Rollin’ in my catallax

Today, we continue in our exploration of what key classical, neoclassical, behavioralist and Austrian economists have to say about social institutions in general, and judicial processes specifically.

Friedrich Hayek (1899-1992) is perhaps the preeminent modern Austrian economist. His Law, Liberty and Legislation built on many of the themes in Menger’s work, and was published in three installments in 1973, 1976 and 1979. (Page numbers here refer to the Kindle edition’s position, sorry.)

Rationalists since Descartes had held that nothing is true unless it could be derived from explicit premises. In Hayek’s view, this line of thought led to an

Descartes didn’t know it all, said Hayek.

anthropomorphizing of social institutions, so that any social body that exists was said to have been designed or contracted for, with a specific purpose in mind. Hayek calls this tendency constructivist rationalism or intentionalism. While man could always strive “to make reason as effective as possible,” many actions do not derive from conscious thought. The mind uses “abstractions” as shortcuts to understand complex phenomena. These abstractions can discipline emotion, not by telling us what to do (which is difficult given the lack of adequate knowledge about the world), but by telling us what not to do. He observed that “man is as much a rule-following animal as a purpose-seeking one.” In sum, individuals lack all the facts to attain Cartesian rationality, and in fact thrive because of it – relying on a wide dispersion of knowledge throughout society. (Hayek, 2012, at 660-817, 1057, 1078, 1100, 1120)[i]

For Hayek, social order can come through taxis (i.e. “made order) or cosmos (i.e. “spontaneous order”). The latter type “will often consist of a system of abstract relations between elements which are also defined only by abstract properties, and for this reason will not be intuitively perceptible and not recognizable except on the basis of a theory accounting for their character.” While the elements in the system will change, their structure of relationships will not.

The elements must follow certain rules of conduct; in human societies, it is patterns of individual conduct which allow some societies to live and others to die. The rules are followed either because of the similar way in which external environments are represented in minds, because of common cultural traditions, or through enforcement (when individual interest would lead them to disregard the rules). In economic exchange, people generally believe that a greater return on effort is preferable to a lesser return, but we can improve this order through “rules of law” that amplify this effect. Some rules have a spontaneous origin; some resultant orders (though guided by designed rules like law) are spontaneous.[ii] (Hayek, 2012, at 1209, 1232, 1349, 1369)

He defines “catallaxy” as “the special kind of spontaneous order produced by the market through people acting within the rules of the law of property, tort and contract.” (6399) The Great Society that is catallaxy is a “means-connected” society, as opposed to the “ends-connected tribal society.” (6441) In Zywicki’s words, “when impersonal processes generate the rules that govern social interactions, such as market prices, language, customs, or legal rules, Hayek argues that being forced to follow those rules does not improperly restrain individual freedom.” (Zywicki and Sanders, 2008, at 591) By this standard, almost no legal or market interaction would be coercive – will almost any other type of interaction would be. This is a stance at odds with classical thought, which did not see contracts as paramount (Smith, 1759, at VII.VI.2 through VII.VI.33), and also with neoclassical thought, which would see many contracts as Pareto inferior.[iii] As opposed to the Pareto optimality in neoclassical economics, there is no way to rank different needs in this uncertain world. (6602)

Much as Menger created some distance from Smith’s classical class-based methodology, Hayek distances himself from the neoclassical framework by doubting rationality, that competition need be perfect to be beneficial, that maximization is possible, or that market imperfections could be corrected by intervention. (9560, 9580) In a more minimalist fashion, Hayek writes that competition tends to bring about the following state of affairs:

“First, everything will be produced which somebody knows how to produce and which he can sell profitably at a price at which buyers will prefer it to available alternatives; second, everything that is being produced is produced by persons who can do so at least as cheaply as anybody else who in fact is not producing it; and third, that everything will be sold at prices lower than, or at least as low as, those at which it could be sold by anybody who in fact does not do so.” (9681)

Commercial spirits begat effective competition, and vice versa – a process that Hayek believes can be universalized across cultures. (9702-9723) Indeed, Hayek believes that democracy is more likely than culture to stunt the growth of competition, since incumbents can protect their “quiet life” through the political process. (9745)

Because individuals are often spatially proximate to one another, they form organizations, including governments. While it is possible to have spontaneous order without government, “in most circumstances [it] becomes indispensable in order to assure that” rules are obeyed. Government’s function in this order is “like that of a maintenance squad of a factory, its object not to produce any particular services or products to be consumed by the citizens, but rather to see that the mechanism which regulates the production of those goods and services is kept in working order.” While government can also provide services that “the spontaneous cannot adequately provide,” in this function is “is one organization among many” in the order, “while in the first it provides an essential condition for the preservation of the overall order.” In government’s spontaneous role, it makes purpose-independent rules, while in government’s organizational role, it relies on purposive commands. Law of the spontaneous order type is consistent with liberty, while command law is not. (Hayek, 2012, at 1409, 1448, 1488)

He claims that he is not arguing for a minimal state that has only armies and courts (except for perhaps in less developed countries where government has “weak powers”). (9082) He argues instead that government can provide for public goods, especially if it only finances rather than administers them, and if this is done at the most decentralized level possible. (9162) Unlike some libertarians, he also believes in immigration controls, especially when “certain differences in national or ethnic traditions (especially differences in the rate of propagation) exist.” He notes, however, that migration might actually help close those gaps. (9366) Expropriation can be defended, so long as it “is strictly limited to instances that can be defined by general rules of law, payment of compensation at full value is required, and the decisions of the administrative authorities subject to the control of independent courts.” (9490)[iv]

His prescription for government is quite unusual. He proposes that people only be allowed to vote for their representatives in a Legislative Assembly once in life – at the age of 45. They may only elect people also aged 45, and would serve for a 15 year term. The election would be indirect, through regional assemblies. After that, the officials would be guaranteed lifetime appointment as lay judges, to prevent any corrupting influence. Their primary job as judges would be to revise the private laws (commercial and criminal) at fairly infrequent intervals, along with other minimal tasks of government. Because they would have relatively little to do, they would promote various voluntary initiatives on the side. A separate Governmental Assembly would deal with the internal affairs of government. Separate bodies could occasionally meet to amend the constitution, if needed. “Sovereignty” would reside “nowhere,” and politics would be dethroned. (10426-11159)


[i] This is only the first of many ways in which Austrian thought overlaps with behavioral economics. While Simon attempted to unpack phenomena like “docility” that leads to social evolution, Hayek also thought that people by and large followed rules not of their own making and this led to evolution. (Other scholars like Sunstein, do not go as far as to postulate evolutionary mechanisms.) And both traditions focus on mental shortcuts, known as “heuristics” in behavioral economics, and “abstractions” in Austrian thought.

[ii] This is an ingenious move, reserving again a privileged space for law as uniquely consistent with the spontaneous order.

[iii] In his chapter on coercion as a limit on the freedom of contract, Trebilcock outlines several schools of thought on the topic. For individual liberties proponents like Robert Nozick, a key way of distinguishing between contractual overtures that are threats versus offers is whether the overture would broaden or shrink the possibilities open to the second party. For others like Benson and Gordley, an overture is coercive if it would reflect an implicit price that deviates from the market price. Kronman would look to whether the class that party B forms a part of would benefit overall from the transaction, even if it otherwise has a coercive feel about it. Economists, finally, would tend to look at whether the person B would derive more utility from the transaction, irrespective of actual consent in the real world. all schools would tend to view “your money or your life” type overtures as coerced contracts that should not be enforced. (Trebilcock, 1997)

[iv] Hayek might on these lines have defended ISDR procedures. Indeed, he suggests a role for international institutions only insofar as they prohibit certain kinds of actions. ((10323)

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  1. Pingback: Libertarians against investment treaties |

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