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The "economics" of social and political relations.

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Adam Knott Posted: Mon, Feb 18 2013 1:34 PM

This post continues a line of thought introduced by ToxicAssets on another thread ( 

The idea introduced was that of approaching interpersonal or political relationships with an "economic" or praxeological or "cost/benefits" analysis.  TA wrote (emphasis added by AK):

I think the major mistake both Friedman and Rothbard incur is that they downplay the costs of creating the whole framework of contracts that would be necessary in order to achieve their visions of anarchism.

The reason why (political) violence exists is that it is an economic resource. Sometimes it is cheaper for one of the parts involved in a bargain to resort to violent methods than to seek a contract-based solution. All costs considered, included any reputation loss and ethical issues. And when that's the case, there will be aggression.

I'm not saying they ignore this fact. They both discuss it when they introduce the problem of social order. But they both rush to their conclusions that a contract based society is more ethical (Rothbard) or efficient (Friedman), and therefore the way of the future, and start to describe what they see as the ideal version of it.

The problem is that their notions of ethics and efficiency when applied to society as a whole are nonsensical. None of them seem to fully realize that insofar as contractual costs are higher than ammunition costs within certain contexts, political violence will be used as means to achieve ends by those who are able to mobilize enough of it.

Because what govern the decisions people take are the real world technological and institutional environments they are embedded in, and the concrete costs these frameworks impose on their decisions. A good book on this subject is Knowledge and Decisions, by Thomas Sowell, a scholar whose economics is more grounded on reality than ideals.

Friedman and Rothbard may look dissimilar in the surface of their language, but they are actually very similar in their thought process, and very close to other popular fantasyland social scientists that existed in the past.

To which I replied:

This is an excellent point.  In other words, a failure to pursue a serious "economics" of the social order as distinct from an economic analysis of market transactions.  This suggestion was made by Lionel Robbins who was influenced by Mises:

"There is an important sense in which the subject-matter of political science can be conceived to come within the scope of our definition of the economic.  Systems of government, property relationships, and the like, can be conceived as the result of choice.  It is desirable that this conception should be further explored on lines analogous to better known analysis." (An Essay on the Nature & Significance of Economic Science)

This quote is taken from the second edition, published in 1935.  I'm not sure whether it appeared in the first edition of 1932.  The clear suggestion is to treat the choices people make regarding social relations by the same analytical method we use to treat the choices they make in market transactions.

As late as 1962, Mises was aware that while there existed an elaborated body of formal analysis that applied to market phenomena, the same type of analysis had yet to be applied to political phenomena.

"Economics or catallactics, the only branch of the theoretical sciences of human action that has up to now been elaborated...."

"It would be preposterous to assert apodictically that science will never succeed in developing a praxeological aprioristic doctrine of political organization that would place a theoretical science by the side of the purely historical discipline of political science.  All we can say today is that no living man knows how such a science could be constructed."

(both passages from The Ultimate Foundation of Economic Science, 1962)

Thus, it was clear to Mises that what was lacking was an economic (i.e., a praxeological) approach to political and interpersonal social relationships, that would extend the kind of analysis that up to then, had only been applied to market phenomena.

TA then replied:

I believe the reason for this lies in accounting.

Purely economic exchanges are somewhat easy to measure and assess with objectivity. It usually boils down to "somebody gave away A in exchange for B (and, of course, his counterpart gave away B in exchange for A)"

So the science of economics can readily identify many patterns on the data that can be collected through such observations. Say, for instance, the law of diminishing returns or the dynamical relationships between supply and demand. These and many other market patterns are percetible and explainable because we can observe and measure many of the variables involved in their occurence, like prices, costs, stocks, production and transaction volumes and so on. Of course many strategical variables remain concealed and introduce uncertainty, but still much of the action takes place on the open field, therefore allowing for a class of general forecasts which bear some similarities to the predictions of natural sciences (sometimes these similarites are greately overrated, though).

Political bargains are harder to quantify. They are most of the time implicit bargains that do not take place, because one of the "traders" doesn't want to play chicken and get hurt. But nonetheless his behavior is shaped by the likely outcome he perceives from such a situation taking place. 

The chief use of power is the (partial) canceling out of other, potentially threatening, sources of power. This cancelling might take place by domination or destruction, which would allow for objective measures with hard data, but most of the time it takes place by insinuation and demonstration and readiness and other forms of non-transactions hard to evaluate.

This kind of situation is very hard to measure since there is little direct data to be observed. Most of the action is not happening. Most of it consists of self-defeating profecies. Anticipation is the name of the game.

Of course the political strategies can be inferred from reveled decisions taken and not taken by each player, but such analysis cannot be carry on too far without getting too complex.

And you cannot generally engage in large scale political accounting because most of the consequential information is private.

And without objective accounting procedures it is difficult to agree on what's really going on, much less on what are the scientific reasons and explanations for what we're not even sure to be happening.

That's why political science is a much more vague and "unscientific" than economics.

This again is an excellent insight.  What allowed economics to develop as a formal science and what has prevented political science from attaining the same degree of development, is that in the realm of market phenomena there appear to be objectively measurable or objectively observable phenomena (i.e, prices) that exhibit regular fluctuations.  The actions that we take in this realm (purchases, sales, etc.), it appears, are followed by predictable, measurable, and observable price fluctuations.  Cause and effect, and regular patterns, appear to be measurable as prices appear to be objective.

In the interpersonal and political spheres, there is no corresponding objective referent that exhibits observable or measurable fluctuations as the result of actions we perform in these realms.  For example, if I coerce someone or lie to someone (examples of interpersonal or political actions), there are no known observable effects that exhibit regular or predictable fluctuations as the result of these actions.   There are innumerable charts that list purchases made and the resultant prices that fluctuate in response.  But there are no corresponding charts that list lies told or acts of coercion, and any observable referent X that exhibits regular fluctuations in response to these acts of dishonesty or coercion.

This lack of an objective referent, analogous to prices in the realm of economics, is what seems to have prevented or inhibited formal analysis in the interpersonal and political realms of human action.  As TA writes, this is why political science is more vague and "unscientific" than economics.

"It would be preposterous to assert apodictically that science will never succeed in developing a praxeological aprioristic doctrine of political organization..." (Mises, UF, p.98)

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Cool, that's exactly the point I was trying to make.

One analogy I find particularly telling is based on the different games of poker.

There are several varieties of poker, and they are basically distinguished by 2 factors: the ratio of public and private information on each hand and the constraints imposed on betting decisions.

For example, on one extreme you can have a limits Texas Hold'em, where you have up to 5 public cards against 2 private cards, and your betting strategy is limited to calling or raising by fixed amounts, and on the other you have no limits 5 Draw, where all cards are concealed and you can bet everything from a call to an all-in.

The availability of information makes limit Texas Hold'em much easier to tackle through formal analysis of expected outcomes. The implied pot odds are easy to estimate, since pots vary by small amounts, and the probable hands are also easy to evaluate, given the pre and post flop betting patterns of your opponent and the cards that show up on the flop, turn and river.

You can often be sure when you are beaten and when you have the nuts, and the rest of the time you can make fairly reasonable assessments of likely outcomes based on the pot odds, and also you can know before each hand the worst and best case scenario of your bankroll.

All this information is available for everyone and the winner will generally be the player who can make the best judgements based upon this public objective data.

On the other end of the spectrum you have the game of no limits 5 draw, where most information is hidden or partially hidden.

In this game, judgements rely on "subjective" information, such as tells, and purposeful disinformation, such as hand representation. And the historic betting action of each game usually reveals hectic (heavy tailed) statistical patterns.

That's why the academic and technical analysis of both games will be very distinct, and the no-limit Texas Hold'em will look more "scientifically understood" game.

That doesn't mean limits Texas Hold'em is an "easier game". Any competitive game will be as hard as your competitors are good and as chance is a factor. And no-limit concealed information games are much more "chance" driven. 

Anyway, the point is that these poker games can be saw as (much) simplified version of the economic/political games played in the real world. Some of them, like the games played on the "white" markets, are more similar to limits texas hold'em, whereas others, played on "black" markets, have patterns that look more like no-limits draw poker.

Free market economists tend to concentrate on the patterns generated by white markets, since data for these markets is (relatively) easy to acquirte and make quantitative/objective sense of.

But, despite the effort of democratic institutions towards more "transparency", still most of the political consequential actions and transactions take place in the dark. Therefore it is expected that its analysis turns out very speculative and informal, and other types of people are attracted to this.


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Yet another interesting pair to contrast is seismology and meteorology.

Both are concerned with the study and perhaps prediction of large scale events in complex systems.

But meteorology has a considerable advantage over seismology, since it can access a lot of the information about the atmosphere directly. You can look at the clouds, you can measure the winds, temperatures and pressure and use that information to guide your future forecasts.

Seismologists have much less available information about the earths crust. They understand that earthquakes happen when geological faults release stress, but there is no direct way of measuring how much is stress is there at any given moment. The general belief is that the consequential geological events that cause surface seismic episodes are happening several miles underground and there is no way to really know what's happening and to predict an earthquake with confidence.

What they have are statistical models that evaluate the probabilities of an earthquake of a given intensity happening in a given area, based on the historic of earthquakes, but those models cannot do better than give static information, in the same way a climatological model say that the probability of raining in London at any given day is 35%, since during the years it rains one day out of three.

That's not very useful.

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A slightly different way of looking at these four examples (2 types of poker, seismology, meteorology) is that from the point of view of methodological individualism (from the point of view of a given individual actor), each of the four will consist of two general or primary categories:

1.  A given content or set of assumptions from which formal implications may be drawn, or, to which a formal theoretical system may be applied.  The formal system allows predictions (leading to satisfactory results) by transforming the original content or assumption into its formal implications:  e.g.,  Original content is 24, then.... = 12 x 2 = 8 x 3 = 6 x 4.

Hayek suggested this same approach with respect to the relationship between action and the object of action:

From the fact that whenever we interpret human action as in any sense purposive or meaningful, whether we do so in ordinary life or for the purposes of the social sciences, we have to define both the objects of human activity and the different kinds of actions themselves, not in physical terms but in terms of the opinions or intentions of the acting persons, there follow some very important consequences; namely, nothing less than that we can, from the concepts of the objects, analytically conclude something about what the actions will be. If we define an object in terms of a person's attitude toward it, it follows, of course, that the definition of the object implies a statement about the attitude of the person toward the thing. When we say that a person possesses food or money, or that he utters a word, we imply that he knows that the first can be eaten, that the second can be used to buy something with, and that the third can be understood — and perhaps many other things. ("The Facts of the Social Sciences")

The idea is to perform a "tautological transformation" on the given or assumed data.


2.  A "region" that is not perceivable or observable, and which therefore, does not supply a content to which a formal system may be applied (and thus  no satisfactory results attained).  This is best described in these passages by Ivar Ekeland:

Randomness appears because the available information, though accurate, is incomplete.

...if determinism means that the past determines the future, it can only be a property of reality as a whole, of the total cosmos.  As soon as one isolates, from this global reality, a sequence of observations to be described and analyzed, one runs the risk of finding only randomness in that particular projection of the deterministic whole.....Science can only isolate subsystems for study, and set up experimental screens on which to project this inaccessible whole.  Even if reality is deterministic, it may well happen that what we observe in this way is unpredictability and randomness.

From a strictly scientific point of view, there is only one thing we can apply the laws of physics to, and that is the universe.  There is no physical subsystem which we could isolate from the influence of the rest of the cosmos.

Let us just insist that the only object the laws of physics can be applied to with total confidence is the universe as a whole.  It is the only physical system which contains all the information necessary for applying the laws of physics with perfect accuracy.  In theory, a complete and detailed knowledge of the state of the universe today would be necessary to make any predictions about the future, if full scientific rigor is to be observed.  In practice, no such knowledge can be attained or even remotely approached.  What we do is to carve out subsystems, to which we apply the laws of physics as if they [the subsystems] were isolated.  ... We let go of the total deterministic system, which we cannot handle, and confine our observations to narrow subsystems., trying to interpret them independently of the rest.

These subsystems may exhibit randomness, even though the total system is deterministic...

...a purely deterministic law may materialize in a totally random sequence of observations if part of the information is withheld, as it must be in any practical situation.

(Mathematics and the Unexpected, 1988, p. 62-64)

Whenever a given content is isolated in a consciousness, the inescapable corollary is that something else is rendered unobservable, the essential lesson of quantum physics. 

These two categories of consciousness seem to be primary: the category of that which concretely appears, and the category of that which, in relation, is rendered unobservable.  The unobservable part is an essential constituent of the perceived object.  E.g:

I see a person.  What makes him/her a person is that he/she has a mind, which is not observed.

I see a wall.  What makes it a wall is that it has another side, which is not observed.

The part I can see, the "objective" part (the perceptual, sensual, observable, etc.) is either directly satisfactory to me, or, as a given concrete, is subject to interpretation in terms of a formal system, such that I can make predictions with respect to it, thus leading to satisfactory results.

The part I cannot see----the part that is not observable, sensible, perceivable, etc.---is either directly unsatisfactory to me, or, is not graspable in terms of a formal system such that predictions could be made leading to satisfactory results.

The reason the liberty movement identifies itself with the market and the market process, is because the market process is associated with "objective" (i.e., perceivable, sensible, observable) price signals, monetary units, and tangible goods, which are either satisfying to us directly, or, as concrete givens, are objects graspable in terms of formal theoretical systems enabling predictions that lead to satisfactory results.

By contrast, the "command" system of social organization (roughly corresponding to that part of society that is government and not market), we associate (in our own minds) with the minds of those who are to do the commanding.  When we refer to other minds (something unobservable), this act is either dissatisfactory itself, or,  we refer to the unobservable aspect of that which we are currently apprehending (as opposed to the body in front of us), and this aspect is not graspable in terms of a formal system allowing predictions that would lead to satisfactory results. 

In other words, the liberty movement is associated with the market because we consider prices to be objective or observable manifestations of other minds, and the prices, as observable objects, are either directly pleasing (are members of a category of observable objects constituting "satisfaction" in/to our consciousness), or, as concrete given contents, are graspable in terms of a formal system allowing predictions resulting in satisfactory results.

The liberty movement seeks to avoid the command system (integration into society by the commands of others, instead of self-integration guided by observable market signals)  because we associate the command system with other minds.  In our own consciousness, other minds belong to the category of unobservables, and are dissatisfactory for the reasons already stated.



"It would be preposterous to assert apodictically that science will never succeed in developing a praxeological aprioristic doctrine of political organization..." (Mises, UF, p.98)

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I think your post makes interesting points but I fail to understand the whole message.

The whole description of randomness emerging from incomplete information is very accurate.

I don't know if I get what you're saying about defining things by what can't be observed.

I mean, a wall is still a wall if it has a window or if it's made of glass.

And a person is still a person if by any means we happen to know what she's thinking.

But perhaps I'm missing something here...

The link with quantum mechanics seems also unclear.

The uncertainty principle is technically due to the non commutativity of operators we associate with observations.

Quantum mechanics postulates that the distribution of probabilities associated with the state of a system evolves following a diffusion-like equation called Schroedinger equation.

But we can not capture the precise distribution at any given time, we can only observe the eigenvalues associated to the eigenmodes of any given observation operator.

Some magnitudes, like the moment and the position of a particle, are associated with measurement operators that do not commute, i.e., that provide different results if you apply them in the reverse order.

This circumstances make it impossible to know both magnitudes with arbitrary precision. Measuring the moment affect a posterior measurement of position and there is a limit on the accuracy of our knowledge of one magnitude given the accuracy we have established for the other.

But there are some magnitudes that have commutative operators.

It is a rather technical thing related to the eigenmodes of the operators more than anything.

I mean, I'm not saying it is entirely dissociated with the problem of uncertainty in, say, the game of poker.

But any relationship is difficult to establish formally. The uncertainty in quantum mechanics comes from these very mathematically precise postulates about fundamental bounds on how we obtain information about particles and insofar as this postulates are adequate to describe the empirical experience, we accept them.

However uncertainty in poker is more due to our inability to process or make sense of the amount of data theoretically available.

For instance, when the dealer or however shuffles the deck does his thing, it is not fundamentally impossible for anyone with a fast enough measurement equipment to follow the shuffling and thus keep track of the order of cards. But that is in practice impossible to do with the naked eye.

The same for the many tells the players can show. Theoretically, it might be possible to entirely read the persons intention by his or her expressions but even the most experienced player can only rely on this skill up to a certain degree.

What I mean is that the uncertainty of quantum physics is related to fundamental circumstances of information acquisition, whereas the uncertainty of more mondaine phenomena seems more related to the practical non-tractability of available data, at least in real-time, to be useful for forecasts and decision making.

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