The libertarian fog meets the neoclassical black box

The last 30 years have been marked by an alliance between libertarian rhetoric with neoclassical economics. But these two schools differ quite a bit, even if you just look at their “law and economics” theories.

For Austrians/libertarians, judges can never perform the efficiency-maximizing role assigned them by neoclassicals. As Zywicki writes, “A Posnerian judge will

Foggy black box.

thus face a three-fold challenge. First, the judge must possess sufficient learning, information, and expertise to be able to determine the efficient legal rule in isolation. Second, the judge must be able to determine whether the efficient rule in isolation is also the efficient rule when embedded in and interacting with other relevant legal rules. But finally, the judge must be able to discern how the legal rule interacts with other nonlegal rules that may be relevant to the determination.” This task supposes more knowledge than anyone can have. A “Hayekian judge has the more modest responsibility of ensuring the internal consistency of his own decision within the overall operation of the spontaneous order—or, perhaps more accurately, spontaneous orders—in which the judge acts.” (Zywicki and Sanders, 2008, at 575, 577)The Austrian view, that judges act modestly and in the name of coherence and parties’ expectations, does seem to more accurately reflect prevailing judicial ideology.

Posner for his part was active in responding to the Hayekian challenge, in particular, what he thought was Hayek’s overreliance on the importance of custom and tradition in deciding what the law should be. He noted that, if judges purely relied on custom, they would undoubtedly uphold tribal customs or economic practices (like traditional monopolies) that were harmful to society. (Posner, 2010, at 8.4)

Posner seems to be raising a normative objection (what should judges do) to what Hayek had attempted to make out as a descriptive and theoretical account (what judges actually do when they are articulating something that could be described as law). Nonetheless, Austrians have taken seriously the criticism that Hayek – while conceding that law does change – did not seem to provide a change mechanism. (While this is a lacuna worth addressing, it is ironic that Austrians felt prompted towards it by Posner, whose theory (while logically coherent in a static sense) itself lacks a motor of change.)

Linda Schwartzstein made a modification to the Hayekian scheme, writing that it is lawyers rather than judges that lead to change in law. They are entrepreneurs that have case-, precedent- and issue-specific knowledge that is highly sought after. They have knowledge of how to bend legal concepts to meet client needs – if they do not, and impose their own will – they will meet with ethical disciplines and a loss of reputation. They will rarely act as the type of interest group that Hayek worried about, since they have incentives to not reveal what they know. Lawyers in general will only work together in those instances where it is significantly in their collective interest to advance a novel area of the law that had stumped them in their individual cases. Thus, they have little to no discordance with the spontaneous order. (Schwartzstein, 1994, at 1069-1072)

Todd Zywicki, in contrast, used an institutional and historical approach to put Hayek’s theory of judging in context. When Hayek studied the common law in the early part of the 20th century, the role of judges was more passive, and so-called “judicial activism” to advance social or efficiency goals was seen as more minimal. This was because judges were paid by the parties and competed with one another and with private judges to render verdicts. Because the same party was just as likely to be a plaintiff as a defendant, they had a preference for judges that would render predictable decisions that would affirm the expectations of the parties – rather than those that served some social goal like efficiency or redistribution. (Zywicki contrasts this with modern arbitration, where certain types of parties are more likely to be either the plaintiff or defendant, and so may foot-drag on jurisdictional or arbitral appointment issues, and develop preferences for purposive rather than non-purposive judicial decisions.) As appellate courts became more active and more interested in social outcomes, they started to function more as the types of positivist legislators of which Hayek was skeptical. (Zywicki and Sanders, 2008, at 596-597)

Interestingly, both Smith and Posner also at points emphasized the value of intra-jurisdictional competition for getting better (more independent, and more efficiency-promoting, respectively) judging. (Smith, 1776, at V.1.62-V.1.64). (Landes and Posner, 1979, at 252) Indeed, for Posner, the very foot-dragging-in-arbitrator-nomination phenomenon that Zywicki worries about is the reason for public intervention to back up the private arbitration industry. (Landes and Posner, 1979, at 246)

Parting thoughts and affinities with behavioralism

Austrian thought is weak as a social science (but strong as an ideology) because its premises are not falsifiable. Therefore, Hayek’s statements like “it is the great merit of the spontaneous order concerned only with means that it makes possible the existence of a large number of distinct and voluntary value communities” coexist with statements like “It is one of the greatest weaknesses of our time that we lack the patience and faith to build up voluntary organizations for purposes which we value highly, and immediately ask the government to bring about by coercion” anything that people desire. Do we have a spontaneous order, and does it tend to promote voluntary organizations? Or do we not have a spontaneous order, and therefore lack these organizations? Catallaxy encapsulates the ideal – because we can never purge our societies of all pollution by purposive action – it will never bear responsibility for explaining social outcomes. In other words, any desirable phenomena can be attributed to the functioning of the mechanism of interest, while any undesirable phenomenon is tautologically attributed to some other mechanism.

While Hayek’s skepticism of purposive social change gives his theory a conservative bias, he struggles with traditions that (while old) he doesn’t want to be associated with. For instance, Hayek sees social justice as an antiquated tribal emotional instinct for loyalty that unfortunately persists in socialism and even in democracies. Human emotions attach to the concrete, known and the visible, which engenders feelings of retribution, sympathy and loyalty that often lead to concerns about distribution and social justice. (6891, 7074, 7156). Humans will only understand the conflict of social justice with the spontaneous order by appreciating abstract principles.[i]

There is some overlap between behavioralism and Austrianism. In Simon’s words (echoing Hayek), if we put aside notion of Pareto optimality, “market processes commend themselves primarily because they avoid placing on a central planning mechanism a burden of calculation that [it] could not sustain.” In other words, the defense of markets should rest “upon the limits of the inner environment – the computational limits of human beings.” (Simon, 1996, at 34) Also, Hayek’s explanation of the content of emotion could find explanation in the notion of availability heuristics in behavioral economics. (Sunstein, 2009) Simon (1991) points out that docility, group-feeling and loyalty are actually adaptive shortcuts to a lack of perfect computational power, and that the resultant organizations are by far the dominant genus in the economy.

But Hayek is more apt to draw lines between the adaptations he likes, and those he doesn’t like. While market and “lawyers’ law” are acceptable shortcuts, organization is not – and is an aberration from the order. He condemns the mechanisms whereby organizations are stitched together, like “group loyalty,” which he calls the building blocks of trade unions and other groups that are “the real exploiters in our present society.” (10166)

In all, Hayek’s writing set Austrian thinking on a much more severe and absolutist path than earlier Austrian thinkers. While Menger (in contemporary parlance) did little more than to try to justify microfoundations for economic thinking, Hayek so fixated on the individual level of analysis that any examination of social questions becomes paralyzingly impossible. Hayek goes to much greater lengths than Menger to distinguish between law and statute, and to imbue the former with as much legitimacy as he can, while minimizing legitimacy for the latter. For instance, he writes that “specific commands (‘interference’) in a catallaxy create disorder and can never be just.” (6781) Elsewhere, he writes that “attempts to ‘correct’ the market lead to its destruction.” (7053)[ii] On methodology, Hayek also seems more skeptical than Menger of the possibility of using empirical techniques to gain valuable insights into the world. Menger saw empirical work as a useful complement to inference from human nature, and likened pragmatic reforms and statute to the culling of “noxious organisms.” In contrast, it seems difficult to come up with a Hayekian justification for taking any action. It is unsurprising that he would accordingly strip government to the bare minimum.


[i] This seems to require a purposive mental brainwashing in order to align naturally occurring individual sentiments with the benefits of the supposedly spontaneous order. Not very Hayekian!

[ii] Even on these points, Hayek is inconsistent. Hayek was associated dating back to 1943’s Road to Serfdom with the notion that any encroachment on the spontaneous order ineluctably leads to totalitarianism. But in this 1973 book, he argues not of some automatic tendency, but a more cautious point that pragmatism begets pragmatism. Once a leader or group believes they can improve on the spontaneous order through coercion (despite their partial and limited knowledge), they will create problems which demand further pragmatic solutions. 1621 As noted above, these points are made somewhat inconsistently.

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