Tuesday, December 9, 2014

The Church and the Market: The Efficiency Argument

The previous article is about praxeology, while the present article covers the next three sections of chapter 1, The Church and the Market: In Defense of Economics. These sections deal with Catholics and Austrian Economics, The Socialist Calculation Problem, and Austria vs. Chicago. The third and fourth sections are actually an elaboration of the efficiency argument started in the second section.

Thomas E. Woods Jr. argues that the Austrian School advocates tenets that are consistent with Catholicism. It emphasizes "a methodology that respects the uniqueness of man as a creature with free will" (p. 19). It also accepts design in nature discoverable through reason. However, it denies "scientism" and the argument that legitimate knowledge can only be obtained through inductive approach. Considering these tenets, Woods thinks that there is nothing in the Austrian School that Catholics would find disagreeable. Therefore, Woods finds it unfortunate to read the works of publishers that claim that the Austrian School teaches economics that is contrary to Catholicism.

Woods picks up John Sharpe as a concrete example of such kind of publishers. In the latter's defense of socialism as consistent to Catholic social teaching, he dismissed the economists of the Austrian school due to their liberal origin and associating "efficiency" with moral perversity. Woods thinks that Sharpe's assessment of the Austrian School has no basis. The man knows nothing, but a superficial knowledge of the Austrian School. As a fellow Catholic, he indirectly advises Sharpe to follow the example of Thomas Aquinas who tried first to understand his critics' arguments before attempting to refute them.

Though Ludwig von Mises charged socialism with inefficiency, this is not the central argument of the Austrian School against socialism. And besides, the quest for efficiency, says Woods is not a mark of moral perversity, but a value. It is simply an expression of faithful stewardship.

For Ludwig von Mises, the insoluble problem of socialism is the impossibility of economic calculation due to the absence of market price. Without the market price, the central planners are running blind in managing the socialist economy that will inevitably result to economic waste, poverty, and chaos. I like to copy here Ludwig von Mises' sharp and ugly description of socialism taken by Woods from Human Action: 

"Socialism cannot be realized because it is beyond human power to establish it as a social system. The choice is between capitalism and chaos. A man who chooses between drinking a glass of milk and a glass of a solution of potassium cyanide does not choose between two beverages; he chooses between life and death. A society that choose between capitalism and socialism does not choose between two social systems; it chooses between social cooperation and the disintegration of society. Socialism is not an alternative to capitalism; it is an alternative to any system under which men can live as human beings. To stress this point is the task of economics as it is the task of biology and chemistry to teach that potassium cyanide is not a nutriment but a deadly poison" (p. 24). 

Mises' critique of socialism, says Woods, goes beyond economic failure; it includes the threat to "the social and moral foundations of society" (p. 24). In Socialism: An Economic and Sociological Analysis, Mises warns that the socialist project does not stop with the abolition of private property; it also aims to alter the relation between genders. As a result, together with the abolition of private property, marriage too will disappear.

After witnessing the inaccuracy of the efficiency argument John Sharpe raised based on the writings of Ludwig von Mises, we now turn to Murray Rothbard. (I intentionally skip the Coase case for I find the explanation difficult to follow). 

Murray Rothbard questioned the concept of efficiency itself in his paper, The Myth of Efficiency. For Woods, the main point of the section, Austria vs. Chicago is that the efficiency question does not characterize the Austrian School, but the Chicago School. Sharpe therefore was mistaken to use it against the Austrians. Woods' perceives that to simply associate Rothbard's view with the efficiency question "is not even close enough . . . . to qualify as a caricature" (p. 27). In fact, for Rothbard, ethics plays a big role in his economic concept. Here's a quote from Rothbard taken by Woods from The Myth of Efficiency:

"I conclude that we cannot decide on public policy, tort law, rights, or liabilities on the basis of efficiencies or minimizing of costs. But if not costs or efficiency, then what? The answer is that only ethical principles can serve as criteria for our decisions. Efficinecy can never serve as the basis for ethics; on the contrary, ethics must be the guide and touchstone for any consideration of efficiency. Ethics is the primary . . . ." (ibid.).

Source: Woods, T. E. Jr. (2005). The Church and the Market: A Catholic Defense of the Free Economy. Lanham/Boulder/New York/Toronto/Oxford: Lexington Books.


This video confirms Ludwig von Mises' analysis of the destructive consequence of socialism beyond private property