The Fatal Conceit

Why are there are more of us humans now than 100, 300 or 10,000 years ago?

Some reasons are external and beyond our control.  For example, we benefited from the Earth not having collisions with large asteroids or comets recently.

Other reasons are in our control.  It’s those reasons that F.A. Hayek writes about in his book, The Fatal Conceit.

In the book, he explores the idea that over time, through many trials and errors, humans discovered ways of interacting with one another that result in more of us.  Those ways of interaction that produce more of us aren’t necessarily right or wrong and were not developed by design.  They just happen to work or not.

We naturally use those ways in our daily interactions.  Why did you give a friendly wave to the driver that let you merge into traffic?  Why did you stop at the stop sign?  Why did you pay for the coffee?  Why did the coffee shop sell it?  Why did you leave a tip for the waitress?  Why did you not take the tip that was still on the table from the previous customers?

We know those interactions as law, tradition, social norms, human rights, beliefs, etiquette, prudence, respect, benevolence, propriety and property rights.  These interactions evolve over time based on what works and what doesn’t.  We each learn these standards from trial and error and socialization with older generations and sometimes we contribute to their evolution when we try something different and it works.

Those ways of interacting have allowed each of us to live a more prosperous life as we benefit every minute of every day from voluntary actions of an extended order — or a large number of people we don’t know, haven’t met and may never in our life time see.

Hayek’s Fatal Conceit is the belief by some that a small group can design and control the evolution of this thick and ancient web of human interactions to achieve intended consequences, without incurring negative unintended consequences.

The fatal conceit is why a politically and economically centralized Rome died out and centralized companies die off.

I recommend reading Hayek’s The Fatal Conceit.



Who controls the capital?

As I wrote here, this isn’t a blog about Ronald Reagan.  It’s a blog inspired by a quote from Reagan.

But, chapter seven in F.A. Hayek’s The Fatal Conceit, entitled Our Poisoned Language, reminded me of my second favorite quote from Reagan (my first favorite is at the top of this page).

All systems are capitalist.  It’s just a matter of who owns and controls the capital – ancient king, dictator or private individual.

I try to avoid discussion about whether society is socialist, capitalist, communist, fascist or some other common label.  I find those discussions to be unproductive red herrings that avoid getting to the root of the matter.  Each word has textbook definitions and also has much baggage attached.  I find that most discussions about these terms equivocate between the text book definitions and the baggage and rarely apply exactly to any specific group of people.

In his quote, Reagan drops the textbook definition of capitalism and all its baggage to get to the heart of what truly differentiates large groups of people that form political economies — who owns and controls the capital.

In chapter seven of The Fatal Conceit, Hayek explains that the words we use to describe the actions of individuals interacting with each other, words like markets or society, give the impression that these groups of individuals are something they are not — a single unit with a centralized mind or central goal.  And this gives rise to some people using that image to convince others that this single unit should have their overall goals.

Steven Landsburg expressed this idea well in his book The Big Questions, which I quoted here, by explaining that folks  imagine that organizing an economy is like organizing a birthday party, which it is not.

Here’s Hayek’s words to explain the phenomenon (p. 113):

Thus the word ‘society’ has become a convenient label denoting almost any group of people, a group about whose structure or reason for coherence nothing need be known — a makeshift phrase people resort to when they do not quite know what they are talking about.  Apparently a people, a nation, a population, a company, an association, a group, a horde, a band, a tribe, the members of a race, of a religion, sport, entertainment, and inhabitants of any particular place, all are, or constitute societies.

To call by the same name such completely different formations as the companionship of individuals in constant personal contact and the structure formed by millions who are connected only by signals resulting from long and infinitely ramified chains of trade is not only factually misleading but also almost always to model this extended order on the intimate fellowship for which our emotions long.

The crucial difference overlooked in this confusion is that the small group can be led in its activities by agreed aims or the will of its members, while the extended order that is also a ‘society’ is formed into a concordant structure by its members’ observance of similar rules of conduct is the pursuit of different individual perspectives.

Darwinian Common Law

Last week I had a discussion with Ed Darrel about law.   In response to the Supreme Court Justice Oliver Wendell Holmes’ quote that his job is not to do justice, but apply the law, Ed wrote:

…in western law, we have given judges the ability to apply justice where the law fails — which is, by the way, where we get common law.

I asked by whose judgment do we determine when the law fails.  Ed responded:

We use the judge’s judgement.

I should have pointed out that the parties in dispute determine when law fails.  When they cannot reach an agreement privately, they then may decide to bring their dispute to court to be settled by a judge.

I then confused the term ‘common law’ with law when I wrote that I believe ‘common law’ emerges from custom. Ed wrote:

Common law is judge-made law, not custom…

I agree that judges codify common law through their judgments in court cases.  However, I still contend the true source of common law is custom or evolved social norms.

The view that law, in general, emerges from evolved human interactions is that of economist F.A. Hayek and others.  Don Boudreaux (an economist with a law degree) does a great job of laying out his own Hayek-inspired emergent order view of law in the video I linked to in this post.  At the 20 minute mark, Boudreaux defines law as:

Law is socially imposed constraints on behavior, that emerge from everyday, ordinary human behaviors, and that become embedded in widespread expectations.

When deciding a case that will become a part of common law, judges try to make sensible decisions.  How do they do that?

They listen to the arguments from both sides, consider the judgments on similar prior cases, refer to social norms as a guide among other things.  But the key is that evolved social norms weigh heavily on judgments that will set precedents for future similar cases.

In this interview with Richard Posner, regarding his book How Judges Think, Posner said (emphasis added):

American judges operate in a setting of extreme uncertainty, which forces them to exercise an uncomfortably large amount of discretion, casting them often in the role of de facto legislators. They are reluctant to admit that they are (as I call them in the book) “occasional legislators,” and have been skillful in concealing the fact from the public, being abetted in this regard by the legal profession, which has an interest in depicting the law as a domain of sophisticated reasoning rather than, to a considerable extent, of politics, intuition, and emotion. The secrecy of judicial deliberations is an example of the tactics used by the judiciary to conceal the extent to which such deliberations resemble those of ordinary people attempting to resolve disputes in circumstances of uncertainty. The concealment feeds a mystique of professionalism that strengthens the judiciary in its competition for power with the executive and legislative branches of government, the branches that judges like to call “political” in asserted contradistinction to the judicial branch.

What do ordinary people do when attempting to resolve disputes?  They heavily consider what is customary.

It’s not always perfect.  None of us perfectly adhere to social norms.  Sometimes we modify existing norms which might result in a new norm.  That’s what makes it an evolutionary process.  And one of our evolved social norms is when we cannot settle a dispute on our own, we seek the help of a third party.  Sometimes those are judges.

Maybe a better way to make the point of norm-based common law would be to ask this question:

What do you think might happen if judges made arbitrary decisions that had no basis in social norms and customs?

I don’t think it’s a stretch to imagine that judges and the legal system would quickly lose credibility with the people.  We might even see the rise of alternative dispute resolution methods, like private arbitration (hmmm…).

All I can say is that I for one feel more comfortable with judges who agree with Oliver Wendell Holmes on the matter.  Especially in cases where codified law fails (or doesn’t exist), I’d much prefer a judge who thinks his role is to discover the existing non-codified law that is “embedded in widespread expectations” than the judge who thinks he can make it up as he goes.

Macro economics is like magic? Close to it.

F.A. Hayek regarding the ‘Austrian School’ of economics, from The Fatal Conceit (p. 98):

By its stress on what it called the ‘subjective’ nature of economic values it produced a new paradigm for explaining structures arising without design from human interaction.

By “subjective” Hayek means that the value of the things we trade — the morning newspaper, a Coke, a haircut — is determined subjectively by each of us.

By “structure”, I believe Hayek means a system of prices by which a potato’s price becomes relative to how much time it takes you to earn enough to buy it.

All of the prices reflect the subjective values we all place on these items and these prices are discovered through the experience of human interaction and trading these things, not by anyone setting the price.

I’m reminded of an example in Russ Roberts’ The Price of Everything, when the econ professor Ruth asked who set the price of a home she plans to sell.  The seller, answered her students.  Ruth responds, so if I have a house that’s in a neighborhood where like houses normally sell for $800,000, I can set the price for $1.2 million and expect to get that price?  Who really sets the price?  Nobody.

Hayek continues:

Yet, during the last forty years, its [the Austrian school] contributions have been obscured by the rise of ‘macro-economics’, which seeks causal connections between hypothetically measurable entities or statistical aggregates.  These may sometimes, I concede, indicate some vague probabilities, but they certainly do not explain the processes involved in generating them.

Here’s the good part (emphasis added):

But because of the delusion that macro-economics is both viable and useful (a delusion encouraged by its extensive use of mathematics which must always impress politicians lacking any mathematics education, and which is really the nearest thing to the practice of magic that occurs among professional economists) many opinions ruling contemporary government and politics are still based on naive explanations of such economic phenomena as value and prices, explanations that vainly endeavour to account for them as ‘objective’ occurrences independent of human knowledge and aims.  Such explanations cannot interpret the function or appreciate the indispensability of trading and markets for coordinating the productive efforts of large numbers of people.

In other words, macro-economics is really the use of math to relate things that may not really exist.  This is a hard one for people to accept.  After all, GDP is GDP isn’t it?  It’s real?  Those statisticians and economists know what they’re doing, don’t they?

What’s real are the trades between you and others.  What’s real is the thought processes that went your mind that led you to make those trades, as well as the thought processes that went through the minds of your trading partners.

GDP is not real.  The thought processes exist somewhere — in our minds.  GDP is a number printed on a page.  What that number means doesn’t exist anywhere.