DRI-192 for week of 6-7-15: Adding Entrepreneurship to Economics Makes ‘Disruptive’ Innovations Coordinative

An Access Advertising EconBrief:

Adding Entrepreneurship to Economics Makes ‘Disruptive’ Innovations Coordinative

Journalism pretends to be an objective profession. In reality, it is a subjective business. The subjective component derives from the normal limitations nature places on human perception; journalists may aspire to Olympian standards of accuracy and detachment, but they labor under the same biases as everybody else. The need to make a profit causes journalistic enterprises to cater to intellectual fads and fashions just as haute couture does when selling clothes.

The trendy business buzzword these days is “disruptive.” Ever since the Internet began revolutionizing life on the planet, technology has been occupying a bigger part of our lives. Somebody started saying “disruptive” to define new businesses that seemed to usher in noticeable changes in the status quo. When it comes to vocabulary, journalists imitate each other like parrots and chatter like magpies. Now slick magazines, websites and blogs are crawling with articles like “The 10 Most Disruptive Technologies/50 Most Disruptive Firms,” “How to Identify the Next Big Disruptive Technology” and “Which Sector Needs Disrupting the Most?”

It isn’t hard to identify disruptive firms; just picture the firms that have garnered the biggest and most recurring headlines – Apple, Amazon, Uber, Lyft, Airbnb, SpaceX and such. Our job here is to ascertain whether a systematic logic unites the success of these firms and whether the term “disruptive” is economically descriptive – or not. Business writers often associate disruptive technologies with economist Joseph Schumpeter, whose work we examined in last week’s EconBrief.

This association is understandable, but unfortunate. Schumpeter’s linking of entrepreneurial progress and capitalism with technological innovation is not the general case, but only a special case. That is, it is only a small part of the reason why capitalism has been so successful. Schumpeter’s view of the forest was obscured by a few redwoods, figuratively speaking. Even worse, the term “disruptive” – like Schumpeter’s famous phrase “creative destruction” – conveys an utterly misleading impression about the impact of entrepreneurial progress and technological innovation under capitalism.

Journalists and business analysts were right in looking to economics for an understanding of technological innovation. And, as we saw last week, they certainly didn’t get much help from traditional economic theory. But they picked the wrong maverick economist to consult.

A Brief Review 

Our previous EconBrief identified a serious lacuna in economic theory. No, make that multiple lacunae – certain simplifying assumptions that have alienated academic economics from reality. The pervasive use of high-level mathematics and statistical testing encouraged these assumptions because they kept economic theory tractable. Without them, economic models would not have been spare and abstract enough for mathematical and statistical purposes. In effect, the economics profession has chosen theoretical models useful for its own professional advancement but well-nigh useless for the practical benefit of the general public.

Evidence of this is supplied by the traditional indifference to entrepreneurship and innovation shown by mainstream theorists and textbooks. For contrast, we analyzed two striking exceptions to this pattern: the ideas of Joseph Schumpeter and F. A. Hayek. Schumpeter was contemptuous of the mainstream obsession with perfectly competitive equilibrium. He believed that economic development under capitalism was accomplished by a process of “creative destruction.” This did not involve small, incremental increases in output and decreases in price by perfectly competitive firms, each one of which had insignificant shares of its market. Instead, Schumpeter envisioned competition as a life-and-death struggle between large monopoly firms, each producing new products that replaced existing goods and improved consumer welfare by leaps and bounds. “Creative destruction” was a hugely disruptive process, a wholesale overturning of the status quo.

Hayek criticized mainstream theory just as strongly, but from a different angle. Hayek maintained that mainstream, textbook economic theory started out by assuming the things it should be explaining. Where did consumers and producers get the “perfect information” that traditional theory assumed was “given” to them? In effect, Hayek grumbled, it was “given” to them by the economists in their textbooks, not actually given in reality. He had the same complaint about product quality, an issue traditional theory assumed away by treating goods as homogeneous in nature. The trouble is that the vast quantity of information needed by consumers and producers isn’t available in one place; it is dispersed in fragmentary form inside billions of human brains. Only the price system, operating via a functioning free-market system, can collate and transmit this information to all market participants.

Hayek saw the true nature of equilibrium differently than did mainstream economists. The latter took their cue from mathematical economists such as 19th-century pioneer Leon Walras, who formulated equations for supply and demand curves and solved them algebraically to derive an equilibrium at which the quantity demanded and quantity supplied were equal. To Hayek, equilibrium meant that the plans human beings make in the course of living daily life turn out to be compatible, not chaotically inconsistent. That is the true Economic Problem – how to collect and transmit the dispersed information necessary to market functioning among billions of people in order to allow their plans to be mutually compatible.

Entrepreneurship – the Engine of Capitalism

Hayek’s work opened the door to an understanding of capitalism. We had long known that capitalism worked and socialism failed. But we could not supply a nuts-and-bolts, nitty-gritty explanation for why and how this was so. Theory is given little importance by the general public, but it is honored in the breach. The lack of a thoroughgoing theory of capitalist superiority has allowed a myth of socialist superiority to survive and even thrive despite the utter failure of socialism to prosper in practice. A disciple of Hayek and Hayek’s mentor, Ludwig von Mises, utilized the intellectual capital created by his teachers to complete their work.

Israel Kirzner was taught at New York University by Ludwig von Mises. His dissertation became an intermediate textbook on price theory, The Economic Point of View. In 1973, Kirzner synthesized the ideas of Mises and Hayek in a book called Competition and Entrepreneurship. For the first time, we had an explicit justification and explanation of the vital role played by the entrepreneur in economic life.

Heretofore, the entrepreneur had been the mystery figure of economic theory, akin to the Abominable Snowman or Bigfoot. To some, he was simply the organizer of production. To others, he was a salesman or promoter. To Schumpeter, he was an innovator who created new products using the lever of technology. Israel Kirzner took a completely different tack.

The keynote in Kirzner’s view of the entrepreneur is alertness to opportunity within a market framework. As a first approximation, the entrepreneur’s attention is fixed upon the price system. He or she is constantly searching for “value discrepancies;” that is, differences between the price(s) of input(s) and output. For example, he may observe that a, b and c can combine in production to produce D. The price of amounts of a, b and c sufficient to produce one unit of D is $5, while the entrepreneur sees (or envisions) that D will sell for $10. This act of intellectual visualization itself is what constitutes entrepreneurship in Israel Kirzner’s theory. Acting upon entrepreneurial observation requires productive activity.

There is a family resemblance between Kirzner’s concept of entrepreneurship and what is often termed “arbitrage.” But the two are far from identical. Arbitrage is loosely defined as buying and selling in different markets to profit from price differentials. Often, the same good is purchased and sold – simultaneously if possible – to reduce or even eliminate any risk of financial loss. Kirznerian entrepreneurship is far more comprehensive. Different goods may be involved, purchases need not be simultaneous or even close to it; indeed, markets for some of the goods or inputs involved may not even exist at the point of visualization! The entrepreneur may be contemplating the introduction of an entirely new good, a la Schumpeter. At the other extreme, the entrepreneur may be hoping to profit from the smallest price discrepancy in the most homogeneous good, as banks or traders do when they arbitrage away tiny price differences in stocks, bonds or foreign currencies in different exchanges.

In fact, the entrepreneur need not even be a producer or a seller at all. Consumers can and do engage in entrepreneurial activity all the time. Consumers clip and redeem coupons. They scan newspapers and online ads for sales and comparative prices. This activity is analytically indistinguishable from the activity of producers, Kirzner claims, because in both cases there is a net increase in value derived by consumers – and consumption is the end-in-view behind all economic activity.

The Consumer as Entrepreneur – A Case Study

In 1965, Samuel Rubin and a few friends were dismayed by the vanishing interest in, and availability of, silent movies. They held a small film festival for silent-movie enthusiasts and created the Society for Cinephiles. This gathering became the first classic-movie film festival. Fifty years later, Cinecon remains the oldest and most respected of this now-worldwide genre. Three years later, Steven Haynes, John Baker and John Stingley hosted a small gathering for classic-movie lovers in Columbus, Ohio. This year, Mr. Haynes died after planning the 47th meeting of the Cinevent festival, which annually attracts a few hundred dedicated lovers of silent and studio-system-era movies. In 1980, classic-movie fanatic Phil Serling began the Cinefest gathering in Syracuse, New York with a few close friends. 2015 marked the final meeting of this festival, which attracted attendees from around the world. Today the San Francisco Silent Film Festival is a headline-making event featuring the latest newly found and restored rarities.

This genre of classic-movie worship was begun by consumers, not by profit-motivated producers. But these consumers nevertheless were alert to opportunity – the discrepancy in value between the movies currently available for viewing and those of the past. Prior to the digital age, older movies (particularly silent movies) were seldom screened and hard to view. Moreover, they were disintegrating rapidly and dangerous to maintain because of the fire-danger posed by nitrate film stock. Yet thanks to the efforts of these pioneering consumers, today we have multiple television channels exclusively, primarily or secondarily devoted to showing classic films, including silent movies. Turner Classic Movies (TCM) leads the way, while the Fox Channel is close behind. Over twenty thousand people attend the Turner Classic Movies Festival in Hollywood every year and TCM’s annual cruise and other promotions attract thousands more. Film preservation is a major endeavor, with new discoveries of heretofore “lost” movies occurring every year. Classic movies is big business, thanks to the dispersed entrepreneurship efforts of the scattered but determined few decades ago. The small net gains in value experienced by the silent-movie lovers in 1965 multiplied millions-fold into the consumption gains of millions worldwide today on television and in person.

Schumpeter Vs. Hayek/Kirzner: Away from Equilibrium or Towards It?

Contemporary business analysts take an ambivalent attitude toward innovation and entrepreneurship. They give lip service toward its benefits – new products and services, the benefits reaped by consumers. But they imply in no uncertain terms that these benefits carry a terrible price. Terms like “creative destruction,” with heavy emphasis placed on the second word, directly state that there is a tradeoff between consumer gains and destructive loss suffered by workers, owners of businesses driven into insolvency and even members of the general public who lose non-human resources that are somehow vaporized by the awesome power of technology. Instead of stressing the labor-saving properties of technology, commentators are more apt to refer to labor-killing innovations. No wonder, then, that journalists have turned to Schumpeter, whose apocalyptic view of capitalism was that its superior productivity would ultimately prove its undoing. With friends like Schumpeter, capitalism has grown ever more defenseless against its enemies.

Schumpeter believed that entrepreneurial innovation was both creative and destructive – creative because its products were new, destructive because they completely supplanted the replaced competing products, driving their competition from the field. In the technical sense, then, Schumpeter saw entrepreneurs as a dysequilibrating force, spearheading a movement away from one stable equilibrium position to a different one. Schumpeter himself recognized that, in practice and unlike the blackboard transitions that academic economists effect in the blink of an eye, these movements would often be wrenching. But the analysis of Kirzner, using the framework built by Hayek and Mises, leads to different conclusions.

Kirzner acknowledged the validity of Schumpeter’s form of entrepreneurship. But he recognized that it was only the exceptional case. The garden variety, everyday forms of entrepreneurship – practiced by consumers as well as producers – produce movements toward equilibrium, not away from it. This is true for two reasons. First, entrepreneurship does not lead away from equilibrium because the traditional concept of equilibrium is a myth; reality changes far too quickly for actual equilibrium ever to be reached, let alone be maintained. Second, entrepreneurship leads toward equilibrium because it enables human beings to better coordinate their plans by allowing a more efficient exchange of information. Hayek objected to the traditional economic assumption of “perfect information” because he claimed that this assumed the existence of equilibrium at the outset. Kirzner’s theory of entrepreneurship tells us that the so-called “disruptive” businesses of today are pushing us closer and closer to that condition of perfect information – which means we are getting closer and closer to perfectly coordinated equilibrium. Of course, we never reach this blissful state, but capitalism keeps us steadily on the move in the right direction.

What is Google, with its search-engine technology, if not the search for the economist’s informational Shangri-La of perfect information? Wikipedia, a user-created encyclopedia, is the archetype of Hayek’s model of a world in which information exists in dispersed, fragmentary form that is unified by a voluntary, beneficial market. Facebook has become a colossus by making it easy for people to provide information about themselves to others – and in the process become a kind of worldwide clearinghouse for information of all kinds. Pinterest has narrowed this same type of focus to photos, but the key is still information. Newer technology businesses like Crowd Strike, specializing in cyber intelligence and security, and the Chinese company Tencent, with its emphasis on mobile advertising, are also informational in character.

In each of these cases, entrepreneurs were alert to the market opportunities opened by technology and signaled by the low prices ushered in by the digital age. The entrepreneurial character of some of these businesses has baffled the business establishment because it has not emulated the conventional, profit-seeking model. That is usually because the initial entrepreneurs have been consumers striving to create value for their own direct use. Only later have they realized the potential for exporting the value surplus created to the rest of the world. This looks outré to most observers but it is fully consistent with Israel Kirzner’s theory of entrepreneurship.

Another of the unrealistic simplifying assumptions deplored by Hayek was “costless” transactions, particularly entry, exit and determination of product quality. This was another case of economists assuming what they should be proving, or at least investigating; it started out by assuming equilibrium and skipped the market process necessary to produce – or, more realistically, approach – an eventual equilibrium. The technological innovations of the last two decades that weren’t information in character were mostly directed at reducing various costs, either natural or man-made costs.

The Internet itself is a mammoth exercise in reducing the costs of transport and communication. Instead of calling in the telephone, we can now send an e-mail. By inventing smartphones, Apple has one-upped the Internet and desktop computers by making this communication mobile. In between these two inventions, of course, came cell phones – invented decades earlier but made practical when Moore’s Law eventually shrank them to pocket size. The shocking thing is how little economics had to say about any of these revolutionary human innovations – because traditional economic theory had long assumed zero transport and transactions costs. Why concern yourself with an innovation when your theory says there is no need for it in the first place?

The development of cell phones was held back for years by government regulation of telecommunications, which fought tooth and claw to prevent competition between phone companies and innovation by monopoly providers. In formal logic, the effect of government regulation is best envisioned as equivalent to the effect of a mountain range or an ocean on transportation. Alternatively, think of costs as being like taxes. Transport costs are “levied” by nature, while taxes are levied by governments. Transactions costs may be either natural or man-made. And a review of recent “disruptive” businesses shows many designed specifically to overcome either natural or man-made costs.

The entrepreneurs of Uber and Lyft observed the artificially high taxi fares created by local-government regulation in the U.S. and elsewhere in the world. They envisioned lower prices and faster response-times resulting from assembling a voluntary workforce of casual drivers and independent professionals, operating free from the stranglehold of regulation. Airbnb looked at the rental market for habitation and saw the potential for achieving the same kind of economies by enlisting owners as vendors. Jeff Bezos of Amazon envisioned consumers freed from the shackles of traveling to retail stores and a supplier with transport costs lowered by economies of scale. The result has shaken the world of retail sales to its foundations. (We should note that this combines the lowering of natural transport costs and the lowering of artificial man-made sales taxes.) Driverless cars threaten an even bigger revolution in the world of transportation by overcoming the costs of human error and accidents – if they can overcome the “tax” of government regulation to achieve liftoff. Body sensors are a revolutionary innovation triggered by the consumer desire to overcome high medical costs of maintaining good health, which are an artifact of regulation. The new website Open Bazaar dubs itself “a decentralized peer-to-peer marketplace” whose goal “is to give everyone in the world the ability to directly engage in trade with each other.” In other words, it is dedicated to reducing transactions costs to the irreducible minimum.

Once again, these cost-based innovations are entrepreneur-driven. Again, some of them were pioneered by consumers rather than by the corporate or venture-capital establishment. This is exactly what we would expect, given the theory developed by Israel Kirzner.

Monopoly or Competition? 

Schumpeter believed that true progress came from monopoly, not competition. He meant monopoly in the effective, substantial sense, not merely the formalistic sense of a transitory market hegemony enjoyed by the innovator. Events have clearly proven Schumpeter wrong. It is hard to find a case today that would correspond to Schumpeter’s archetype; instead, the initial innovator has been superseded by somebody else. Market leadership has been the result of performance, not entry barriers or patents or government pull. And the innovators themselves have often been “nobodies” rather than monopolists boasting war chests heavy with monopoly profits.

Pattern Prediction

In 1929, Ludwig von Mises predicted a “great crash” and refused to take a position in the Austrian government for fear of association with the economic downturn he anticipated. F.A. Hayek predicted a sharp recession, pursuant to the business-cycle theory he had recently developed. Later, Hayek predicted the failure of Keynesian counter-cyclical fiscal and monetary policies and the high worldwide inflation of the 1970s, coupled with the recession that followed measured taken to break the inflation.

In general, Hayek did not believe that accurate quantitative prediction of economic events was possible. At most, he felt, economic theory could offer “pattern predictions” of a more general nature. His own statements, both in economics and political philosophy, tended to support this approach.

Israel Kirzner did not “predict” the advent of the Internet or the invention of the smartphone. But the technological revolution and the businesses spearheading it conformed to the general pattern of entrepreneurship outlined in Israel Kirzner’s theory. In this sense, while this revolution came as a complete surprise to the mainstream economics profession, it can hardly have surprised Kirzner. The revolution was led by people behaving just as Kirzner hypothesized that entrepreneurs do behave.

Can the Status Quo be “Disruptive?”

Based on our analysis and Israel Kirzner’s theory of entrepreneurship, the business buzzword “disruptive” is misleading when applied to the cutting-edge firms and technologies of today. It is indeed true that these technologies overturn the status quo. But the status quo is hindering human progress and preventing attainment of true economic equilibrium; it is hurting people rather than helping them. If transport costs or transaction costs or taxes or regulation are hurting people – and helping at most only a minority vested interest in the process – then changing the status quo is the indicated action. “Stability” is not always good. After all, Stalin’s Soviet Union was stable. Fortunately, the Soviet Union later collapsed when that stability disintegrated.

As Israel Kirzner himself has always maintained, economics is all about making people better off. When this criterion is placed foremost, discarding the pure formalism of mainstream theory, is becomes clear that Mises, Hayek and Kirzner were right and Schumpeter was wrong. Entrepreneurship is equilibrating because it tends to better coordinate the plans made by individual human beings.

The process by which Nobel Prizes are awarded is highly secretive. The Nobel committee keeps their candidate “cards” close to their vests. Rumors have circulated, however, placing Israel Kirzner’s name on the short list of potential awardees. No man alive has done more than he to redeem the tarnished prestige of economics as a subject worth studying for its practical value to humanity.

DRI-309 for week of 8-25-13: What Does ‘Social’ Mean Today?

An Access Advertising EconBrief:

What Does ‘Social’ Mean Today?

For decades, European political parties have rallied around the banner of “social democracy.” Today, Catholic churches throughout the world solemnly urge their congregants to work for “social justice.” Businesses have long been advised to practice “social responsibility.” Certain investment funds are now organized around the principle of “social investing.” Celebrities advertise the possession of a finely honed “social conscience.”

The rhetorical weight carried by the word “social” has never been heavier. Judging by this, one would suppose that the adjective’s meaning is well-defined and universally understood. Assuming that to be so, it should be relatively easy to explain its meanings above, as well as many other similar ones.

That turns out to be far from true. A great economist and social theorist called “social” the great “weasel word” of our time. In the words of the old popular song, how long has this been going on?

Well over two hundred years, believe it or not. The great English philosopher Lord Action accurately observed that, “Few discoveries are more irritating than those which expose the pedigree of ideas.” Those people who invoke the word “social” as a holy sacrament will be outraged to learn its pedigree. For the rest of us, though, the knowledge should prove illuminating.

“What is Social?”
One man above all others made it his business to learn the history and meaning of the word “social.” F.A. Hayek was a leading European economist before World War II, and among his friends were the Freiburg School of German economists who styled themselves the “Soziate Marktwirtschaft” or “Social Market” economists. Why, Hayek wondered, didn’t they simply call themselves “free-market” economists? What magic did the word “social” weave to gain precedence over the idea of freedom?

Over the years, Hayek morphed from world-class economist to world-renowned social philosopher. His fascination with the rhetorical preeminence of “social” eventually produced the article “What Is ‘Social?’ What Does It Mean?” It was published in 1957, then reworked and republished in 1961. In it, Hayek performed feats of semantic archaeology in order to expose the pedigree of “social” in economics and political philosophy.

Hayek’s research produced a scathing assessment. He declared that “the word ‘social’ has become an adjective which robs of its clear meaning every phrase it qualifies and transforms it into a phrase of unlimited elasticity, the implications of which can always be distorted if they are unacceptable, and the use of which…serves merely to conceal the lack of any real agreement between men regarding a formula upon which… they are supposed to be agreed.” It is symptomatic of “an attempt to dress up slogans in a guise acceptable to all tastes.” The word “always confuses and never clarifies;” “pretends to give an answer where no answer exists,” and “is so often used as camouflage for aspirations that have nothing to do with the common interest… .” It has served as a “magical incantation” and used to justify end-runs around traditional morality.

Whew. Can one word that is thrown around so casually and so widely really justify this indictment? Let’s briefly take one example of its usage and try on a few of Hayek’s criticisms for size.

The Example of “Social Justice”
A popular reference source (Wikipedia) has this to say about the concept of “social justice.” “Social justice is justice exercised within a society, particularly as it is applied to and among the various social classes of a society. A socially just society is one based on the principles of equality and solidarity;” it “understands and values human rights as well as recognizing the dignity of every human being.”

The origin of the phrase is ascribed to a Jesuit priest in 1840. It was used to justify the concept of a “living wage” in the late 19th century. The Fascist priest Father Coughlin (curiously, his Fascism goes unremarked by Wikipedia) often employed the term. It became a mainspring of practical Catholic teaching and of the Protestant Social Gospel. Social theorist John Rawls developed a theory of equity intended to give substance to a secular version of social justice.

We can easily locate all of the characteristics identified by Hayek even in this short précis. The definition of “social justice” as “justice exercised within a society” is tautological; this expresses the communal syrup that the word pours over every subject it touches. The “principles of equality and solidarity” sound satisfactorily concrete, but the trouble is that there are no such principles – unless you’re willing to sign off on the notion that everybody is supposed to be equal in all respects. “Solidarity,” of course, is the complementary noun to “social;” each purportedly sanctifies without really saying anything substantial. As such, solidarity became the all-purpose buzzword of the international labor movement. It implies fidelity to an unimpeachable ideal without defining the ideal, just as “social” implies an ideal without defining it.

The reference to “human rights” may well seem obscure to those unfamiliar with the age-old left-wing dichotomy between “property rights” and “human rights” – a false distinction, since all rights are human rights by implication. There may some day be a society that recognizes the dignity of every human being, but the sun has not yet shone on it. Thus, social justice illustrates Hayek’s reference to an underlying lack of agreement masked by a façade of universal accord. The roll call of dubious subscribers to the concept, ranging from Fascists to socialists to left-wing extremists and simplistic activists, dovetails perfectly with a concept of “unlimited elasticity,” which masquerades “in the guise acceptable to all tastes” as a “magical incantation” used to justify dubious means to achieve allegedly noble ends.

The Basic Uses of “Social”
Devotees of the various “social” causes have used the word in certain basic recurring ways. Each of them displays Hayek’s characteristics. We can associate these generic uses with specific “social” causes and government actions.

First, there is the plea for inclusiveness. As originally developed, this had considerable justification. As Hayek admitted, “in the last [19th] century…political discussion and the taking of political decisions were confined to a small upper class.” The appending of “social” was a shorthand way of reminding the upper classes that “they were responsible for the fate of the most numerous and poorest sections of the community.” But the concept “seems somewhat of an anachronism in an age when it is the masses who wield political power.” This is probably the dawn of the well-worn injunction to develop a “social conscience.” We associate the mid-19th century with famous “social” legislation ranging from the end of debtor’s prisons and reform of poor laws to the repeal of the Corn Laws in England.

Second, “social” is a plea to view personal morality abstractly rather than concretely by assigning to it remote consequences as well as immediate ones. For example, traditional ethics implores the businessman to treat his employees and customers fairly by respecting their rights and not hurting them. But “social responsibility” demands that businessmen know, understand and affect the consequences of all their buying decisions as well. They should refuse to buy inputs produced using labor that is paid “too little,” even though this benefits their own customers and workers, because it ostensibly hurts the workers who produce those inputs.

This stands the economic logic of free markets on its head. Businessmen are experts on their own business and the wants of their customers. Free markets allow them to know as little as possible about the input goods they buy because this economizes on information – which is scarce – and on the use of businessmen’s time – which is likewise scarce. But the illogic of “social responsibility” demands that businessmen specialize in learning things it is difficult or impossible for them to know instead of things they normally learn in the course of doing business. This is so absurdly inefficient it is downright crazy; instead of doing what they do best, businessmen are supposed to divert their attention to things they know little about and disregard the value generated by the free market.

The crowning absurdity is that “socially responsibility” expects businessmen to accept on faith the assertions of activists that buying goods produced with low-wage labor hurts the workers who produce those goods. And this is dead wrong, since it does just the opposite – by increasing the demand for the goods labor produces, it increases the marginal product of labor and labor’s wage. The same illogic is sometimes extended even farther to consumers, who are even less well placed to gauge the remote consequences of their personal buying decisions and, thus, are even more at the mercy of the bad economics propounded by “social” theory activists.

Thirdly, “social” theory demands that government also reverse its traditional ethical role by treating individuals concretely rather than abstractly. The traditional Rule of Law requires government to judge individuals by abstract rules of justice – and that the same abstract rules apply to all individuals. But “social justice” requires government to judge individuals according to their respective merits, which requires treating different individuals by different rules; e.g., repealing the traditional Rule of Law. Contemporary examples of this repeal abound: affirmative action, bailouts for firms adjudged “too big to fail,” eminent domain for the benefit of private business, augmented rights granted to certain politically identifiable groups while basic rights are denied to others, and on and on, ad nauseum.

Finally, “social” theory clearly implies the upsetting of traditional morality by the substitution of “social” criteria for traditional moral criteria. Although it seems superficially that traditional moral criteria are without rational foundation, this is misleading. In fact, those criteria evolved over thousands of years because they were conducive to a successful order within humanity. As the Spanish philosopher Ortega y Gasset reminds us, “order is not a pressure imposed on society from without, but an equilibrium which is set up from within.” The word “equilibrium” implies the existence of change which culminates in a new, improved order. Social evolution is thus comparable to economic equilibrium, in which new goods and services are subject to a market test and accepted or rejected. Surviving moral criteria are abstract rules that may not benefit every single individual in every single case but that have demonstrated powerful survival value for humanity over thousands of years. And these rules are subject to a powerful evolutionary test over time.

In contrast, “social” theory substitutes the concrete, ad hoc rules adapted to each situation by self-appointed social theorists. These self-appointed experts reject free competition in both economics and political philosophy; thus, these social theories do not receive the same rigorous evolutionary tests that vetted traditional morality.

Both the impersonal workings of the free economic market and the abstract, impersonal workings of the “market” for morality and social philosophy seem to be harsh because there is no inherent spokesman or advocate to explain their operation to the public. Economists have failed to perform this task for free markets, while the influence of moral arbiters like clergymen and philosophers has waned in recent decades. The plans of “social” theorists appear to be kind because they are designed with appearance in mind rather than to actually attain the results they advertise.

Corollaries to the Uses of “Social”
Certain corollary effects of these uses are implied and have, in fact, emerged. When the appeal to the communal of “social” effects of our actions predominates over our personal actions, our personal responsibility for our own lives and welfare erodes. And sure enough, the widespread reluctance to take responsibility for individual actions is palpable. Why should we take responsibility for saving when the federal government takes our money by force for the ostensible purpose of saving and investing it for our individual retirement uses? Thus does saving decline, asymptotically approaching zero. Why should we accept responsibility for our own errors when we are forced to take responsibility for the errors of others by taxation, criminal justice, economic policy and a host of other coercive actions by government? Hence the growing tendency to claim universal “rights” to goods and services such as food, health care, housing and more.

The irony is that each of us is the world’s leading expert on our self. “Social” policy forces us to shoulder responsibility for people and things we aren’t, and can never be, expert on, while forswearing responsibility for the one person on whom our expertise is preeminent. In economic terms, this cannot possibly be an efficient way to order a society.

This leads to another important point of information theory. The demands of “social” theory imply that certain select individuals possess talents and information denied to the rabble. These are the people who decide which particular distribution of income or wealth is “socially just, which business actions are or aren’t “socially responsible, what linguistic forms are or aren’t “socially aware,” and so forth.

The elevation of some people above others is practiced predominantly by government. In order to reward people according to merit, government must in principle have knowledge about the particular circumstances of individuals that justify the rewards (or deny them, as the case may be). In practice, of course, government is so distant from most individuals that it cannot begin to possess that kind of knowledge. That is why the concept of group rights has emerged, since it is often possible to identify individual membership in a group. Race, gender, religion, political preference and other group affiliations are among the various identifiers used to justify preferential treatment by government.

The blatant shortcomings of this philosophy have now become manifest to all. One need not be a political philosopher steeped in the Rule of Law to appreciate that envy now plays a pivotal role in politics and government. Rather than concentrate on producing goods and services, people now focus on redistributing real income and wealth in their own favor. This is the inevitable by-product of a “social” theory focused on fairness rather than growth. The laws of economics offer a straightforward path toward growth, but there is no comparably unambiguous theory of fairness that will satisfy the competing claimants of “social” causes.

And once again, the shortcomings of “social” theory as magnified by a further irony. For decades, government welfare programs have been recognized as failures by researchers, the general public and welfare recipients themselves. Only “social theorists,” bureaucrats and politicians still support them. This is bad enough. But even worse, the rejection of free markets by “social” theorists has eliminated the only practical means by which individual merit might be used as the basis for compensatory social action. Although you are the world’s leading expert on you and I am the leading authority on me, you will sometimes gain authoritative information about me. By allowing you to keep your own real income and the freedom to utilize it as you see fit, I am also allowing to conduct your own personal policy of “social justice.” This concept of neighborhood or community charity is one form of tribalism that has persisted for thousands of years because it is clearly efficient and has survival value. Yet it is one of the first victims of government-imposed “social justice.” Bureaucrats resent the competition provided by private charity. Even more, they resent watching money used privately when it could have been siphoned off for their own use.

What is the relation between the adjective “social” and the noun “socialism?” Socialism had roots traceable at least to the Middle Ages, but its formal beginnings go back to the French philosophers Saint-Simon and Comte in the 18th century. It was Saint-Simon who visualized “society” as one single organic unity and longed to organize a nation’s productive activity as if it were one single unified factory.

It is this pretense that defines the essence of socialism and the appeal of its adjectival handmaiden, “social.” Participation in the sanctifying “social” enterprise at once washes the participant clean of sin and cloaks pursuit of personal gain in the guise of altruism and nobility. It makes the participant automatically virtuous and popular and “one with the universe” – well, part of a subset of like-minded people, anyway.

Socialism sputtered to life in 19th-century revolutionary Europe and enjoyed various incarnations throughout the late 19th and 20th centuries. It has failed uniformly, not just in achieving “the principles of equality and solidarity” but in providing goods and services for citizens. Failure was most complete in those polities where the approach to classical socialism was closest. (In this regard, it should be remembered that the Scandinavian welfare states fell far short of Great Britain on the classic socialist criterion of industrial nationalization.) Yet socialism as an ideal still thrives while capitalism, whose historical preeminence is inarguable, languishes in bad odor.

Hayek’s criticisms of “social” explain this paradox. Socialism’s shortcomings are its virtues. Its language encourages instant belief and acceptance. It smoothes over differences, enveloping them in a fog of good feeling and obscurantism. It promises an easy road to salvation, demanding little of the disciple and offering much. Words are valued for their immediate effects, and the immediate effects of “social” are favorable to the user and the hearer. True, it is an obstacle to clear thinking – but when the immediate products of clear thinking are unpalatable, who wants clear thinking, anyway?

“Social” keeps the ideal of socialism alive while burying its reality. As long as “social” prefaces anything except an “ism,” the listener has license to dissociate the adjective from the noun and luxuriate in the visceral associations of the former while ignoring the gruesome history of the latter.

Just One LIttle, Itsy-Bitsy, Teeny-Weenie Word
F.A. Hayek closed his essay on “social” by saying, “it seems to me that a great deal of what today professes to be social is, in the deeper and truer sense of the word, thoroughly and completely anti-social.” Hayek was right that “such a little word not only throws light upon the process of the evolution of ideas and the story of human error, but … also exercises an irrational power which becomes apparent only when… we lay bare its true meaning.”

Who would have dreamed that one word could say so much?