Introduction
We mentioned in section 2 that the “second fundamental theorem of welfare economics,” developed within the static framework of neoclassical theory, depicts efficiency and ethics as two distinct dimensions which may be combined in different ways.(49) In fact, from the perspective of welfare economics, multiple Pareto optimums exist (represented by each and every point on the production possibility curve), and every one of these points could correspond to a unique ethical model of income redistribution. Thus, for example, in the Bergson-Samuelson view, a hypothetical “social welfare function” would potentially embody the socially acceptable model of redistribution and would lead us to the “optimum optimorum” at the point of intersection between the social welfare function and the production possibility curve. This type of analysis has convinced many thinkers of the theory’s supposed vagueness as a tool for evaluating an economic system, since they consider such an evaluation ultimately dependent on value judgements which lie outside the scope of economic theory.
This entire mainstream paradigm is disrupted completely if we introduce the dynamic conception of economic efficiency: for as we shall see, not all ethical systems of income redistribution are compatible with dynamic efficiency understood as entrepreneurial creativity and coordination. Thus the economics theorist encounters a fascinating field of research that centers precisely on determining which principles of social ethics or distributive justice drive and are compatible with the market processes that characterize dynamic efficiency.
Ethics as a Necessary and Sufficient Condition for Dynamic Efficiency
Most of the stances on distributive justice and social ethics which up to now have predominated and have formed the “ethical foundation” of important political and social movements (of a “socialist” or social democratic nature) are rooted in the static conception of economic efficiency. The established paradigm of neoclassical economic theory rests on the idea that information is objective and given (either in certain or probabilistic terms), and thus that it is possible to make cost-benefit analyses based on it and, as we have indicated, that the issues of utility maximization have absolutely no connection with moral considerations, and hence the two can be combined in different proportions. Furthermore, the dominant static viewpoint led almost inexorably to the conclusion that resources are in a sense given and known, and therefore the economic problem of their distribution was deemed separate and distinct from the issue of their production. Granted, if resources are given, it is vitally important to inquire into the best way to allocate among different people both the available means of production and the final result of the different production processes.
This whole approach collapses like a stack of cards in light of the new dynamic conception of market processes, which hinges on the theory of entrepreneurship and on the notion of dynamic efficiency we have been examining. From this perspective, every person possesses an innate creative capacity that enables him to perceive and discover the profit opportunities which arise in his environment, and to act accordingly to take advantage of them. Therefore, entrepreneurship consists of the typically human ability to perpetually create and discover new ends and means. From this point of view, resources are never given, but instead, both ends and means are continually devised ex novo by entrepreneurs, who always wish to reach new objectives that they discover to be of value. At the same time, this creative power of entrepreneurship combines, as we have seen, with its capacity for coordination. Therefore, if ends, means, and resources are not “given,” but are continually created from nothing as a result of the entrepreneurial action of humans, clearly the fundamental ethical question ceases to be how to fairly distribute “what exists,” and becomes how, in view of human nature, to best foster entrepreneurial coordination and creativity.
Consequently, in the field of social ethics, we arrive at the fundamental conclusion that the conception of human beings as creative, coordinating actors involves the axiomatic acceptance of the principle that each person has the right to appropriate the results of his entrepreneurial creativity. That is, the private appropriation of the fruits of entrepreneurial creation and discovery is a tenet of natural law, because if an actor were not able to claim what he creates or discovers, his capacity to detect profit opportunities would become blocked, and his incentive to act would disappear. Moreover, the above principle is universal in that it can be applied to all people at all possible times and in all conceivable places.
The precept we have just set out, which provides the ethical basis for all market economies, offers other decided, characteristic advantages. First, it possesses a strong, intuitive, and universal attraction: it seems obvious that if someone creates something from nothing, he has the right to appropriate it, since in doing so he does no harm to anyone.(50) (Before he invented his creation, it did not exist, and thus its invention harms no one, and it benefits at least the creative actor, when it does not also benefit many other people.) Second, the above is a universally sound ethical principle which is closely related to the traditional precept of Roman law regarding homesteading or the original appropriation of resources that belong to no one (occupatio rei nullius). In addition, it offers a solution to the paradox represented by “Locke’s proviso,” which places the following limit on original appropriation: a sufficient “number” of resources must be left for other people. The principle we defend, which rests on creativity, renders “Locke’s proviso” unnecessary: no product of human creativity exists prior to its entrepreneurial discovery or creation, and therefore its appropriation cannot hurt anyone. Hence, Locke’s condition makes sense only in a static environment in which it is presumed that resources already exist (and thus are “given”), that they do not change, and that they must be distributed among a predetermined number of people.
If we conceive the economy as a dynamic, entrepreneurial process, the ethical principle which must govern social interactions rests on the view that the fairest society is the one which most energetically promotes the entrepreneurial creativity of all of its members. To achieve this goal, it is imperative that a society provide each member with the a priori guarantee that he will be permitted to appropriate the results of his entrepreneurial creativity and that no one will expropriate these results, either partially or totally, much less the public authorities.
We must conclude that the aforestated basic principle of social ethics, one which hinges on the private ownership of all that is entrepreneurially created and discovered, and thus on the voluntary exchange of all goods and services, is both the necessary and the sufficient condition for dynamic efficiency. This principle is a necessary condition, because to impede the private ownership of the fruits of each human action is to remove the most powerful incentive to create and discover profit opportunities as well as the fundamental source of creativity and coordination that propels the system’s dynamic efficiency (i.e. the rightward movement of the corresponding production possibility curve). However, the ethics of private property constitute not only the necessary condition for dynamic efficiency, but also the sufficient condition. Given the vital drive which characterizes all human beings, an environment of freedom in which they are not coerced and in which their private property is respected constitutes a sufficient condition for the development of the entrepreneurial process of creativity and coordination which marks dynamic efficiency.
To hinder free human action to any degree by impairing people’s right to own what they entrepreneurially create is not only dynamically inefficient, since it obstructs their creativity and coordinating capacity, but also fundamentally immoral, since such coercion prevents the actor from developing that which is by nature most essential in himself, i.e. his innate ability to create and conceive new ends and means and to act accordingly in an attempt to achieve his objectives. To the extent that state coercion impedes entrepreneurial human action, people’s creative capacity will be limited, and the information or knowledge necessary to coordinate society will not emerge or be discovered. Thus socialism and the economic interventionism of the state in general are not only dynamically inefficient but also ethically reprehensible.(51)
It is precisely for the above reasons that socialism is not only an intellectual error, since it stops people from generating the information needed by the regulatory agency to coordinate society via coercive commands, but also, as we have indicated, it conflicts with human nature and is ethically unacceptable. In other words, the analysis up to this point exposes the socialist, interventionist system as immoral, because it is built upon the use of force to prevent each person from claiming the product of his own entrepreneurial creativity. Thus we see that socialism is not only theoretically impossible and dynamically inefficient, but that at the same time it is an essentially immoral social system, since it contradicts the most intimate aspect of human nature by keeping people from acting freely and appropriating the results of their own entrepreneurial creativity, and thus from realizing their potential.(52)
Hence, according to our analysis, nothing is more (dynamically) efficient than Justice (in its proper sense). If we perceive the market as a dynamic process, then dynamic efficiency, understood as coordination and creativity, emerges from the behavior of human beings who follow certain moral laws (regarding the respect for life, private property, and the fulfillment of contracts). In this way, the exercise of human action subject to these ethical principles gives rise to a dynamically efficient social process such as we have been describing. It is now easy to see why, from a dynamic standpoint, efficiency is not compatible with different models of equity or justice (as the second fundamental theorem of welfare economics erroneously stated), but instead arises exclusively from one (that based on the respect for private property and entrepreneurship). Therefore, the contradiction between efficiency and justice is false. What is just cannot be inefficient, and what is efficient cannot be unjust. A dynamic analysis reveals that justice and efficiency are but two sides of the same coin, which also confirms the consistent, integrated order that exists in the social realm. Consequently, our study of dynamic efficiency allows us to discover which ethical principles make this type of efficiency possible. Even more significant and ambitious, however, is that our study permits an objective and scientifically uniform handling of all social problems.(53)
Dynamic Efficiency and the Principles of Personal Morality
Up to this point, we have looked at social ethics and discussed the key principles which provide the framework that makes dynamic efficiency possible. Outside of that sphere we find the most intimate principles of personal morality. The influence of such principles on dynamic efficiency has rarely been studied, and in any case, they are considered part of a realm that is separate and distinct from that of social ethics. Nevertheless, we believe this separation to be completely unjustified. In fact, a number of ethical and moral principles are of great importance to the dynamic efficiency of social processes, and with respect to these standards, the following paradox arises: the failure to meet them on a personal level entails a staggering cost in terms of dynamic efficiency, however the attempt to impose them on people via the coercive force of the public authorities also generates severe inefficiency from the dynamic standpoint. Hence, certain social institutions carry major significance in transmitting and encouraging the observance of these personal moral principles which, by their very nature, cannot be imposed by force but are nevertheless of real importance to the dynamic efficiency of society. Through religion and the family, for example, people internalize these principles and thus learn to uphold them habitually and to transmit them to the next generation.(54) The principles which relate to sexual morality, the creation and indefinite preservation of the family institution, faithfulness between spouses and the care of children, the control of atavistic urges, and specifically, the overcoming and restraint of unhealthy envy, etc. are all of crucial importance to the successful working of the social process of creativity and coordination, and to its fostering dynamic efficiency in society as well as possible.
When an individual fails to observe moral principles, this lack of compliance ultimately and invariably results in some appalling human cost which affects not only the person who triggers it but also a large group of third parties who have a direct or indirect connection with him. In fact, such behavior can even come to block much of the dynamic efficiency of an entire social system. Much more serious is the spread of immoral behaviors through the systematic processes of moral corruption which can eventually and completely paralyze the healthy, efficient social process. Therefore, the study, from the perspective of the economic theory of dynamic efficiency, of the role of personal moral principles and the different social institutions which make possible and encourage their fulfillment and preservation in society, opens up an extremely significant field of research for scholars, one we hope will exert a decisive influence in the future.
For an illustration of the possibility and value of examining personal moral principles in terms of dynamic efficiency, let us consider the behavior spouses should, with consistent effort, aspire to and maintain, to keep their marriages going and preserve the institution of the family, for their own benefit and especially for that of their children. For example, if a family man begins to give way to a more or less frivolous desire for an attractive, young companion over all else, he could very likely end up divorcing his wife, precisely when she is getting older and the children are nearly grown. If such behavior becomes widespread, then before women decide to marry and start a family, they may very well begin to reflect on the high risk that their husbands may abandon them just as they are wrapping up a period of long years spent raising children, and precisely at a time when their age and abilities put them at a disadvantage in the labor market. As a result, not only will a larger number of marriages and families be broken up, but even more significantly, the rate at which new marriages and families are started will decline, and women will tend to prolong their single life to ensure their professional careers and independent means of support, all of which will lead to a dramatic drop in the birth rate. In the absence of migratory trends to ease the decrease in the birth rate and the consequent aging of the population, the social process of entrepreneurial creativity and coordination which fuels dynamic efficiency will suffer. Both the progress of civilization and economic and social development require a constantly expanding population capable of sustaining, among a continually increasing number of people, the steady growth in the volume of social knowledge which entrepreneurial creativity generates. Ultimately, dynamic efficiency depends on people’s creativity and capacity for coordination, and other things being equal, it will tend to increase as the number of human beings increases, which can only happen within a certain framework of moral laws to govern family relationships.
It is easy to see that in the context of family relationships, the principles of personal morality take on crucial importance to dynamic efficiency. Nevertheless, it is also true and only apparently paradoxical that the state must not use coercive force to impose such principles in a manner similar to that in which it defends, for example, the legal regulations of criminal law. The latter mainly prohibit certain behaviors which involve the criminal use of violence or deception against other people; that is, physical violence or the threat of it, or the criminal achievement of some end via deceit or fraud. In contrast, the coercive imposition of personal moral principles would cripple dynamic efficiency: personal family relationships, for example, belong to the most private sphere of human life, and it is practically impossible for an outsider to obtain all of the information necessary to make well-informed judgements about them, much less to resolve conceivable problems when the involved parties lack sufficient desire or willingness to solve them. The promotion of the entire framework of personal moral principles, insofar as they can be imposed by force, to the rank of legal regulations would only give rise to a closed, inquisitorial society that would deprive the population of nearly all of the individual freedoms which comprise the foundation of entrepreneurship, the only possible inducement to dynamic efficiency in the whole social process.
The above considerations reveal the importance of alternative, non-coercive methods of social guidance which expose people to the most intimate and personal moral precepts and encourage their internalization and observance. Religious feelings and principles, which are acquired at an early age within the family, play an indispensable role in this regard (together with the social pressure exerted by other members of the family and community). Religious precepts provide direction under which to act, they help people control their most atavistic impulses, and they serve as a guide in the selection of those people with whom we decide to build an intimate relationship or even a family and the rest of our lives. Other things being equal, the firmer and more enduring a person’s moral principles appear, the greater the esteem that person should inspire.
The Evolution of Ethical Principles: Institutions Essential to Dynamic Efficiency
Elsewhere we have defined the concept of “institution” as “any regulated pattern of conduct or behavior,”(56) and in this sense, it is easy to deduce from the analysis thus far that the social process of creation and coordination of which dynamic efficiency consists must be guided; that is, it must be subject to ethics and law, or in other words, to a series of moral principles and legal rules.
In fact, as we have seen, the basic entrepreneurial act consists of buying at a low price and selling at a high one, and thus grasping a profit opportunity and coordinating the initially maladjusted behavior of social agents. This act would be thwarted or would fail to take place if all participating parties did not guarantee the fulfillment of their commitments; or, for example, if some circumstance rendered the contract void, or if any of the contracting parties consented due to fraud or deception, either at the time of payment or of the delivery of the good, of the quality promised. For this reason, basic legal principles, such as the respect for life, peacefully acquired ownership, the fulfillment of contracts, and in general, compliance with the legal regulations which have evolved through custom and which comprise civil and criminal law provide the basic institutional structure or prerequisite for dynamic efficiency. The same can be said of the personal moral principles we discussed in the last section, of the natural right to own private property, and of the implications of this right, all of which compose the foundation of basic social ethics which is entirely responsible for sustaining dynamic efficiency.
Although these principles have emerged through an evolutionary process, they form part of human nature. To put it another way, human nature manifests itself through a process of evolution, and with the benefit of hindsight and the use of reason, man is then able to refine the principles which arise from his errors in logic and contradictions, to strengthen these principles, and through careful study to apply them to the new areas and challenges that develop in society. Therefore, any scientific analysis of the dynamic aspect of social efficiency must begin with the acknowledgement that such a study can never be conducted in an institutional vacuum; that is, that the theoretical analysis of dynamic efficiency is inseparable from the study of the institutional framework in which entrepreneurial behaviors take place. As a result, we should be particularly critical of the existing economic theory of nirvana developed by neoclassical welfare economists, the majority of whom insist on judging real market processes in a complete institutional vacuum; in other words, with a total disregard for real-life human interactions.
Hence, a vast field of research is opening up for specialists in applied economics and involves the examination and reevaluation of each and every social institution (economic, juridical, moral, ethical, and even linguistic) with a view to analyzing the capacity of each to trigger dynamic efficiency and the role each plays in the encouragement of it. Elsewhere we have explained that the theorist who embarks on this task must be particularly thorough and prudent, above all because he attempts to analyze highly complex, real-life features of society which have evolved over time, are accompanied by a huge volume of experience and information, compose human nature, and are not often easily understood via the conceptual tools of the analyst.(57)
In the next and last section of this paper, we will provide some examples of practical applications to illustrate, or at least sketch, the direction in which we believe the economic analysis of social institutions may evolve in the future if the dynamic concept of economic efficiency we have presented is consistently applied.
Jesús Huerta de Soto
Professor of Political Economy
King Juan Carlos University of Madrid, Spain
«No part of this work may be reprinted or reproduced or utilized in any form
or by any electronic, mechanical, or other means, now known or hereafter
invented, including photocopying and recording, or in any information
storage or retrieval system, without citing the name of the author and the
source from which it has been taken.»
______________________________________
(49) As we have seen, we can arrive at a similar conclusion via Coase’s theorem.
(50) Our example of a pathological, antisocial envious person would constitute the exception.
(51) See Huerta de Soto 2001b.
(52) The drive of entrepreneurial creativity also manifests itself in help to the needy and in the prior search for and systematic detection of situations in which others are in need. In fact, coercive state intervention, through the mechanisms typical of the so-called welfare state, neutralizes and to a great extent blocks the entrepreneurial search for situations of urgent human need and for opportunities to help one’s neighbors (both close and distant) who are experiencing difficulties. In this way, intervention drowns the natural desire to support one’s fellow man and blocks the actions that would tend to aid those in distress through the voluntary, spontaneous cooperation most people prize. Pope John Paul II stressed these and other issues in his 1991 encyclical, Centesimus Annus: On the Hundredth Anniversary of Rerum Novarum (Rome: Vatican Press, chapter 4, section 49).
(53) For a more detailed analysis of the above considerations, see Huerta de Soto 2002b, 193-219.
(54) These institutions (the family, religion) also play an indispensable role in instilling habitual adherence to the more general norms of social ethics (concerning property rights). All of the state’s coercive power
(55) Deep-seated religious convictions and behavior that is consistent with them act as a sort of “certificate of guarantee” concerning the future fulfillment of family obligations. Such a “guarantee” lessens (though it does not eliminate) the uncertainty inherent in any marital decision, and although it does not exclude the possible disappointment of expectations, it promotes the adjustment and coordination which make a prosperous and dynamically efficient society possible.
(56) Huerta de Soto 2001b, 69, note 37.
(57) Huerta de Soto 1994, 105-109.