ISSA 1996 Intercollegiate Social Science Association

Proceedings Of The 2nd Annual Symposium
April 20, 1996

Cleveland State University
Cuyahoga Community College
Lakeland Community College
Lorain County Community College

Some Advice from Ludwig, Murray, and Michael on Regional Growth and Development.

by David R. Ferguson

The essence of economic growth and development is not central planning and regulation, but rather experimentation. This paper will attempt to uncover the economic and philosophical foundations for this contention.

We shall look to the work of three men.

In chronological order, let me introduce first Ludwig von Mises, whom I believe is the best representative of what is known as "Austrian" economics. Second, is Murray Rothbard, the great economist and libertarian social philosopher. Last, we have Michael Rothschild, who in a period of brilliant inspiration, invented the concept of "Bionomics."

Von Mises first demonstrated in 1921 the unworkability of the socialist system due to the unavoidable problem of economic calculation: 1 He maintained that economic calculation (what to produce, how many, etc.) was impossible by the criterion of rationality due to the lack of market driven price signals. Friedrich Hayek, a student of Mises, carried the concept further by introducing the idea of spontaneous order, wherein an economic system is essentially self organizing 2 and also by showing that the primary function of markets is the dissemination of knowledge. 3 Working in contradiction to these "Austrian" theories of the natural process of market interaction is the mainstream theory of market failure. The acceptance of this theory provides a rationalization for government intervention. And if regulatory control is appropriate, then planning initiatives would seem the next logical step.

Building on the Austrian foundation, Israel Kirzner has spotlighted the leading role of the entrepreneur in achieving what the Austrians consider the ultimate goal of economic activity. That is consumer satisfaction.4 Also, the "Austrians" have given us another insight which is related to planning and this is the concept of "methodological individualism." 5 According to this idea, only individuals think and act. Thus GM does not raise prices and America does not import goods and services. Society does not have goals, only individuals have goals. And only individuals can raise prices or import goods. When individual rights are sacrificed for the benefit of the public, this is really a smokescreen for transferring benefits from individual A to individual B. The actions are always morally, and also economically wrong. As Hayek said, "Complexity is not a reason for planning but planning is a reason for complexity." Complex plans to benefit society are never as good as individual plans to benefit the individual as long as the latter takes place in a civil society where the rule of law protects property and spontaneous order is allowed to coordinate the activities of all the participants.

Taken as a whole the advice that the "Austrians" would offer to those who intend to plan and regulate for the improvement of economic outcomes is - "Hands off. Leave them alone." The invisible hand is the best planner and the consumer is the best regulator.

Next, to Murray Rothbard. Rothbard explains the libertarian creed as a "nonaggression axiom." To wit, no man or group of men may aggress against the person or property of anyone else. Aggression is defined as the initiation of the use or threat of physical violence against person or property. 6

Many would accept this axiom as self-evident since aggresion is generally considered anti-social behavior. But on closer examination, what this means is that peaceful, honest people should not be forced to do anything against their will. Does this include not paying taxes? How about selling drugs or home-schooling without permission? Rothbard's answer is yes to all of the above. Civil behavior is to be encouraged but never to be forced.

Thus the moral question of central planning and regulation takes precedence over the utilitarian question of its efficiency. Property rights deserve protection as essentially human rights. Eminent domain, zoning, urban renewal are all examples of paving the road to ruin with good intentions. But one asks. "Doesn't the end justify the means?" Of course. To do otherwise would simply be irrational. Ends are always justified by means in the sense that the latter is used to accomplish the former. The question always reduces down to a determination of the priority of the various ends. In a world of scarcity, ends will inevitably conflict. Therefore the choice is between rationalizing or justifying the coercive use of social force or refusing to do so as a matter of principle.

Rothbard's advice: the natural rights of individuals are indistinguishable from their property rights. By assigning trump card status to these rights the community will thrive and the energy of individuals will flow freely and constructively. Growth and development will spontaneously materialize.

Now to Bionomics. Bionomics rejects the viewpoint that the economy is a mechanism with predictable outcomes. Instead, Rothschild sees the economy as an evolving ecosystem, no more predictable than say,whether it will be sunny or cloudy one year from today. The incredibly complex system, although unpredictable, is not without organization. This web of competitive and cooperative behavior is uncontrollable but as functional as day and night. 7

Like DNA as it undergoes mutation and natural selection the economy evolves. 8 This evolutionary process which is a "result of human action but not human design," leads to the development of social institutions such as language, law, and money as it also leads to the utilization of advanced technologies. Mainstream economics tends to focus on equilibrium (both static and dynamic) models which assume away the destabilizing parameters of technological change. This is somewhat like analyzing your earning capacity assuming you will never learn anything new. It's easier to do but is it meaningful in terms of real life predictions?

One of the obvious consequences of the Classical Newtonian vs. The Bionomic Darwinian view is the perceived role of the government planners and regulators. Mechanics may be able to fix machines but they can't use the same techniques to fix a tree. The tree needs room to grow and sometimes it simply needs to die to replenish the nutrients in the soil and give other trees a chance to live. It's an ever-changing cycle.

The fatal flaw in the development of mainstream economic thought was to follow the lead of Alfred Marshall and focus on the concept of equilibrium rather than the big picture of historical development. The resulting myopic viewpoint has lead us through Keynes to Samuelson and to three confused and disillusioned generations of economics students.

Economics, for example, is not about the maximization of total utility by utility-maximizing consumer machines employing the equi-marginal principle. The heart of economic activity is the creation of utility by the ingenious and sometimes courageous activities of the producers.

The attempt to satisfy the restless wants and needs of the consumer is more fundamental to an understanding of the purpose of competition than the fact that in long run equilibrium price equals both average cost and marginal cost.

In Bionomics the emphasis is on information. Information must flow and the discovery of new information must be encouraged and rewarded. In order to accomplish this, impediments must be removed and false signals eradicated.

Evolution cannot be planned by human beings. And, as Peter Drucker once said, nothing is worse than doing something very efficiently that shouldn't be done at all. Thus attempts to improve the planning process are doomed to fail before they begin.

Simply allowing competition to do its main tasks which are 1 to direct production into the appropriate arenas according to the law of comparative advantage, and 2 providing an incentive for producers to seek out their "niche" so that natural selection can yield improvements, is sufficient to achieve efficiency and growth or development.

Bionomics emphasizes the learning curve concept of increasing efficiency. Learning curves are not a function of market structure and thus the politics of anti-trust laws become expendable. Organizational learning which is a function of both creativity and freedom makes the concepts of equilibrium prices and zero economic profits seem considerably less important.

Growth and development depend on creativity, education (free market), the division of labor, and the learning curve. The essential ingredient in the maximization of these inputs is the freedom to experiment and the acceptance of responsibility for the consequence of change (profit or loss in the broad sense).

Scientists are now discovering that "chaos is not disorder; it is a higher form of order." The idea is that chaos can be healthy. Trying to plan a system that is chaotically organized inevitable brings forth unintended consequences which lead to more planning and in the process short circuits the feed-back loops that enable the system to perform in the marvelously complex interaction that no planner could ever grasp. Laissez faire is not a formula for disorganization. Paradoxically it is the prerequisite for order.

Rothschild's advice: Economic growth and development is a biological phenomena. The role of government is to let the water flow (lower taxes), don't block the sunlight (reduce regulations) and, clear the weeds (protect property rights). And, don't forget, the gardener is not the government but the entrepreneur. The market process will make the garden healthy, balanced, and productive. And natural law will guide the garden's growth, which can then nourish us both materially and spiritually.

Truth, it seems, resides at the convergence of non-contradictory knowledge. Wisdom may be the combination of truth and reason. Although I have barely tapped the reservoirs of knowledge cited in this paper, perhaps it has been sufficient for some to vector in on the essential truth. Liberty is both moral and utilitarian and that's probably not a coincidence. If we are to be wise, we must use our reason to act in accordance with this truth.

  1. Ludwig von Mises, Socialism, 1922
  2. Friedrich A. Hayek, Studies in Philosophy, Politics and Economics, Chap. 6, 1967
  3. Friedrich A. Hayek, Individualism and Economic Order, 1948
  4. Israel M. Kirzner, The Prime Mover of Progress: The Entrepreneur in Capitalism and Socialism, 1980
  5. Friedrich A. Hayek, The Counter-Revolution of Science: Studies on the Abuse of Reason, 1980
  6. Murray N. Rothbard, For A New Liberty, 1973
  7. Michael Rothschild, Bionomics, 1990
  8. Adam Ferguson, An Essay on the History of Civil Society, 1767

David R. Ferguson is a co-founder of the Intercollegiate Social Science Association. An Associate Professor of Economics at Lorain County Community College, he recently founded and is now President of the Adam Ferguson Institute in North Ridgeville, Ohio.