• You Didn’t Build That: An Austrian Critique

    pdficon2William J. Corcoran
    University of Nebraska Omaha
    Email: corcoran@unomaha.edu

     

    Elizabeth Warren started it off. On a YouTube video in August 2011 she stated, “There is nobody in this country who got rich on his own — nobody.” The obvious message is that one owes others for the success they have had and therefore higher taxes on the rich are warranted.

    Obama picked up on the gist of it and in a July 13, 2012, campaign speech stated: “You didn’t get there on your own. If you’ve got a business – you didn’t build that.” However, this got pushback captured in the statement “I built that”. The value of rugged individualism is still well-entrenched in the American psyche. However, Obama later in a more moderate tone reasserted his point with the undeniable and appealing statement that “We did not build this country on our own. We built it together.”

    The essential message is that transactional relationships with others on the way to one’s success imposes an obligation. Conveniently, the easiest method of collecting what is owed is government. This message must be having an impact because beyond benefits received, it appears that many feel that they should give part of their income. This is curious.

    Two questions come to mind. The first, what is the nature of society and the role of the individual within it? This is the concern of the first part of this paper and is answered well in the writings of Mises on human society.

    The second question concerns the fact that these statements by Warren and Obama and numerous others favor a more centralized government approach rather than the free market, have great appeal. Simply put, why? The second part of this paper turns to Hayek’s last book, “The Fatal Conceit”, for some insights. There he contrasts the small group order with the extended order, i.e., the free market.

    Mises’ Society

    The Austrian approach to economic analysis is called methodological individualism, i.e., ultimately individuals make decisions. Mises rejects the tendency to view society as some organic whole that is beyond the individual, and which has objectives that are beyond the individual’s objectives. Groups, institutions, governments, etc., don’t make decisions. There is some person within them who makes the decision.

    Mises explains that society is composed of individuals who voluntarily cooperate with each other in exchanging (Mises 1998: 141). It begins with the market and the fact that by an exchange each gains more than he receives. It is not an equal exchange as some mistakenly think. More is gained by both parties than is given and each gives to get, do ut des. There is no one that walks away from a completed exchange that is owed. As exchange relationships widen, individuals gravitate towards producing where either innately, through learning or because of location they can produce at a cost lower than others can, a division of labor. This results in greater output shown by the law of comparative advantage which was most famously articulated by the classical economist Ricardo. Expansion of the number of participants progressively leads to a greater division of labor and a greater output. That Mises bases society on one of the most fundamental of economic laws is astonishing in its simplicity.

    For someone to exhort that you didn’t build that, you had help from others and thus, you should give back, appears as an attempt to expropriate these gains. They are tapping into the experience of everybody realizing the net benefits from exchange. And, because most individuals are unaware of the universal gains from the division of labor it is easy to impose upon them the mistaken idea that something was given to them and a sense of obligation. But, in fact, where everyone voluntarily participates in market exchange, no one owes anything to anyone.

    Hayek: Paleo Man

    This leads to the second question. Why are we vulnerable to such exhortations? Statements like profits or incomes are excessive, the path of selfish individualism, “greed”, has been tried and failed, or that capitalists are exploitative, all tear away at the free market. Certainly, one answer is that most have a very rudimentary or no understanding of the economics. But more fundamentally the answer is in our genetic inheritance.

    In “Fatal Conceit” Hayek refers to primitive peoples, members of roving bands of maybe twenty to a hundred whose instincts developed within the small group (Hayek 1989:11). The social ordering that existed over some 2.6 million years, the Paleolithic period, tended to be stable in the sense of little change in technology. However the period was long enough for many genetic adaptations resulting in the primitive form of today’s man (Paleo man).[1]

    Small groups that cooperated more effectively would be favored in evolutionary competition. Foremost among the elements that result in greater cooperation is the instincts towards solidarity and altruism. The more the members of the group shared common interest, the more they agreed on the actions they should take, the more they gave each other mutual support, the more they were loyal and the more they were concerned for the wellbeing of each other all contributed to the group’s survival and the evolutionary reinforcement of those very instincts. These instincts would be decisive and Paleo man can be characterized by them.[2]

    To begin with, Paleo man was not individualistic. For one, he was not likely to survive on his own. Further, he generally acted in accord with the consent of the members of the group or, at most, directed by a headman. The group would have shared the same aims and perceptions. Paleo man knew each member of the group, they were likely kin, and he had frequent face-to-face contact. His loyalty would be limited to the group and he would be suspicious of and may be aggressive towards strangers.

    Paleo man would tend to be an egalitarian. Unequal shares would disrupt unity. As a hunter-gatherer, his skill set would be similar to the others in the group. He would have an obligation not only to share what he got, but also share knowledge about food sources and shelter. He would have a desire to contribute visibly. He would be noncompetitive in the sense of not trying to gain a greater share.

    Paleo man was nomadic and would want to minimize the burden of travel. Thus, he is unlikely to be acquisitive.[3] Property beyond the personal would be shared by all. Private property connoting a private sphere of acting would be unthinkable.

    Paleo man’s world is visible and concrete. His objectives were basic: safety, food and shelter.

    He would be comfortable with the tangible and easily understood and suspicious of the intangible and not readily knowable. Physical prowess of its members enhanced survival of the group. Creation of value by gathering and hunting of food was a physical act.

    It is not intended that the instincts of Paleo man be trivialized or underestimated. On the contrary, his instincts are a vital component of living meaningful lives and there are a host of circumstances where they are desirable. Examples include the voluntary action called for in naturally caused calamities, the sharing during more intimate times with family, the camaraderie in social groups, even the coordination within firms to achieve its objectives. The fulfillment of these instincts provides satisfaction. The togetherness and sharing add meaning to our lives. Paleo man is us and our instincts are collectivist.

    In a sense, the genetic endowment, the instincts of Paleo man is an equilibrium value system. It is akin to the useful concepts of “long-run equilibrium” and “an evenly rotating economy” in economic analysis. It can be seen as a relatively fixed set to which reference can be made as changes come about. These instincts are more likely to predominate, but not completely, in the determination of a person’s attitudes and emotions.

    Hayek: Extended Order

    Hayek’s extended order is essentially the free competitive market; extended because it goes well beyond the order of the small group. It produces means involving people and places that are largely unknown moving towards a multitude of personal ends also unknown. Most exchanges are between strangers. Prices determined in an impersonal market reflect values and costs and may indicate profit opportunities, which redirect the allocation of resources. The free market is competitive. It involves individuals with initiative trying to outdo each other. For trading, private property is necessary.[4]

    The competitive order involved rules that are demanding: fulfilling contracts, the discipline of work, risk taking, savings, and restraining instincts. The abstract concept of price, which gives little information about the why of its movements, directs decisions.

    Hayek contends that the free market and its rules have also resulted from a process of evolution, cultural evolution, which is ongoing. Adaptations that are favorable allow groups to prosper and are passed on and disseminated by imitative learning. This process is similar to the process of natural selection via the genes. Learning allows cultural evolution to be much faster than genetic evolution. Further, the markets can be said to be wiser than any persons. The rules that have evolved and survived over the long run are the winners. They have made the most productive use of resources and are sustaining the largest numbers. However, to maintain the adaptive process of the markets and the possibility of new rules arising it is essential that prices and profits be free to reflect fully actual conditions.

    Instincts versus Rules

    The extended order rules and Paleo man’s instincts are in tension. For starters, the restraints imposed by the rules on Paleo man’s instincts would be disliked and the discipline required to follow the rules is burdensome. Acting in accord with instincts is a form of freedom.

    Further, there would be a disassociation of the inner instincts from the outside requirements to behave in accord with the rules of the market. This can be understood as a form of personal alienation and may even produce guilt.

    The list of the conflict between instincts and rules is even longer. Paleo man’s communal feelings, oneness with the group, are in opposition to the separation from competitively trying to outdo others for a greater share. His interactions are all with familiar people, market exchanges are mostly with strangers. Private property and material acquisitiveness is foreign to him. The existence of poverty when he has much is uncomfortable and may also produce guilt.

    The free market involves abstractions and Paleo man’s life is comfortably filled with tangibles. The free market itself appears chaotic compared to the somewhat knowable stable world within the group.

    It is especially in times of stress, uncertainty, and crisis that the Paleo instincts are more likely to come to the fore. Then, appeals for togetherness and sacrifice, will be understood. Selfishness and private gain will be condemned. He would be more subject to a demagogic appeal to passion, and the urge to act, maybe violently with a mob, is more likely.  Distortions in the meaning of words, propaganda, and advertisements from pressure groups appear to target Paleo man.

    Hayek warns that to return to an order that gives free reign to instincts will result in the loss of productivity gains that come from the free market and the rules thereof. It may even lead to the complete undermining of the market itself. Abandon the use of money, return to autarky, eliminate the banks and the financial markets and millions, if not billions, would suffer (Hayek 1988:27).

    Mises writes that the fateful error of the early classical liberals was that they thought the masses were “morally good and reasonable” and that democracy would throw off “the chains of tradition and superstition” (Mises 1998:193). A new age of improvement through rational conduct would arise. They did not fully account for the instincts of Paleo man.

    Examples

    To Paleo man the labor theory of value is obvious. Production for use rather than for profit would have appeal. That rent for property is unearned makes sense. That prices should just cover cost is basic logic. That interest rates should not be excessive is only fair. These statements, all anti-free markets, would be very understandable to Paleo man.

    The recognition of Paleo man’s instincts is paradigmatic. It appears to be applicable to any number of occurrences. In addition to the situation indicated in the title of this paper, you didn’t build that, what follows is suggestive.

    One of the more renowned political exhortations in recent history is President Kennedy’s: “ask not what your country can do for you – ask what you can do for your country.”  Mises would have classical liberals responding, why we are being asked “to renounce our well-being for the benefit of society” (Mises 1998:147). Now this response makes perfect sense to an economist in light of the gains from the division of labor within the framework of society. But for Paleo man who finds his safety and very existence within the group and the understanding that each of the members must contribute to maintain it, that response would at minimum not make sense, but, more likely, he would be offended and possibly angered.

    As another example, Rahm Emanuel in November of 2008 said “You never want a serious crisis to go to waste. And what I mean by that is an opportunity to do things you think you could not do before.” That statement can be interpreted in light of this paper as, centralized control can be expanded at the expense of the free market when Paleo man’s instincts are intensified.

    And another: Articles about the recent Occupy Wall Street movement identify three sources of their grievances, unfair income distribution, financial markets, and capitalism itself. The occupiers were Paleo man instincts carried into mass action.

    Conclusion

    The main point is that to maintain the viability of the free market Paleo man’s instincts must be taken into account. These instincts give rise to attitudes and emotions appropriate for the small group. Applying the logic of his instincts to the market is misplaced and would undermine it.

    Knowing the existence of Paleo man’s anti-market instincts may appear to make the problem of explaining the importance of the free market and the costly effects of an increasingly centralized egalitarian system, seem more formidable. But, on the positive side, it is important to realize the exact source and nature of the resistance. Only then can the problem be addressed correctly. We cannot mentally bludgeon with our seemingly cool and cute economic abstractions. Patience, perseverance, and simplification are necessary to persuade. Ideas, while maintaining their integrity as much as possible, need to be put into the conceptual framework of the greater community, and be made understandable to the instincts of Paleo man.

    References

    Hayek, Friedrich A. [1988] The Fatal Conceit: The Errors of Socialism, edited by W. W. Bartley III, The University of Chicago Press, Chicago.

    Mises, Ludwig von. [1949] 1998. Human Action, Scholars’ Edition. Auburn: Mises Institute.

    Read, Leonard E .1999. I, Pencil: My Family Tree as told to Leonard E. Read. 1999. Library of Economics and Liberty.

     


    [1] Hayek does not use the term Paleo man but the time period he specifies make it unmistakable that he is referring to the small group’s evolution during the Paleolithic period. (Hayek 1998:11)

    [2] Paleo man’s instincts described by Hayek are spread throughout his book. (Hayek 1998:11) The following tries to gather them together with some enhancement.

    [3] Hayek does not include non-acquisitiveness in his specification of instincts.

    [4] Probably the best article describing the far flung, involved, impersonal market interrelations is given by L. J. Reed in his article I Pencil. (Read 1999).