In Defense of Karl Popper and Piecemeal Social Engineering

Karl Popper in 1990. (Photo credit: Wikipedia)
Karl R. Popper was one of the most influential philosophers of science in the 20^th century.  His ideas on inductivism and falsifiability transformed the philosophy of science, creating credibility when he turned his mind to the social sciences.  Over the course of his lifetime he moved from a strong commitment to social democracy to support for liberal democracy, possibly due to the influence of his longtime friend, Friedrich Hayek.

In The Open Society and Its Enemies Popper proposed something he called “piecemeal social engineering.”[1]  In this regime he suggested that governments implement small societal changes and then critically evaluate the results.  He also mentioned that private individuals and businesses were participants in this process saying:

Even a man who opens a new shop, or who reserves a ticket for the theatre, is carrying out a kind of social experiment on a small scale ;  and all our knowledge of social conditions is based on experience gained by making experiments of this kind.[2]

In the context that Popper suggested it most free market advocates would find his view of social engineering to be anathema; but if we view it critically and in the context of Popper’s more abstract ideas, specifically “evolutionary epistemology,” we can come to a different and positive conclusion.

Consider Bryan Magee’s representation of Popper’s view of problem solving in society when he says, “Because he regards living as first and foremost a process of problem-solving he wants societies which are conducive to problem-solving.”[3]  When Popper suggested that liberal democracies could legislate small changes in the societal structure, evaluate the results and either repeal or retain the changes he was arguing against utopian views and for such a society.  As such it was a significant advancement in thinking about societal changes and a sensible argument against all utopian schemes.  Unfortunately, Popper was naïve about the ability of governments, even those of liberal democracies, to evaluate the results of their actions and to learn from them.

Governments are unable to learn from their mistakes for a number of reasons:

1. The individuals supporting a specific experiment risk citizens’ resources, not their own.
2. In a mixed economy, government does pay market prices for the resources it consumes, but as a monopoly it forces the populace to pay arbitrary prices for the goods and services it provides.
3. There is no signal such as profit or loss that can inform the experimenters of their success or failure.  In fact, it is widely suggested that government should undertake projects that are “desired” but that generate losses.

In addition to the inability of governments to learn, they impose their experiments on the entire populace, eliminating the possibility of parallel, competitive experiments through which more progress could be made.
As mentioned earlier, Popper did suggest that businesses could, in effect, also participate in piecemeal social engineering by implementing different business plans and offering revised or different products.  He failed to realize that what seemed to him to be a minor component was in fact the most significant and could accomplish his goal of societal evolution more effectively.
The fact is that businesses in the free market have built-in mechanisms that signal difficulties and facilitate learning:

1. The individuals involved are risking their own or investors’ resources – resources that are freely given and are at risk in the project.  This risk factor dampens the enthusiasm for projects that appear fantastic or utopian as opposed to realistic.
2. Businesses charge prices that must reflect customers’ values.
3. If income minus expenses is negative that signals that the business’s inputs are not creating a value for consumers that justifies the consumption of resources.  The individuals involved must make the decision whether to continue to consume capital or abandon the project.

Businesses are naturally competitive and are generally unable to impose their plans on the population, making it possible for multiple plans to be executed simultaneously across various industries.

Thus, we can say that Popper’s idea – piecemeal experimentation with the expectation of finding problem solutions – was sensible, but his means – governments of liberal democracies – could not accomplish that end.  On the other hand, a society free of government intervention and based on profit and loss has the tools required to accomplish it.

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[1] Popper, Karl R., The Open Society and Its Enemies, Volume I: The Spell of Plato, (New York: Harper & Row, 1963), 158.
[2] Ibid, 162.
[3] Magee, Bryan, Philosophy and the Real World: An Introduction to Karl Popper, (La Salle, Illinois: Open Court, 1985), 75.

Personal Value Judgments

Image via Wikipedia
In the, so far, excellent foreword to Ludwig von Mises's Epistemological Problems of Economics, Jörg Guido Hülsmann makes the following curious statement:

The discipline of economics dealt with human action to the extent that the acting person could base his decisions on personal value judgments and economic calculations, whereas praxeology dealt with human choices guided by personal value judgments alone.

But economic calculation simply augments personal value judgments.  Any analogy might be the use of a scale when confronted by two sacks of potatoes.  Which one should I buy?  The scale is a tool that can aid me in that decision, assuming that I want to buy a greater weight of potatoes for my money.  However, the color of the potatoes, their apparent age and quality may override my desire for the greater weight.  The scale simply supplies a quantitative input to my value judgment, the basis for every choice I make.

If the statement were instead, "personal value judgments in the context of economic calculations," I would be in complete agreement.  I suspect that Dr. Hülsmann would change the phrasing himself if asked about this seeming separation of value judgments and economic calculation.

Update: Further on,  Dr. Hülsmann does, indeed, seem to come more into alignment with my understanding of the Austrian view.

The GDP Fixation

Every Friday I receive a free investment letter from John Mauldin, an investment advisor who has enough credibility to get on CNBC, hold conferences with top speakers and produce an investment letter read by millions. Recently, he has been harping on GDP (as in GDP = C + I + G + (X-M), where C is consumption, I is investment, G is government spending, X is exports and M is imports). Now, if we accept that increased GDP is good, then any decrease in G is bad. However, some economists disagree and suggest that G should, in fact, be subtracted from the equation, as government spending is spending that people would otherwise forgo or channel into activities other than invading Iraq, bailing out banks or purchasing car companies that have failed to be competitive. Such an economist is Murray N. Rothbard who, in America's Great Depression, describes a measure he calls the Gross Private Product, or GPP. To quote him (pg 224),

In the pleasant but illusory world of "national product statistics," government expenditures on goods and services constitute an addition to the nation's product. Actually, since government's revenue, in contrast to all other institutions, is coerced from the taxpayers rather than paid voluntarily, it is far more realistic to regard all government expenditures as a depredation upon, rather than an addition to the national product. (emphasis in original)

So, Rothbard's equation is

GPP = C + I - G + (X-M)

where G now represents the maximum of government revenues and government spending - the value it extracts from the economy. Rothbard elaborates more on GPP and the reader may want to follow up on his ideas. In fact, I think that Rothbard may be too harsh on government spending, as there is some value produced in some spending - it's just impossible to know what it is as it is not subject to consumer sovereignty or profit and loss.

Now, if Mauldin were like Paul Krugman - that is completely ignorant of the Austrian School of economics and a shill for Democrats - I wouldn't blame him. However, Mauldin does know about the Austrian School and was apparently present when Gary North and Mark Skousen interviewed F. A. Hayek. Mauldin does disagree with the Austrian Business Cycle Theory (ABCT) and has said in his newsletter that he is more inclined to Irving Fisher's views; but how can a thinking person suggest that G - government spending - must not be reduced too quickly as it will lead to a reduction in GDP and further economic pain? Yes, a reduction of government spending will injure some parts of the population, but that capital is then freed up for productive uses. The longer we delay that reduction the greater - and wider - will be the pain.

Article in Liberty Magazine

Liberty has published the issue online that contains an article I wrote called "Laissez Faire Justice" on the cover and "Marketing Morality" in the table of contents. It is an expanded and edited (by Liberty editors) version of my previous post "Competition as a Discovery Procedure for Ethics."

2021/10/15 Edit: Replace heading link and dead article link to reflect live URLs.

Banking, Theory, and the Crucible of Free Markets

Recently, a salvo was fired by Joseph T. Salerno in the battle between those who argue for 100% banking reserves (characterized by Salerno as the Neo-Currency School) and those who support a more lax approach, represented by Lawrence H. White. You can find White's response here. Aside from disputing what von Mises meant when he wrote about banking on a number of occasions, it seems that Salerno's argument is that the creation of fiduciary media is sufficient to create business cycles, while White's claim is that the creation of fiduciary media in the right amount prevents depressions. To both of them I say that their approaches are simply business models. If consumers value the 100% reserves model more, it may dominate. If the fractional reserve model serves their needs better, we may see the opposite. And the likely result is that some combination of the models will co-exist, even in the same institution. And, if business cycles persist, entrepreneurs will either learn to live with them, as humanity has learned to live with the unknown future, or banks will adjust their actions to mitigate the financial impacts, learning from their market failures and successes. Policy disputes are important in societies with large amounts of state intrusion, and if either Salerno or White had any chance of their arguments affecting the course of the Obama, or any other, Administration, I would be encouraging them to pull out the stops to make their points. However, their arguments are for a free society, and consumers expressing their preferences will be the final arbiters.

Conflict of Interest

During the recent grilling of Goldman Sachs's management I was struck by an oft-repeated question about whether they were concerned more about the welfare of their clients or of the firm. It seems the deeper question, assuming that the answer was one or the other, is how a firm that has a divergence between its interests and those of its clients can continue to exist? If a firm were to have a known divergence of interests with its clients and is still in business, a number of conclusions might be drawn.

It could be possible that for this type of business no one has come up with a way in which to align the interests of both parties. This problem is one of knowledge, and might especially plague industries in which results are difficult to evaluate or are not evident until a much later date - medicine comes to mind. Or it may be that there are known ways of aligning interests, but they are illegal. For example, it is my understanding that it is illegal for stock brokers to cover client losses on stock recommendations. Finally, in a corollary to the latter case, regulations and mandates may create such a barrier to entry that innovative business models that would potentially align the interests of clients and the firm more closely are unlikely to be tried. This condition effectively produces a cartel of the already-existing enterprises that then provide uniformly mediocre services. How many times has your bank angered you, and you decide against changing because "they are all the same?"

In a free market "consumer sovereignty" has a meaning, and firms that ignore it are destined for the trash heap.

Anarchism

In the book The Socialist Tradition, Alexander Gray states (pg 3):

An anarchist society is conceivable only if all concerned are the embodiment of reason and restraint. Not merely therefore should an anarchist be a man of reason; he should also combine with his own reason a wholly unreasonable belief that all others are equally reasonable.

I would agree with this quote in the context of an anarchism that expects certain values, like abstract concepts of justice or equality, to be universally held. However, as a free-market anarchist I suggest that a society in which people hold many different values is possible, just as we live in a society in which Fords, Chevrolets and Toyotas, among others, address the values of a wide spectrum of car buyers. See my blog entry, "Competition as a Discovery Procedure or Ethics" for thoughts on that subject.