Property, Freedom & Society

30 Hoppe in One Lesson, Illustrated in Welfare Economics

Jeffrey M. Herbener

Every schoolboy learns that, to reach a true conclusion, one must start with true premises and use valid logic. The lesson, unfortunately, is largely forgotten later in life. Most lack the intelligence, interest, or courage to apply the lesson rigorously. Many break or bend the rules to further their own agendas or careers. Others can only muster the will to follow the rules in some part or in some cases. Rare is the person who masters the lesson.

Hans-Hermann Hoppe has demonstrated the intellectual heights that can be reached by employing the lesson with a brilliant mind, fervent devotion to the truth, and unflagging moral courage. What follows is a brief account of how he set right the entire field of Welfare economics.1

Old Welfare economics attempted to overturn the laissez-faire conclusions of the Classical school on the basis of the theory of marginal utility ushered in by the Marginalist Revolution. If utility can be compared interpersonally, by various assumptions such as cardinal utility or identical utility schedules or utility of money among people, the Old Welfare economists argued that diminishing marginal utility implied a social welfare gain from, among other interventions of the state, redistributing wealth from the rich to the poor. This line of argument was brought up short by the demonstration that the subjectivity of value precludes interpersonal utility comparisons. Therefore, social welfare can only be said to unambiguously improve from a change if it makes at least one person better off and no one else worse off. This Pareto Rule forbade economists from claiming social welfare improvements from state interventions since they do make some better off and others worse off.

New Welfare economics tried to weave a case for state intervention within the constraints of the Pareto Rule. The conclusions of New Welfare economics can be drawn from its main theorems. The First Welfare Theorem states that a perfectly-competitive general equilibrium is Pareto Optimal. From this theorem, the New Welfare economists conclude that a divergence of the real economy from this hypothetical condition justifies state intervention to improve social welfare. Economics journals are replete with cases demonstrating how the market economy fails to achieve a perfectly-competitive general equilibrium and what interventions the state should make to remove the market’s inefficiency. The Second Welfare Theorem states that any Pareto Optimal solution can be brought about by a perfectly-competitive general equilibrium. For each pattern of initial endowments of income among persons, the perfectly-functioning market economy would reach a different Pareto Optimal outcome of production and exchange. From this theorem, New Welfare economists conclude that the state can distribute income, in whatever pattern it wants, e.g., to achieve a particular conception of equity, without impairing the social welfare maximizing property of the perfectly-functioning market economy.

In his article on utility and welfare economics in 1956, Murray Rothbard demonstrated that New Welfare economists were wrong to think that a case against laissez-faire could be constructed on the ground of the subjectivity of value.2 He argued that New Welfare economists were correct to infer the impossibility of interpersonal utility comparisons from the subjectivity of value. Value is a state of mind without an extensive property that could be objectively analyzed. As such, no common unit of value exists among persons in which their mental states could be measured and thus, compared. Having accepted the subjectivity of value as the reason for the impossibility of interpersonal utility comparisons, which they made a pillar of their Welfare economics, New Welfare economists commit themselves to other corollaries of subjective value. In particular, Rothbard contended, they must embrace the concept of demonstrated preference. Because preferences exist solely in a person’s mind, another person can acquire objective knowledge about them only by inferring it from his actions. Since no other objective knowledge of a person’s preferences exists, only demonstrated preference can be used in the analysis of Welfare economics. Both the impossibility of interpersonal utility comparisons and demonstrated preference are deduced directly from the subjectivity of value, and therefore, New Welfare economists cannot, validly, accept one and reject the other. The impossibility of interpersonal utility comparisons constrains Welfare economics by the Pareto Rule, making it harder to justify state intervention than otherwise, but demonstrated preference raises the bar for justifying state intervention that much higher. According to New Welfare economists, the level set by the Pareto Rule is determined by the market’s deviation from the optimal result of a perfectly-competitive general-equilibrium model, but demonstrated preference eliminates any use of hypothetical values, including the utility functions of economic agents that underlie such models. To be scientific, Welfare economics must confine itself to statements about preferences that actual persons demonstrate in their actions. Rothbard wrote:

Demonstrated preference, as we remember, eliminates hypothetical imaginings about individual value scales. Welfare economics has until now always considered values as hypothetical valuations of hypothetical “social states.” But demonstrated preference only treats values as revealed through chosen action.3

The First Welfare Theorem, reconstituted along Rothbardian lines, does not refer to the general equilibrium state of models invented by economists. It refers to the actual economy, for which it is more difficult to demonstrate social welfare improvements from state intervention. If market outcomes are compared to other realizable conditions reached in actual economic systems, instead of unrealizable outcomes of perfectly-functioning, fictitious models, then market failure seems unlikely. And, as Rothbard showed, the market does surpass the levels of social welfare reached in other, actual economic systems.

The Second Welfare Theorem, however, seemed unscathed by Rothbard’s critique. New Welfare economists could still advocate one intervention of the state. Without impairing the efficiency of the market in bringing about a Pareto Optimal point, the state could still distribute income to achieve its conception of equity. Rothbard responded that private property was the proper initial distribution of wealth from which market activity renders a Pareto Optimal outcome. And, because the initial distribution of private property is not arbitrary, but follows the lines of self-ownership of labor, homesteader ownership of land, and producer ownership of goods, state intervention in property ownership could not produce an outcome commensurate in social welfare with the Pareto Optimal outcome of laissez-faire. New Welfare economists, however, not being adherents to Rothbard’s natural rights theory of property, denied that state distribution of property ownership would lead to a market outcome inferior in social welfare to that of the unhampered market. Even some economists who favored laissez-faire agreed that the pattern of property ownership in society is arbitrary with respect to the market achieving a Pareto Optimal outcome and hence, the state can rearrange it without detrimental consequences on social welfare.

It was left to Hoppe to work out the logic of Rothbard’s argument and reach a definitive conclusion about the effect on social welfare of state distribution of property ownership.4 In so doing, he reoriented Welfare economics to its true course. Although latent in Rothbard’s analysis, Hoppe was the one who demonstrated that the Pareto Rule approach to social welfare economics leads, not to an optimization end point, but to a step-by-step Pareto Superior process with an objective starting point. As Rothbard had done before him, Hoppe confronted New Welfare economists with a logical inconsistency in their argument. They had accepted a basic principle, this time self-ownership, from which they inferred social welfare consequences of voluntary exchange, i.e., they pronounced on the social welfare consequences of voluntary exchange from the viewpoint of the traders themselves. But, in embracing self-ownership, they must also accept its logical corollary, namely Lockean property acquisition. Hoppe pointed out that self-ownership is a necessary precondition to all acquisition and use of property and not just voluntary exchange. Therefore, it is the starting point for each succeeding step of social interaction.

In critiquing Kirzner’s view of Welfare economics, Hoppe writes:

If, however, the Pareto criterion is firmly wedded to the notion of demonstrated preference, it in fact can be employed to yield such a starting point and serve, then, as a perfectly unobjectionable welfare criterion: a person’s original appropriation of unowned resources, as demonstrated by this very action, increases his utility (at least ex ante). At the same time, it makes no one worse off, because in appropriating them he takes nothing away from others. For obviously, others could have homesteaded these resources, too, if only they had perceived them as scarce. But they did not actually do so, which demonstrates that they attached no value to them whatsoever, and hence they cannot be said to have lost any utility on account of this act. Proceeding from this Pareto-optimal basis, then, any further act of production, utilizing homesteaded resources, is equally Pareto-optimal on demonstrated preference grounds, provided only that it does not uninvitedly impair the physical integrity of the resources homesteaded, or produced with homesteaded means by others. And finally, every voluntary exchange starting from this basis must also be regarded as a Pareto-optimal change, because it can only take place if both parties expect to benefit from it. Thus, contrary to Kirzner, Pareto-optimality is not only compatible with methodological individualism; together with the notion of demonstrated preference, it also provides the key to (Austrian) welfare economics and its proof that the free market, operating according to the rules just described, always, and invariably so, increases social utility, while each deviation from it decreases it.5

Hoppe showed that the Pareto Rule needed to be applied to the social welfare consequences of the acquisition of property and not just its use. Self-ownership is the immutable starting point for the process of acquiring and then using property. State distribution of income to achieve an ostensibly more equitable “initial” endowment of income among persons fails to satisfy the Pareto Rule. In other words, the Second Welfare Theorem, reconstituted along Hoppean lines, is false. Only one initial endowment, the Lockean one, is capable of producing a Pareto Optimal outcome.

Moreover, Hoppe’s argument dispatches entirely the notion of Pareto Optimality as a social-welfare maximizing end state. Welfare economics starts with the objective fact of self-ownership and then demonstrates that each step of voluntary acquisition and use of property satisfies the Pareto Rule and thereby, improves social welfare. Moreover, each instance of state intervention into the voluntary acquisition or use of property, benefits some and harms others and thereby, fails to improve social welfare. The actual market, then, is not compared to some end point it may eventually reach, but has not yet achieved. If that were the case, it might be claimed that some interventions of the state could facilitate the actual market in achieving the higher level of social welfare at its end point. Instead, Welfare economics is constrained to comparing the actual market to actual state intervention. No room is left for the claim that the market fails to attain some ideal which might be use to justify state intervention. Hoppe definitively established that the unhampered market is superior in improving social welfare.

Welfare economics is arguably the least of Hoppe’s accomplishments in employing the lesson. In every field that has drawn his attention, he has, like Ludwig von Mises and Murray Rothbard before him, exemplified sound reasoning in social analysis. He improved the edifice they constructed by clarifying first principles and relentlessly and fearlessly tracing out the logical implications of these premises to their conclusions. He is an exemplar for all those who love the truth.

 

                             

Jeffrey M. Herbener (jmherbener@gcc.edu) is professor of economics and chairman of the economics department at Grove City College. He is a Senior Fellow of the Ludwig von Mises Institute and associate editor of The Quarterly Journal of Austrian Economics.

6On the development of Welfare economics, see Mark Blaug, “The Fundamental Theorems of Welfare Economics, Historically Considered,” History of Political Economy 39, no. 2 (2007): 185–207 and Jeffrey M. Herbener, “The Pareto Rule and Welfare Economics,” Review of Austrian Economics 10 (1997): 79–106.

7Murray N. Rothbard, “Toward a Reconstruction of Utility and Welfare Economics,” The Logic of Action, One (Cheltenham, U.K.: Edward Elgar, 1997), pp. 211–54.

8Ibid., p. 240.

9Hans-Hermann Hoppe, “Review of Man, Economy, and Liberty,” Review of Austrian Economics 4 (1990): 249–63.

10Ibid., pp. 257–58.

• 1Professors Hoppe’s publications, including links to translations and a detailed bibliography, are available at his website, www.hanshoppe.com.
• 2“Hans-Hermann Hoppe: Potret Intelektual Anti-Intelektual” [“Interview with Hans-Hermann Hoppe, an Anti-Intellectual Intellectual”], interview by Sukasah Syahdan, Akal dan Kehendak (Indonesia) (Apr. 28, 2008) (English translation available at www.hanshoppe.com/publications).
• 3“Principles of the Property and Freedom Society,” available at www.propertyandfreedom.org (quoting the Opening Declaration from the Inaugural Meeting: Bodrum, Turkey, May 2006).
• 4Hans-Hermann Hoppe, A Theory of Socialism and Capitalism: Economics, Politics, and Ethics (Boston: Kluwer Academic Publishers, 1989), chs. 2 & 7; idem, The Economics and Ethics of Private Property: Studies in Political Economy and Philosophy, 2nd ed. (Auburn, Ala.: Ludwig von Mises Institute, 2006 [1993]), chs. 11–13, 15, and “Appendix: Four Critical Replies.”
• 5Idem, Democracy.
• 6Eventually, Hoppe turned into a full-blown Austrian when, in the early 1980s, he went to the United States on a prestigious Heisenberg fellowship. This time his research project concerned political philosophy, but it was again squarely built on Austrian economics. In 1986, he became Rothbard’s colleague at the University of Nevada, Las Vegas (UNLV), where he would teach for the next 21 years. After Rothbard’s untimely death in 1995, Professor Hoppe assumed a place of uncontested leadership among Austro-libertarian scholars, becoming the editor of the Journal of Libertarian Studies, a co-editor of the Review of Austrian Economics, and then a co-editor of the Quarterly Journal of Austrian Economics. Professor Hoppe, now Professor Emeritus of Economics at UNLV and Distinguished Fellow with the Ludwig von Mises Institute, also serves on on the editorial board of Libertarian Papers. In addition to authoring numerous scholarly articles, his important books include Handeln und Erkennen (1976), Kritik der Kausalwissenschaftlichen Sozialforschung (1983), Eigentum, Anarchie, und Staat (1987), A Theory of Socialism and Capitalism (1989), The Economics and Ethics of Private Property (1993, enlarged 2nd edition 2006), Democracy—The God that Failed (2001), and The Myth of National Defense (editor, 2003). His works have been translated into at least 21 languages, not counting English.
• 7Among Professor Hoppe’s many achievements we should stress in particular his brilliant critique of positivist methodology as applied to the social sciences, a new praxeological approach to political philosophy, an encompassing comparative analysis of socialism and capitalism, and a theory of secession as a means of political reform. Most importantly, in his book Democracy—The God that Failed, Professor Hoppe has delivered a profound critique of democracy, as well as an original reinterpretation of Western history in the twentieth century, both of which have stirred international debate in academia and among the wider public. Other influential works from his pen have dealt with the role of migrations within a free society, and with the role of public intellectuals in political transformation processes. Moreover, he has excelled as an historian of thought and made path-breaking contributions to other areas such as monopoly theory; the theory of public goods; the sociology of taxation; the positive methodology of the social sciences; the theory of risk; the production of security; the transformation of formerly socialist countries; and the evolution of monetary institutions and their impact on international relations. And Professor Hoppe’s work is ongoing: he is currently working on a major book project that will restate and elaborate on his previous work in the fields of epistemology and ethics—more generally, the nature of human rationality. The goal of the book is to provide “a systematic and interdisciplinary reconstruction of human history (pre-history, hunter-gatherer societies, agricultural societies, industrial societies).”
• 8for justly acquired private property, freedom of contract, freedom of association—which logically implies the right to not associate with, or to discriminate against—anyone in one’s personal and business relations—and unconditional free trade. It condemns imperialism and militarism and their fomenters, and champions peace. It rejects positivism, relativism, and egalitarianism in any form, whether of “outcome” or “opportunity,” and it has an outspoken distaste for politics and politicians.
• 9Hoppe’s axiom of private property is also of crucial importance. If you debate about ethical issues, it means that you presuppose your own right, as well as the right of other people, to debate the issue. This acceptance implies that you do respect the rights of others people involved in the debate to control their own bodies. And the conclusion is crucial: if you even begin debating what is right and what is wrong, it means that you already have acknowledged that private property is necessary and inescapable for any moral judgment. This applies even to those who try to argue against private property. The ethical ground for private property has never been so strong and deep before.
• 10There are also many other fields where Hans Hoppe has pushed the limits of political and economic science. Monarchy is not as bad as democracy, he argues. This was and still is unacceptable to many intellectuals, and most people have followed the lead of the intellectuals because they have had no good arguments to the contrary. A simple reference to the “strong hand” of a dictator was not only politically incorrect and old fashioned, but also contrary to the goals and the image of society most people actually have. Hoppe provides a clear explanation to sort through this intellectual mess. The absence of democracy in public decision-making does not necessarily mean dictatorship and the most terrible exploitation of the people. On the contrary: democracy is the system which leads to dictatorship, exploitation of others, ignorance, and vulgarity.