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Understanding Homo Economicus in Deeper Terms

Why do free markets, despite their success in material outputs, fail to gain the moral high ground in surveys of public opinion, especially among a millennial generation said to be swelling the ranks of the Democratic Socialists? Juxtaposing two seemingly dissimilar writers, George Gilder (1939-) and Eric Voegelin (1901-1985), may shed light on the answer. We can look to Gilder on the macroeconomic, and Voegelin on the philosophical, principles that inform the often narrowly specialized thinking of writers who support free enterprise.

Our natural desires to apprehend the good and the just are often left cold by a model of homo economicus that seems to lack an account of the dignity of the human person. “The good” and “the just” (“social justice” in today’s parlance) are terms often taken up in a collectivist vein within the moral vacuum left by many pro-market arguments.

Voegelin found shortcomings in the economic theories of the Austrian School. And Gilder, while believing that free markets matter, critiques a central element of market economics: the attainment of equilibrium. This essay seeks to assess whether these two demurrers, one from a philosopher and one from a tech-friendly economist, are reconcilable with one another. If they are, what could emerge is an analysis that is interestingly interdisciplinary—one that transcends the limits of economic methodology while still making the case for the proper place of economic methodology in the ordering of human flourishing.

Entrepreneurs and Creativity

Equilibrium is defined by most economists as the state in which market supply and demand, however momentarily, balance each other and by so doing stabilize prices. At one end Adam Smith argued that a free market would naturally trend toward equilibrium; any shortage of one good would lead to provision by another who is incentivized to step in. At the other end, an economist like the New Keynesian Huw David Dixon goes on to detail three properties in a state of equilibrium: 1) assuming the behavior of economic actors is consistent, 2) that none of the agents has an incentive to change his or her behavior, and 3) that the equilibrium is the outcome of a dynamic process.

Gilder says the belief in equilibrium, even as defined by free market icon Adam Smith, leaves little or no room for creativity or surprise, namely the unpredictable activities of entrepreneurs making entirely new things. Entrepreneurs create new demand, as opposed to balancing an existing economic state and an imagined one. He put it this way: where on the one hand, “ ‘free market’ economists believe in the triumph of the system and want to let it alone to find its equilibrium, the stasis optimum allocation of resources,” on the other hand, socialists “see the failures of the system and want to impose equilibrium from above.” The state of equilibrium sought by economists has thus been an error, in his view.

Eric Voegelin and the Austrian School  

Many who value free markets have wondered about Voegelin’s relationship with the Austrian economic tradition. The Voegelinian association with the Austrian School comes in large part from his and the Austrians’ common antipathy to the collectivism that placed the ideal of a perfectly equal future society above the liberties that have actually made possible what progress mankind has achieved throughout its history.

Voegelin often invoked the concept of “Gnosis,” which he defined as the “immediate apprehension or vision of truth without the need for critical reflection.” What he famously called “immanentizing the eschaton” was his description of the urge to find secular salvation through the application, by fanatics of varying kinds, of an all-encompassing ideal—in many cases a perfection sought to be delivered by the power of government.

Voegelin—who attended private seminars at the University of Vienna when he was around 19, on the invitation on Ludwig von Mises, and was in communication with Friedrich Hayek over a long period—believed there were more dimensions to the human person than the economic, and that an economic focus was therefore too narrow. Thus, while agreeing with Hayek’s analysis in part, he noted in a 1938 letter to him: “I do not believe that the problem is one of the economic system and state intervention exclusively.” He saw it rather in the state of mind of people’s conceptions of reality.

If Hayek tells us what happens when we take “the road to serfdom,” does not Voegelin shed light on why we are inclined to take it? Namely that we seek a state of Gnostic certainty or perfection as an overarching end that simply cannot exist in the world—beyond the institutions for human liberty in which progress is enabled.

A Free Market Gnosis?

Voegelin stated in the aforementioned correspondence that one one cannot approach the works of contemporary intellectuals without taking into consideration the “Gnostik” problematic. And so, bringing in the Gilder critique, we might ask whether the reflexive free market acceptance of equilibrium has been a Gnosis of our own, arising from a too-limited focus on economics, with an inward-looking belief that the construction of a state of reality confined to the economics discipline can deliver some certainty.

For Gilder, the Keynesian or state-oriented economists and the Hayekian or private sector-oriented economists share an essential economic vision, in that they consider their discipline to be successful to the extend that it eliminates surprise—“insofar, that is, as the inexorable workings of the machine (abstractly constructed) override the initiatives of human actors,” which is the core starting point of Austrian methodology. “Except for the entrepreneur,” writes Gilder, “capitalism would be a closed system suspended in the perfect equilibrium of the economists’ dream.”

The Materialistic Superstition

If Voegelin does have something to offer us, it is not the free market as an end in itself, but as an outcome of the right philosophy of the human person as he or she is—not as he or she should be in a state of existence defined as an end to be attained. The free market is not a machine, Gilder argues; therefore, a notion of equilibrium underplays the importance of human action within the requisite conditions of human freedom, in which markets are constituted.

Even theorists working in the tradition of the Austrian School have consistently maintained that every realized price “establishes a momentary equilibrium between demand and supply and exhausts all the potential gains from trade.” This, though, leaves something—or, perhaps better said, someone—out.

What of those individuals not in the economy in that moment due to a lack of economic freedom, such as burdensome restrictions and regulations, who thus do not partake in markets and therefore any alleged state of equilibrium? Equilibrium fails by definition to consider the potential gains that have not been tapped owing to the deprivation of economic liberty suffered by persons who are unfree to varying extents—men and women whose entrepreneurial gifts have not been realized because their human potential, not a market equilibrium, is the chief issue at hand. Economic inquiry, to Voegelin’s mind, leaves off consideration of the human being when he or she ceases to be measurable as homo economicus. But free people precede the free economy, the success of which is measured after the fact.

In this analysis, equilibrium is at best a description of the market at any given point and nothing more; in other cases, it is Gnostic in nature when pursued as a constructed ideal, and this is not justified even if done in the name of mandated (state-driven) capitalism, much less socialism. The nature of the reality described is one that is mechanistic, not dynamic—an abstraction, rather than a personalistic appraisal of the ordering of our economic affairs in conditions of ordered liberty to be protected and safeguarded.

Ideas have consequences, and therein lie the risks explicated by Gilder when a Gnostic ideal is placed at the center of economic liberty. As he wrote in his book Knowledge and Power: The Information Theory of Capitalism and How It Is Revolutionizing Our World (2013) and elsewhere: “The belief that wealth consists not in ideas, attitudes, moral codes and mental disciplines, but in definable and static things that can be seized and redistributed, is the materialistic superstition.”

When the models of the economists underplay the importance of human action within the conditions of human freedom, we ought to be guided by such thinkers as Voegelin and Gilder. For there is no requirement to immanentize an eschaton of equilibrium in trying to make the case for economic liberty. To transcend the narrowness of economic analysis of which Voegelin warned us, we should recognize that when it comes to human flourishing more than economics is at stake.

Reader Discussion

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on September 25, 2018 at 08:23:33 am

Very well said!
And let us not be unmindful of the *gnostic* tendency within law and politics and the intersecting arc those disciplines form with economics.

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gabe
on September 25, 2018 at 11:52:05 am

"Even theorists working in the tradition of the Austrian School have consistently maintained that every realized price “establishes a momentary equilibrium between demand and supply and exhausts all the potential gains from trade.” This, though, leaves something—or, perhaps better said, someone—out."

The word is momentary. As in MOMENT. Prices are always changing because of human beings choosing to act by examining their preferences and doing what they prefer most to all of the other options.

"What of those individuals not in the economy in that moment due to a lack of economic freedom, such as burdensome restrictions and regulations, who thus do not partake in markets and therefore any alleged state of equilibrium?"

There are always people that are excluded because all economic transactions are local and we can only be in one place at any particular point in time. The problem is not their inability to be in all places where they may gain the greatest opportunity to engage in economic activities but the fact that governments intervene in free markets.

"Equilibrium fails by definition to consider the potential gains that have not been tapped owing to the deprivation of economic liberty suffered by persons who are unfree to varying extents—men and women whose entrepreneurial gifts have not been realized because their human potential, not a market equilibrium, is the chief issue at hand. "

Sorry but I do not see the point in this argument. First, there is no such thing as a meaningful or lasting equilibrium in a free market. We can argue that it is created by unhindered economic exchange but it does not and cannot last. Markets do not restrain men and women or prevent them from reaching their potential. They offer all of us a chance to prove our worth by serving a customer who wishes to exchange whatever we are offering for whatever they are offering. There is no issue at play as long as individuals engage in free markets. And any path that reduces liberty is one that takes us further away from the stated goal.

"Economic inquiry, to Voegelin’s mind, leaves off consideration of the human being when he or she ceases to be measurable as homo economicus. But free people precede the free economy, the success of which is measured after the fact."

We cannot be free if we meddle in the economy.

"In this analysis, equilibrium is at best a description of the market at any given point and nothing more;..."

Agreed about equilibrium. It is transient so the claim of equilibirum is essentially meaningless.

"...in other cases, it is Gnostic in nature when pursued as a constructed ideal, and this is not justified even if done in the name of mandated (state-driven) capitalism, much less socialism."

I don't truly understand this. Why would equilibrium be pursued as a constructed ideal? I could not think of anything as less human. Nature is not in equilibrium and neither crony capitalism nor socialism can be said to have anything to do with the natural world nor a useful constructed ideal.

"The nature of the reality described is one that is mechanistic, not dynamic—an abstraction, rather than a personalistic appraisal of the ordering of our economic affairs in conditions of ordered liberty to be protected and safeguarded."

I am sorry but the language is a bit too ambiguous for me to respond in a meaningful way.

"Ideas have consequences, and therein lie the risks explicated by Gilder when a Gnostic ideal is placed at the center of economic liberty. As he wrote in his book Knowledge and Power: The Information Theory of Capitalism and How It Is Revolutionizing Our World (2013) and elsewhere: “The belief that wealth consists not in ideas, attitudes, moral codes and mental disciplines, but in definable and static things that can be seized and redistributed, is the materialistic superstition.”"

There is not much to disagree with here. Gilder's critique of the Utopian idealists seems spot on.

"When the models of the economists underplay the importance of human action within the conditions of human freedom, we ought to be guided by such thinkers as Voegelin and Gilder. For there is no requirement to immanentize an eschaton of equilibrium in trying to make the case for economic liberty. To transcend the narrowness of economic analysis of which Voegelin warned us, we should recognize that when it comes to human flourishing more than economics is at stake."

Again I agree. But we need free markets to realize our personal goals. Any attempt to restrain free transactions in order to pursue some unjustified or ill-defined teleological construct is futile.

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Vangel Vesovski
on September 25, 2018 at 13:35:00 pm

Thus the title of Burn's book on Rand: "Goddess of the Market". Rand's Gnosis was every bit as bad as that of her enemies.

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aaron
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