planned” – rationally or otherwise. But man’s actions – trading is one of them – is definitely the result of a rational thought process, not instinct. If Hayek used “between instinct and reason” in relation to human action, then I have to disagree with him.
This is Mises in Human Action–
“Man trades because he has learnt, through imitation, that trading is the only moral way of obtaining desired objects.”
“Learnt through imitation” meaning he now fully understands, or he simply mimics like in the case of the monkeys and the hat trader?
I totally agree with you that Ubel, Amartya Sen and their ilk hold that ordinary people must be controlled because they are not rational all the time. And we must challenge this assertion. One way is to insist we are rational; the other is to say that the catallactic order is itself not the creature of reason.
As Mises says in the quote you have provided, “When applied to the ultimate ends of action, the terms rational and irrational are inappropriate and meaningless. The ultimate end of action is always the satisfaction of some desires of the acting man.” Note that “purposeful” means just that “the means which man chooses for satisfaction are determined by a rational consideration of expense and success.” This “rational consideration” is the basis of the science of praxeology. But it is not based on a full understanding of the catallactic order. It is simply powered by a “sense of gain.”
You will find that every businessman knows full well how he gains, but never how the entire order can prosper. Hence protectionism. Say’s Law of Markets is, even today, not taught in business schools. Also note how all the MBAs and PhDs in Finance messed up over “sub-prime mortgages.” Further, all the “rational considerations of expense and success” are subjective. They vary from man to man.
Adam Smith was right when he said that the social division of labour is not the product of any human wisdom. He said it is the result of “a slow and gradual process, based on a natural propensity to truck, barter and exchange.” We see this natural propensity all the time. For example, when children who have never been to school exchange toys and food amongst each other.
This natural propensity is further strengthened by imitative learning. A child who wants a chocolate will see his father buy it for him by trading some money for the chocolate. He will never see his father steal or rob chocolates. This learnt behaviour is the basis of the catallactic order and civilization itself. But it is not based on reason.
There is a subtle difference between “reason” and “rational behaviour.” A consideration of subjective costs and benefits is “rational” – and is the only assumption required in praxeology. However, “reason” implies that man has created the market economy through deliberate collective choice. It is this latter belief that I challenge.
“Note that ‘purposeful’ means just that ‘the means which man chooses for satisfaction are determined by a rational consideration of expense and success.’ This ‘rational consideration’ is the basis of the science of praxeology.”
“Further, all the ‘rational considerations of expense and success’ are subjective. They vary from man to man.”
There are two concepts here – the means and the end. I think we agree that the means that man chooses to achieve a particular end are always rational (and necessarily subjective) – that is, he has weighed the consequences of his actions (or inaction).
But the end that he is working towards may not necessarily be so -“rationally chosen”; that is, he may not know the “exact” reason behind his preference for A over B – reading a book over horse-riding, for example, but then this too is always a subjective choice.
Consider a smoker. Smoking is injurious to health. The smoker may not know why he’s smoking (it gives him pleasure, maybe; or is a stress-buster) or the source of any benefits derived – pleasure, reduction in stress; but when he decides to smoke, he does so only after taking into account the possibility of a shortened life span – he has weighed the consequences of the act of smoking.
“But it is not based on a full understanding of the catallactic order. It is simply powered by a ‘sense of gain.'”
“You will find that every businessman knows full well how he gains, but never how the entire order can prosper.”
Now the “full understanding of the catallactic order.” I already agreed that we do not know the entire structure of the market, or can plan it – its impossible. But we surely know that “trading is beneficial to both parties” – you can call it “sense of gain” or whatever. The fact is we know trading benefits us. That’s why we indulge in it, like the businessman you refer to.
Man (the rational man) does not spend his entire lifetime not knowing the benefits of trading. He does not need to know that the entire “trading order” benefits. If every transaction is mutually beneficial, it stands to reason that the whole order benefits. As Rothbard says-
All we have to do is extrapolate from here.
“Adam Smith was right when he said that the social division of labour is not the product of any human wisdom. He said it is the result of ‘a slow and gradual process, based on a natural propensity to truck, barter and exchange.'”
Rothbard uses the adjective “irrational and innate” when he describes Smith’s “natural propensity” theory-
Different people are good at different things – that is why they do (or try to do) those things which they are good at. About division of labor, have you read this. I think it’s a reasonable explanation of how it happens.
“For example, when children who have never been to school exchange toys and food amongst each other.
This natural propensity is further strengthened by imitative learning. A child who wants a chocolate will see his father buy it for him by trading some money for the chocolate. He will never see his father steal or rob chocolates.”
Children may not “know” (fully grasp the concept) about it initially, but they exchange because they give away things they do not want in exchange for things they do – they benefit. They do come to “know” about it when they mature. The imitation, at one point or the other, has to transform into knowledge – that stealing is wrong; that trading is good.
“This learnt behaviour is the basis of the catallactic order and civilization itself. But it is not based on reason.
There is a subtle difference between “reason” and “rational behaviour.” A consideration of subjective costs and benefits is “rational” – and is the only assumption required in praxeology. However, “reason” implies that man has created the market economy through deliberate collective choice. It is this latter belief that I challenge.”
I agree with your definition of rational behavior, but not that of reason. “Reason,” when it comes to humans and their behavior, is the device – faculty – that man uses to make sense of things. “Reason” is what tells us what is right, and what is wrong, and why things operate the way they do. So “Reason” and “rational” refer to the same thing when it comes to actions. “Rational” is an adjective, “reason” a noun.
I think, you are using “reason” in a different sense – in the “what is the reason behind X” sense. I don’t think that “‘reason’ implies that man has created the market economy through deliberate collective choice,” because the market is not the creation of a single man or community. Its an abstract concept that represents countless small transactions, each carried out for its very own purpose.
“And we must challenge this assertion. One way is to insist we are rational; the other is to say that the catallactic order is itself not the creature of reason.”
I am for the first way; to say that the market is not a creature of reason, is handing over victory to Ubel on a platter – “the market is not rational, so we need to control it.”
The market may not be a deliberate, rational, act, but the actions of those who make up the market definitely are. And that fact needs to be stressed.
PS: I don’t know why Rothbard’s essay disappointed you; I find it very illuminating, the complete version. Any specific reason?
Rothbard’s two-volume history of economic thought disappointed me for many reasons. The first volume goes too far back in time and ends with a diatribe against Adam Smith. It seems to me that the entire first volume was dedicated to lowering the position of Smith – and nothing else.
The second volume is relevant, but I would have been much happier if he had written the first volume on the Austrians, about whom he knew a lot. Rothbard died without writing a history of the Austrians.
Anyway, I belong to the “between instinct and reason” school. I see economic man more as a zombie following his “natural propensity” than the “rational utility-maximizer” of microeconomic theory. He does not know why he does what he does. Note that it is man alone who trades – while his closest cousins, the monkeys, steal.
It is indeed this position that hammers the socialists hardest: if the catallactic order is not the product of reason, it cannot be substituted for by reason (planning). Think about it. And thanks for the enlightening discussion.
Some points to be added to the above, arrived at after further reflection:
1. The Austrians have always emphasized that all human beings are “speculators” in the market catallaxy. A lot of guesswork is going on.
2. These speculators operate with “imperfect knowledge.” There can be no “rationality” when knowledge is imperfect. Of course, this imperfect knowledge, which is “fragmented,” is the very basis of trade.
3. Contrary to the model of the “rational utility maximizer,” human beings in markets operate largely on the basis of “hunches,” “gut feel,” and other such “irrational” means of arriving at decisions.
For more on this, do consult the works of Israel Kirzner, perhaps the greatest living Austrian today, after Hans Hermann Hoppe. In particular, a brief pamphlet entitled “How Markets Work: Disequilibrium, Discovery and Entrepreneurship”.
“The Austrians have always emphasized that all human beings are “speculators” in the market catallaxy…human beings in markets operate largely on the basis of “hunches,” “gut feel,” and other such “irrational” means of arriving at decisions.”
That does seem to be the case as far as some of them are concerned. The problem is fallibility (or lack of “perfect knowledge”) != irrationality. That is, just because I don’t know what the lowest price for a particular good in a particular market is, doesn’t mean that I won’t visit a few shops and then buy from the one offering me the best bargain. The search for the “bargain” is what I refer to when I talk of rational decisions in the market place. The more complex the decision, the more rational the decision maker has to be – an Ambani won’t set up his cracker facility based on a hunch.
“For more on this, do consult the works of Israel Kirzner, perhaps the greatest living Austrian today, after Hans Hermann Hoppe.”
Will do that once I familiarize myself with a few works of their predecessors, particularly Mises. Rothbard first, however; he’s just as opinionated as Rand was.
Aristotle,
Regarding Sauvik’s comment
“It is indeed this position that hammers the socialists hardest: if the catallactic order is not the product of reason, it cannot be substituted for by reason (planning).”
You are right that this is handing victory over on a platter.
Note whom it is being handed over to. Not to the socialists but to the pragmatists. It is important to realize that socialist ideology is dead and its economic aspects no longer need to be refuted. Incidentally that is why I wrote against labeling the pragmatists as socialists.
“Not to the socialists but to the pragmatists. It is important to realize that socialist ideology is dead and its economic aspects no longer need to be refuted.”
Yes, its the pragmatist who will win in the case I refer to. The problem, however, is that its not socialism that has been discredited but communism. As proof, read this editorial-
There was another story in Newsweek a week back – “We are all socialists now.” The term has actually become kind of “cool.” What we call mixed-economy is actually socialism-lite, as the Dispatch editor calls it.
Ubel is a different breed of animal – he does not represent the traditional “liberal” crowd who are not exactly pragmatists; he actually represents paternalism – fascism.
The “liberal” crowd, on the other hand, believes in egalitarianism – socialism-lite. They may not take over factories, or banks, but they do feel people have to work for the greater good – society. And they feel its regulations that have failed, not the government. About refutation, if its “means of production” and traditional indicators of socialism you are talking about, including detailed government planning, then yes, probably; but as Peikoff points out, you only need to have indirect control over property to have “ownership.”
There are two different wreckage crews out there – the pragmatists who include fascists and the “truth is that which works” crowd; and the “liberals”/ socialists who believe that its the duty of government to see that businesses work for the benefit of society.
Aristotle,
You are certainly right that “liberalism” is socialism-lite and there are plenty of “liberals” out there. So yes, socialism, as such has not been fully discredited.
“There are two different wreckage crews out there – the pragmatists who include fascists and the “truth is that which works” crowd; and the “liberals”/ socialists who believe that its the duty of government to see that businesses work for the benefit of society.”
Yes, and my point is that mis-identifying the pragmatists as socialists (as a lot of people opposed to socialism seem to do) makes the word lose its sting and cognitive value in any debate with pragmatists.
“Yes, and my point is that mis-identifying the pragmatists as socialists (as a lot of people opposed to socialism seem to do) makes the word lose its sting and cognitive value in any debate with pragmatists.”
I don’t deny the “sting” argument, but who are the pragmatists here?
I can identify the Times of India and most of the English newspapers in India as pragmatists (can’t say the same about television media, they are “liberal”). But Obama and his circus troupe, for example, are not pragmatists (though I might have used the word interchangeably with “liberal” in the past) – they are “liberal.” I am making this distinction now because I really didn’t pay much attention to it before; pragmatism truly stands for principle of being unprincipled, whereas liberalism stands for altruism of a certain kind.
In that sense, I surely won’t call the Times of India as a newspaper advocating socialist ideas, but I would label India, and the US as socialist countries because they have never given up on that ideology.
Am I missing something here?