On Law... And Modern Economics

At the centre of our ongoing discussions on Reason and Ethics (here and here) lies the relationship between Law and Economics, the first based on the “laws of reality,” of things “out there,” their ownership, transfer, mortgage, etc.; and the second based on the “laws of thought,” of things “in there,” or how we think before acting.

In both, there are “prescriptions”: in Law, the inviolability of Private Property; in Economics, Liberty under such Law.

But what I really wanted to focus attention on was what Murray Rothbard called “laws of reality” and Ludwig von Mises, his revered teacher, called “laws of thought.”

Thinking about Law goes back millennia, but we all know that Property arose before the law. It was because there was Property that Law came about.

And now we all know that where the rules of the game were most favourable, the most conducive to Liberty and Property, the greatest flowering of the people resulted. The “common law” predates parliament. America had the “Wild West” – which was not so wild, as it was based on Private Property. But the most important ingredient was Liberty.

The prescriptive lesson to learn from this is that civilization is not in such a sorry state that it needs Law from any group of “lawmakers,” however “legal” they might be: as in the case of a written constitution that is “by law established.” Law always goes back to the past, and the best lawyers are those who know about decisions taken in similar cases of the past. There is this no need for “new law.” There are only some legal “maxims” that should guide the practical application of the Law, such as the inviolability of Property, the legitimacy of original appropriation, or homesteading, the keeping of written promises and contracts, and restitution for damages, or torts. All crimes then are crimes against Individuals. There are no “crimes against The State.” If no one is hurt, there is no crime. It is these that Rothbard has elaborated upon in his Ethics of Liberty. These are based on the “laws of reality”: of the best way to organize the world outside, our Property.

Praxeology, in its present, highly developed form, is a very young science. This modern economics is not Law, and its methods are different from the historical method of Law. Rothbard himself has penned a history of economic thought before Adam Smith, and there is much to be gained from studying it, but we must concede that the academic rigour of the moderns is a very recent phenomenon. Indeed, Rothbard ends this first volume with a severe battering of Adam Smith, whom we all consider a man on the right side, but there were serious problems within the new discipline then, like their inability to solve the “value paradox,” or how gold is more valuable than iron, although iron is more “useful”; and their hilarious “labour theory of value” was an error that had grave practical consequences, in that it lay at the foundation of all Marxist errors.

Thus, there is something uniquely fresh about modern economics, something that makes it a young science eager to capture the attention of all truth-seekers, for it is a vital science. It deals with nothing less than survival itself. It is also, in a deep sense, a moral science. But that apart, the most unique aspect of this science, in its modern form, is that it traces everything back to logical categories present in each human mind. It is based on “laws of thought.” Its method lies in “looking out from within the consciousness.” Its teachings are the fruit of western civilization, of the intellectual culture of 19th-century Vienna, and its scientific rigour. If you are ignorant about the laws that govern interpersonal exchanges in markets, you are missing out on knowledge vital to your very survival.

And if there is a “higher purpose” that lies in the earthly struggles of the pioneers, including both Mises and Rothbard, then it is this: this science must be transmitted to each human mind. There are huge errors only because of bad theories. Socialism is one such theory. Democracy is another. Praxeology and Catallactics are also theory. But they are the only valid theories on the subject. They expose the huge errors in mainstream economics, from its mathematisation to its pretty diagrams, to its fictitious “macroeconomics” and its even sillier “microeconomics” which does not enter the micro-mind, the mind of the individual micro actor, because it is not based on “laws of thought.” Mainstream microeconomics is about the “rational utility maximiser.” It is a mathematical problem.

There is more to human logic than the ability to solve mathematical problems. Indeed, all the math you need to know to successfully engage in even the biggest catallactic ventures are the simple operations of arithmetic: ask Richard Branson or Donald Trump. Serious students of the subject need to ask themselves the question: Have I come here to learn Mathematics, or have I come here to learn Economics?

We trace modern economics back to the “marginal revolution” in 1871, and to three names: Carl Menger from Vienna, William Stanley Jevons from England, and Leon Walras from Lausanne. This settled the “value paradox”: value was seen to lie in the last unit of the good in question, the so-called “marginal” unit. It was the marginal unit of gold that was being exchanged for a marginal unit of iron, and it is these marginal valuations that were the source of their respective values.

But only the Viennese Carl Menger traced value back to the mind of the acting man. His method was “subjective.” And being subjective means “looking inside the mind” for laws of thought that guide all action.

Indeed, of the three, Menger is the man to watch. For he alone inaugurated a methodological individualism combined with subjectivism, and his second book in 1883 was entirely devoted to methodological issues. Mises and Hayek have both added to this foundation, and if there is anything to learn from their works, it is that mainstream economics is cock-and-bull. Menger thus founded a “school of thought” – the Austrian School.

According to the Austrians, the real question is not the “best laws”: the real question is how the order happens on its own, based on “laws of thought” we all follow. This is the new science Menger inaugurated, which Mises called “Praxeology”: the science of human action; praxis being the Latin for “action.” At its core is the Action Axiom: that man enters into acts of peaceful interpersonal exchange. This is a basic human phenomenon, a basic social fact. Indeed, the division of labour is not a “theory” – it is datum, a historical fact.

Thus, getting back to what I was driving at: the “axioms” that Rothbard’s Ethics of Liberty is based on, like property and homesteading, are about reality, while there is something very different about the axioms that Mises listed, which are present in the logic of every individual mind that engages in peaceful inter-personal exchange. It might be expedient to call the former "maxims."

[Which reminds me: Peace is also an important prescription of this science. Its basic lesson is that war destroys, while markets are all about production.]

This is how the two disciplines of Law and Economics interact. Both are vital subjects. But they are different subjects. The first is about laws of reality; the latter about laws of thought. In both we see spontaneous order. We do not see a “common will.”

It was not Rothbard but Bruno Leoni who captured the essence of the ideal legal process when he said that the common law mimics the market in that two people who share a dispute go to two private lawyers, both entrepreneurs, both of whom study the past, and who take the matter before an impartial judge. At the core lies the individual, interacting with another individual – exactly as in the market. Leoni made a powerful case against “inflated legislation.” He showed us how we can achieve a “natural order.”

Law is the old subject, millions study Law. It is modern economics that almost everybody is ignorant of. It requires books that convey its teachings in simple forms to the interested layman. I have recently taken on the task, which I hope to complete in a year or so. Wish me luck.

And Boom Shankar 2 U 2, on this glorious Sunday.