Wednesday, September 8, 2010

Liberalism, Its Origins and Consequences - Chapter 3 - The Truth is Out There

One of the most contentious arguments I have ever had on Townhall's comment boards was when my essay "Absolute Values" was featured alongside the professional pundits. My point was a simple one, almost an economic truism. I argued that all values are subjective, that they are ordinal not cardinal, and that any choice must be evaluated in terms of costs and benefits, and that no choice has an absolute value, that is, if we start pursuing a goal "no matter the cost", we will produce terrible outcomes. However, some conservatives being prone to hear certain words and then shut their ears, I was instantly labeled a proponent of ethical relativism, I was told that freedom was an absolute good, and I was pelted with many religious messages (with the absurd implication that I, the author of an essay suggesting the working of the free market proves the existence of G-d, as well as countless essays denouncing the supposed proofs of militant atheists, am some sort of liberal atheist).

Having been through that experience, hopefully I have learned something, and so I can approach what amounts to the same topic a little better. Unfortunately, because many confuse ethics, religion and economic valuation, not to mention that conservatism is unfortunately infected with authoritarian social conservatives, I am afraid that my point, that there is no single "right answer" to economic questions, will be met with resistance. Worse, it will be met with resistance which argues against points I am not making.

But since I anticipate these troubles, perhaps we can at least partly avoid them.If nothing else, at least maybe I can build upon some very basic points and thus postpone the mistaken arguments until much later, allowing readers to absorb at least some of the argument before they stop listening.

The first point, and a very simple one, is that people want things, and want things to differing degrees. They may want corn more than shoes, or a sweater more than a candy bar. Whatever the hierarchy, they value the various options based on this hierarchy. The wants are ordinal, not cardinal (that is "I want corn more than beans", not "I want 4 corn per 3 beans"), but there are a wide range of such valuations, including "I want two ears of corn more than four cans of beans". So, for a single individual, he can tell whether any exchange will make him better or worse in terms of his personal satisfaction. And, when we make a composite of all the relative valuations of all the individuals, using the relative values for both the "demand" and "supply" sides, we can actually create a numeric price representing the composite of all those valuations.

However, just because we can put a number on the collective desire, that does not mean that there is mathematical precision to the system. The price is, at best, an estimate. Because individuals will buy more if goods are underpriced, and buy less if overpriced, the market tends to force this number toward the most accurate representation of all wants, but as valuations constantly change as well, both as needs are met, new needs found, old needs grow, and valuations simply change,these numbers are also being pushed about by random winds of human whim, and so they will never reach the "true" number. On the other hand, as a means of representing our collective desires, there is no system which produces more accurate results, so this imperfect number is also the best possible number.

Which brings me to one final point. In this whole discussion, we have been talking about valuations. Valuation in an economic sense is always measured in terms of individual satisfaction. I will trade X for Y because I value X more than Y, and you will because you value Y more than X. This is only possible because we value the two goods differently, but because we do, it allows us both to win in the exchange.

The problem with many liberal theories is that they forget the subjective nature of economics. We work and produce to satisfy our wants. The only measure of those wants is our own personal assessment of how much a given product or service will please us. Sometimes, such as assessing new products with which we are not familiar, we may expect more joy than it truly brings. Or we may buy an inferior version of a good which is less satisfying than expected. However, such errors are self-correcting, as once we have been misled, we change our behavior, avoiding the specific offender, and, if we have repeated experiences of subpar products, avoiding all but the most reliable goods.

But the main point is that the economic system is a success or failure from the individual perspective to the degree it provides satisfaction. In isolation, I would work to satisfy the most keenly felt need first, then the second most keenly felt and so on. In a society, I can produce something that does not satisfy my needs directly, but then exchange it for goods and services which satisfy my wants. If I can achieve more satisfaction through trade than through personal production, I have succeeded. If I am less satisfied, then I need to change my behavior.

And the success or failure of an economic or social system has the same measure. For each individual the question is whether the given system makes him more or less satisfied than he would be as a hermit. And since society is nothing but a collection of individuals, logically there is no way to measure the success of the system for society as a whole other than the degree to which it succeeds for all individuals. Of course, one could argue how to measure these results, whether it is better to improve the satisfaction of more individuals, or to improve total satisfaction more, even if it is limited to fewer individuals. (Fortunately, the free market commonly produces both the greatest satisfaction and the most widespread benefits, so it is a moot point in most cases. But as it sometimes arises as a hypothetical question it is worth mentioning.)

The problems arise when liberalism denies individual satisfaction as the measure by which success is measured. Sometimes the choice of measure is simplistic to the point of idiocy, using sheer volume of output, or even the money value of that output, to measure success, ignoring the simple truth that workers do not work to produce, but to consume, and so output alone is no measure of success, which should be seen in terms of the satisfaction that output produces.

However, most often those who do not agree with subjective valuation tend to fall into two camps. One agrees that satisfaction is the purpose of production, and that success should be measured in terms of satisfaction brought to the public, but alleges that individuals are unable to determine their own wants correctly, and so tend to pursue the wrong goals. As this relates to the theory of foolish citizens, we will discuss this more in the next chapter.

The other, more common theory, does not make explicit its basis for evaluating success or failure, but it does make quite plain the terms it intends to use. This is the juxtaposition of "necessities" and "luxuries" or "needs" and "wants" about which we often hear. In this theory, the purpose of the economy is to provide for "needs", while pursuing "luxuries" is "greed".And under this theory, the economy is to be assessed not in terms of how well it fulfilled the wants of individuals, but in terms only of how well it fulfilled the desire for necessities, as only necessities matter.

No one has ever truly defined this dichotomy between needs and wants, necessities and luxuries. As I said before:

So, what is a necessity? Most people seem to think they know the meaning of this word intuitively, but, when pressed, have a very hard time defining it, or even specifying if a given good or service falls under it. And should you try to ask more than one person for a definition, it gets even worse, as the "self-evident" meaning of one, if he is even able to give it, very rarely matches with that of another. Despite the fact that the term is one that "everyone knows", which everyone thinks he can define with ease, like its root "need", it is a term without a clear meaning.

It may be slightly bad form, but let me begin by quoting myself, from my essay "The Most Misleading Word":
The problem is simple, it is inherent in the very word itself, the word "need". You see, to use "need" properly, you really need an explicit or implicit clause following it, to explain for what purpose it is needed. For example, "You need an oven to bake a cake." Or, as an example of an implicit clause, if you were discussing driving to the store, "you need to put gas in your car [to drive to the store]." It is only with this modifier that "need" is meaningful, as "need" has meaning only in context.

In "Absolute Values" I discussed the way using absolute terms can make a mess of thought, well "need" is not exception. When we deprive "need" of a context, there is only one way to read it, that is an absolute need, a need one will feel regardless of circumstance. But such needs do not exist. Even the bare minimum I used above, "need to survive" assumes one wishes to survive, and so is wrong in a few aberrant contexts. But, outside of that single case, "need" is only meaningful when we use it as a means to an end. Without the end, "need" is meaningless, and quite misleading.
That argument applies just as well to our current question. A "necessity" is a necessity" only in terms of a specific goal. One can try to give it a more general definition, say "necessary for preserving life", but then "necessities" are pretty low, as a bare minimum of food and water is all that can be considered "necessary", and I have yet to see a definition of "necessity" which contemplates anything beyond bread and water as being a luxury.

No, when people speak of "necessities" in economic terms, they are not talking about anything definable, instead they are smuggling in a value judgment, saying "everyone should have X", and "no one should have more than X". In other words, they are applying some sort of floor to allowable poverty. But, they are in no way defining "necessity", they are simply telling us what they wish everyone had. (See "The Inherent Disappointment of Authoritarianism", for a similar process in the thinking of those promoting socialism. Also see  "Can We Ban the Word "Scarce"?", "Bad Economics Part 17" and "Protean Terminology", for discussions of such ill-defined terms.)

And you can see this in the shifting definition of necessity, even among reformers. What was once a luxury, a car, a television, a single family home, often becomes a necessity in a generation or two. A decade ago we heard about the plight of children without internet access, now we hear sob stories about those without high speed connections. Necessity is not a meaningful phrase, it simply represents the current assumption among a given group of reformers about what everyone should have. It is, in all senses, a meaningless phrase.
And that point is quite significant for our argument. Necessity and luxury may be ill-defined, they may provide no obvious way to tell if the economy is working or not, and they may just be a means of smuggling in one's personal prejudices and value judgments, but they also serve one very important purpose for liberals.

They allow for a right answer.

And that is the one key to eliminating individual valuations. If we admit that the purpose of the economy, or society, is to provide for an individual's satisfaction, and that the only means of determining an individual's satisfaction, or his desires, is through his own assessments of his desires, we cannot have a "right" answer. We cannot say that the economy should always produce more X, or make Y but not Z. With an economy which is successful only to the degree it fulfills shifting desires, unknowable in advance, there is no way to create absolute rules. Except for a rule to let the market decide, we cannot establish the sort of command economy that all interventionist want. We are left, if e are honest, with only one option, letting the market work.

But if we eliminate subjective value, and say that either there is some objective measure of value, or even that there is only subjective value, but one that is unknown to individuals, but knowable to experts, we have created a situation where right answers are possible, where we can have an ideal solution, a perfect way of arranging things.

And that perfectionism is a big part of liberalism. In a few chapters we will discuss both perfectionism and impatience, as they relate to liberal thought, but allow me to make a brief aside here.

Obviously, everyone would like to live in a perfect world, or at least one in which all needs were met and no desires went unfulfilled.The problem is that perfection is impossible in reality, especially as wants shift constantly, making any single solution unlikely to be perfect for longer than an instant. But the liberal theory has perfect answers, solutions which are absolutely correct. And that helps to explain liberal impatience with conservatives who propose gradual improvements, or suggest changing things a little at a time, to see how well things work. As they think there is a single correct answer, and that it is knowable, and even known, liberals tend to want their answer implemented immediately, and expect that doing so will result in nothing but perfection.

It goes without saying that these "ideal" solutions fail in the real world. Price controls, to use but one example, provide a good illustration. If price controls exactly mimic the market value, then they are pointless, producing the same result as the market would,. (Although, if the market forces change, the price control may later produce problems, while a system without controls would have no such problems.) On the other hand, if the price is set too high or two low, either there will be too few sales, or too many. Whichever is the case, it will be an outcome less pleasing than would occur without the controls.

In the same way, all controls result in either nothing, or disappointment. There is simply no way it could produce results better than the market. At least in terms of individual satisfaction.

I am going to cut this one a bit short, as this and the following argument are so closely related. Since the dual points of a right answer and a blind public work together to justify all manner of government involvement, I think I will wait and discuss the two in some detail together. And so, for now, let us just recall that the basic strategy here is to argue that satisfying wants is not the way to measure economic or social success, and define the purpose of the economic or social system in such a way that the average individual cannot determine the success or failure of the system, or even understand how to measure such success or failure. In addition, the system needs to be defined in such a way that the definition of success allows for a singular correct solution which is knowable, but only to a small elite of experts or other enlightened souls.

It is on the basis of such confusing definitions that the whole edifice of liberal thought, in fact all modern political theories justifying government intervention, are founded. But we will see that in greater detail in the following chapter.

Continue to "Liberalism, Its Origins and Consequences - Chapter 4 - Our Foolish Compatriots".
Return to "Liberalism, Its Origins and Consequences - Preface".

POSTSCRIPT

They are not relevant, but as I mentioned my religious essays, they can be read at ""Silly Rules"", "Guess It Is Time", "Knowing Our Limits", "A Reply to Scientific Atheists", "Bad Theses", "Standard of Proof", "Materialist Arrogance", "Atheism's Circular Reasoning", "Strange Double Standard", "Fascinating", "An Interesting Refutation" and "Stacking the Deck". There are more, but they can almost all be found by following the links in the dozen articles I listed. Moving on to more relevant topics, I wrote several essays on precisely the topic of this chapter, including "The Inherent Disappointment of Authoritarianism", "Bad Economics Part 16 ", "The Most Misleading Word" and "Luxury and Necessity". Readers may also find some interest in the essays  "Greed Versus Evil, "The Limits of "Scientific" Management" and "Absolute Values".And, for those interested, there is an amusing post about a blog started entirely to refute what they believed to be my argument, which can be read at "How Bizarre". And finally, the long quote comes from "Luxury and Necessity", mentioned earlier.

Updated Postscript (05/22/2010): I noticed while reading this again that I forgot essays clarifying an essential point. It may seem a small point, but you would be amazed how many people forget it when writing economic theory. And that point is that production is undertaken for the purpose of supporting consumption. We recognize it in everyday life, we work to get money, and need money to buy things we need, or save for future consumption, but when it comes to larger scale economics, especially concerning international trade, it seems that point is forgotten. In private life we rejoice when needed goods go on sale, but when it comes to trade the protectionist groan when foreign goods are cheaper than domestic. Similarly, we recognize in private life that a huge inheritance would allow us to live without working, or reduced expenses would allow us to take a less demanding job, but in trade the protectionists treat raw labor, the total number of jobs, and even the sheer amount of drudgery, as if it is a benefit. As I said in one essay, the protectionists act as if we spend money to justify working, rather than believing that we work in order to have money to spend. But rather than go on, let me just cite the most recent and the best of my protectionist essays, as they will help clarify this essential point, not only significant for understanding this essay, but for refuting many erroneous economic theories. The essays in question are  ""Fair Trade"","Exploited Labor", "Protectionism Right and Left", "Free Trade, Employment, Outsourcing, and Protectionism", "Unfair Advantage and Foreign Trade", "Jobs, Jobs, Jobs, and More Jobs", "Bad Economics Part 6", "Clarfiying My Argument", "Production and Consumption ", "Capitalism and Its Consequences ", "Put Your Money Where Your Mouth Is, Or The Logical Implications of Price Gouging Laws ", "Moral For Me, But Not For Thee ", "Defending Freedom? " and "Clarifying a Reality of Capitalism". A few of these deal more with capitalism in general than protectionism specifically, but all help to clarify the point that production is intended for consumption, that satisfaction from consumption is the purpose of our economy, and that we only produce because we want to consume, all points often forgotten, and which have disastrous effects on theories when they are not recognized.

Originally Published in Random Notes on 2010/05/21.

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