The task before us is to justify the free market given the facts that (1) competition and (2) changes in government policy always harm some people in the process of helping others, even if overall in some sense society becomes richer.

1. Mises justified laissez-faire as follows. First, he stripped socialism of any claim to being a system of production.

Socialism cannot be realized because it is beyond human power to establish it as a social system. The choice is between capitalism and chaos.

A man who chooses between drinking a glass of milk and a glass of a solution of potassium cyanide does not choose between two beverages; he chooses between life and death.

A society that chooses between capitalism and socialism does not choose between two social systems; it chooses between social cooperation and the disintegration of society.

Socialism is not an alternative to capitalism; it is an alternative to any system under which men can live as human beings.

Second, he argued that the Third Way, interventionism is an inconsistent system that slouches inevitably toward socialism. I understand this trend to be of two kinds: actual and intellectual.

The actual way is limited essentially to price controls which do tend to spread until the entire price system is paralyzed.

The intellectual way is different; to quote from my book,

That freedom is indivisible must also be rightly understood. If principle A justifies policy B, and B is evaluated as bad or inappropriate, then according to laws of logic, A must be false, as well. But in obedience to its nature as a general rule, A likely justifies not only the particular B but also numerous other freedoms and practices. And if A is no good, then those freedoms, etc. are undefended and may well no longer be reasonable. Thus, not only B but also C, D, E, and all the rest of the ideas and institutions that A legitimizes fall, too.

If A is “economic freedom,” then even a single intervention undermines its authority not only for itself but for every market or industry or business.

Still, we live in a mixed economy and a semi-feudal order which shows no great instability or tendency toward complete collapse. Perhaps it is good that most people are not hardcore in that they do not take their intellectual mistakes to their absurd logical conclusions.

2. David Friedman likes the Marshallian or Kaldor-Hicks efficiency.

He asks, “The abolition of auto tariffs by itself, however, is not a Pareto improvement: auto workers and stockholders are worse off. How then can Pareto efficiency be used to judge whether the abolition of tariffs would be a good thing?”

And answers: “The situation with the tariff is being condemned not because it is Pareto inferior to the situation without the tariff but because it is Pareto inferior to yet a third situation: abolition of the tariff plus compensating payments.”

As pointed out in a post below, this justification is vain, because no compensation actually occurs.

Not only that, but with respect to competition, the idea that losing businessmen are entitled to compensations is explicitly preposterous.

3. Rothbard’s solution hinges on the fact that subjective harm alone, such as to those auto workers and stockholders due to the abolition of a tariff, is not enough to make an action or policy change illegitimate.

Instead, normative conclusions can be drawn only when subjective harm is paired with an objective injustice understood as violations of previously defined property rights. The auto workers have no right to their jobs. The stockholders similarly have no right to their dividends.

As I write in my book,

In addition, basic justice in buying and selling seems to permit Friday to forsake Crusoe and do business with Smith. Hardly anyone would dare argue that Friday has a moral duty not to make Crusoe worse off upon the appearance of Smith.

Rothbard justifies the property rights system philosophically, prior to any economic analysis.

The problem is that an economist might still feel dissatisfied that the property regime of the free market has not been shown superior to any other system purely on the grounds of human narrow happiness.

As we can see, none of these approaches is without flaws.

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2 Comments

David Friedman · June 8, 2014 at 12:36 pm

You write:

“”David Friedman likes the Marshallian or Kaldor-Hicks efficiency. As pointed out in a post below, this justification is vain”

I wrote, in the chapter you link to:

“I prefer to use the Marshallian approach, which makes the interpersonal comparison explicit, instead of hiding it in the “could be made but isn’t” compensating payment. ”

As I would think was obvious from that, I was not offering Kaldor-Hicks as a justification. I was arguing against it and in favor of Marshall’s approach of justifying economic efficiency as a proxy for utility maximization.

Dmitry Chernikov · June 10, 2014 at 12:23 pm

I notice how almost apologetic you sound when stating that money “is a convenient common unit for measuring value.” For example, you write that in a large economy, “individual differences could be expected to cancel out.” If the utilities to the rich and poor are randomly chosen, then any utility distribution is as probable as any other, so they may cancel out or they may not. But supposing they do, it is unclear to me how the random losers are supposed to be consoled by the fact that the greater number of random winners are happier than before. How to deal with the losers is precisely the problem we were trying to solve in the first place!

Further, all prices are relative not absolute; one purpose of money is to rank all the permutations of bundles goods on a scale as conducing to more or less human happiness. This ranking is ordinal not cardinal.

Further, suppose you give me $1. Money is just a medium of exchange. My surplus is not $1 but rather a candy bar that I can buy with it, or two stamps and box of matches, or some other bundle of goods that costs at most $1. Suppose you instead give me ¢1. There is nothing I can buy with just a penny. This amount is submarginal; hence, my surplus is not ¢1 but zero.

I think you profess nonsense like “money measures value” because you have no idea how to do economics without it. Which is no excuse, really.

Finally, you write: “The ‘potential Paretian’ approach reaches the same conclusion as the Marshallian approach and has the same faults; it simply hides them better. That is why I prefer Marshall.” So, the distinction you are so keen on making is by your own admission almost without a difference. And I think the “almost” may be fairly omitted.

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