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Government: Creator of Uncertainty
by Sheldon Richman, July 2000
THE STOCK MARKET tumbles
of recent months are a reminder that when it comes to economic phenomena,
subjectivism reigns. One of the pillars of the Austrian school of
economics is the principle that in explaining economic events, objective
entities and quantities in themselves don’t count. What counts is
what human beings make of them.
As F.A. Hayek wrote, “It is
probably no exaggeration to say that every important advance in economic
theory during the last hundred years was a further step in the consistent
application of subjectivism.” Up to the time of Carl Menger, founder
of the Austrian school in the late 19th century, much of classical
economics was preoccupied with what was regarded as objective, wealth
for example, which purportedly existed apart from human plans and
purposes. Menger put acting, valuing man at the center of economic study.
For Menger, understanding economic phenomena meant seeing them through
the eyes of the relevant actors.
Subjectivism in economics should not
be confused with subjectivism in philosophy. Philosophy attempts to
discover ultimate truths about reality and the means by which we learn
them. Economics studies the unintended consequences arising from
exchange. Subjectivism in philosophy holds that truth in metaphysics and
the good in ethics are determined by individuals or groups, making these
ultimately arbitrary. Subjectivism in economics means that human choice
is what drives “the economy.” This should be uncontroversial,
but it has been a source of confusion, even among some libertarians.
The major Austrian theorists have
distinguished the hard sciences from the social sciences; they kept
subjectivism in its proper place. Hayek noted:
Not all the disciplines of knowledge which are concerned with
the life of men in groups, however, raise problems which differ in any
important respect from those of the natural sciences. The spread of
contagious diseases is evidently a problem closely connected with the life
of man in society and yet its study has none of the special characteristics
of the social sciences in the narrower sense of the term.
Likewise, Hayek wrote, the
disciplines that focus on heredity, nutrition, demography, and parts of
anthropology also qualify as natural sciences.
The social sciences in the narrower sense, that is, those which used to be
d escribed as the moral sciences, are concerned with man’s
conscious or reflected action, actions where a person can be said to
choose between various courses open to him, and here the situation is
essentially different.
What makes the social sciences
different from other disciplines is that we know the entities “from
the inside.” When we study acting beings, we do so as acting beings.
When we study subatomic particles, atoms, molecules, microbes,
nonhuman animals, planets, and galaxies, we stand apart from the objects
of our study. We may observe, form hypotheses, gather data, conduct tests,
and draw conclusions. But when we study the consequences of human
choice, we can do more. As acting beings we are equipped with a good deal
of knowledge, thanks to introspection.
For Ludwig von Mises, a Kantian in
epistemology, this made the study of human action (praxeology)
“synthetic a priori.” Murray Rothbard, reformulating
Mises’s method through an Aristotelian prism, called the
certainties of human action “broadly empirical” on the
grounds that introspection qualifies as experience. In either case, we can
possess certain undeniable, self-evident truths about human action
precisely because we are acting beings.
Purposeful action
A human being acts to bring about a
state of affairs that he believes he will prefer to the one that would
obtain if he did something else or nothing at all. This uncontroversial
statement contains a wealth of implications.
First, a person’s preference for
that state of affairs and the intensity of that preference are personal
matters, stemming from his particular rich context. “What one
person abandons is often picked up by another,” Menger wrote.
Second, embarking on an action
entails the comparison of unexperienced future states of satisfaction; the
cost of any action is the top-ranked alternative left unchosen. This
opportunity cost is obviously subjective and not observable by anyone. The
actor himself does not know precisely what he gives up in quest of his
chosen objective, since he makes his decision on the basis of
anticipated future states of satisfaction. Considering the
uncertainty of the future, his projections might be mistaken. No one knows
for sure what was down the road not taken.
Third, all action reaches into the
future. Strictly speaking, the consequences of no action are instantaneous.
The delay between action and consequences may be brief, but it exists
nonetheless.
Fourth, the future is uncertain. The
time between act and expected consequences holds the possibility of the
unexpected, which can change the consequences or nullify them entirely. In
Human Action Mises quotes the adage, “There’s
many a slip ’twixt cup and lip.” At any moment, a
person’s knowledge is incomplete, and the gaps leave his plans open
to being thwarted. With different or fuller knowledge, he might have
chosen differently.
All of this has clear application to
the stock market. Fallible people buy stock in a company in anticipation of
future gains superior to what they might obtain in other ways. They do so
on the basis of expectations about the company, what they guess other
people’s expectations are, and other considerations, for example,
interest rates and government policy.
A change in any of the elements can
change an investor’s outlook on the future and prompt him to adjust
his course. Thus if the release of a rising consumer price index summons
fears of a Federal Reserve hike in an interest rate, the investor may
revise his plans and sell his shares in a particular company.
Or if a high-tech company is
threatened with dismemberment by a judge after an antitrust conviction,
the investor, fearing the consequences for the high-tech sector and
perhaps more antitrust action, may dump his high-tech stocks and turn to
more traditional companies.
Many investors may read these events
in essentially the same way, creating a bear market. The beginning of a
downturn can stimulate others to sell also.
On the other hand, investors with
optimistic expectations may mitigate or offset the effects created by
pessimists.
The upshot is that the stock market
and what is said about it are not a science in the “hard” sense
of the word. The market depends on the necessarily imperfect judgment of
human beings. When cable TV commentators scoff that a company is worth
only what people think it’s worth, they are right, of course; but
they mistakenly imply that there is a better way to make such
determinations. There is no better way. Any other method would turn the
market process from the course it naturally follows: serving consumers.
In a market economy consumers
endow objects with value, then, following Menger’s key principle,
value flows from those objects back to the factors of their production. A
factor has value only insofar as it contributes to the production of things
that consumers value.
This is true no matter how remote
from the final product a factor may be. There is no other source from
which a factor can derive value. The value of a corporation’s shares
depends on that corporation’s ability to produce goods or services
that satisfy consumers. If anything, internal or external, prompts
investors to doubt that ability, the stock price will soon reflect that
doubt.
When it comes to causes of distress,
people always want to know, “What can the government do?”
Here’s what it can do: it can stop creating uncertainty. The world is
uncertain enough. The last thing we need is fiscal, monetary, and
regulatory authorities with fluid policies. One of the virtues of a regime
of property rights is that it eliminates most, if not all, policy fluidity and
discretion at the macroeconomic level. This is yet another reason for
abolition of the income tax, full deregulation, and the privatization of
money.
Mr. Richman is senior fellow at The Future of Freedom
Foundation and editor of Ideas on Liberty (published by The
Foundation for Economic Education).
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