Mariana Mazzucato's political theory of economic value

  Professor Mariana Mazzucato is everywhere. According to the Wikipedia, she teaches Economics of Innovation and Public Value at University College London, she chairs the WHO Council on the Economics of Health for All, is member of the Scottish Government's Council of Economic Advisers, the South African President's Economic Advisory Council, and the United Nations' High-Level Advisory Board on Economic and Social Affairs. She has been advisor of the Italian, Swedish, and Brazilian governments, the British Labour Party, the OECD, the World Economic Forum, and the European Union, among others. Apart from a number of books, she publishes her opinions in The New York Times, the Guardian and the Financial Times. In 2022 she was a speaker at the World Trade Organization in Geneva and the World Economic Forum in Davos.

     She has received the Leontief Award For Advancing the Frontiers of Economic Thought, an All European Academies Award, the von Neumann Award, the Grand Ufficiale Ordine al Merito della Repubblica Italiana, and honorary doctorates from many universities (among them the Argentine Universidad de San Martín).

     And Pope Francis cites her work with admiration.

     Nevertheless professor Mazzucato defines herself as outside the mainstream (?). She advocates a bigger role of governments in the economy, which perhaps is music not entirely disagreeable to the institutions she advises.

     In books like The Entrepreneurial State and Rethinking Capitalism she describes government as a main source of technological innovation and prosperity ―she even condemns outsourcing tasks to private companies. In her latest book Mission Economy she writes that governments must shrug off traditional budgetary parsimony and assume missions modeled on the Apollo moon landing. She selects three main tasks for a government's mission: a Green New Deal, health care, and narrowing “the digital divide”.

The root of all problems (according to Mazzucato)

     But it is in her book The Value of Everything that Mazzucato deals with the deeper source of all the failures she attributes to modern capitalism: the very concept of economic value. She is convinced that without challenging mainstream notions about value all efforts will lack substance and will end in mere patches.

     The first chapters of the book set the scene for the rest. There Mazzucato tells the history of the various theories about economic value, starting with the oldest and finishing with the marginalists, the modern theory of value.

     Mazzucato tells us “This book does not try to argue for any theory of value” (p. 18). Nevertheless she makes a very positive description of Marx's theory and a very negative account of those who succesfully challenged it, the marginalists. What is more, in her treatment of Marx's theory of value she omits obvious objections to it and does not even mention well known refutations, like the famous one written by Bohm-Bawerk (one of the ten greatest economists in history according to Joseph Schumpeter). On the other hand, the chapter Mazzucato dedicates to the marginalists is full of disparaging remarks. In subsequent chapters she connects marginalism with the subprime mortgage crisis of 2008, the growth of what she calls “casino capitalism”, excessive salaries for managers, and growing inequalities of wealth.

     Already in the Introduction Mazzucato writes that “I will argue that the way the word ‘value’ is used in modern economics has made it easier for value-extracting activities to masquerade as value-creating activities. And in the process rents (unearned income) get confused with profits (earned income); inequality rises, and investment in the real economy falls”. Along the book she castigates modern capitalism and puts the blame on the modern theory of value.

     Nevertheless, she says that her purpose is not to defend any theory but to promote debate. In spite of such disclaimers, it is perplexing to find that someone writes a whole book on the theories of economic value, blames the modern one for all sorts of calamities, but declares to have no definite preference for any theory. Worse, for someone who just wants to revive debate, it is odd that Mazzucato omits references to views that oppose her own. That approach is not limited to this book. For instance, as we will see later, Matt Ridely's book How Innovation Works makes significant objections to the role Mazzucato assigns to governments concerning innovation. The author and the book are very well known. Still, in her most recent book and in her many speeches on the Web Mazzucato does not even mention them.

     She follows the same tactic in her treatment of the subprime mortage crisis of 2008, for which she blames the private financial sector. She does not mention the many authors that point out the part of the blame that corresponds to governments.

The marginalists as defenders of privilege

     Mazzucato puts the emergence of the modern (or "marginalist") theory of value in what she considers to be its historical context and purpose. She writes that by the end of the XIX century socialists became more and more influential, Marx and Engels challenged those who “had no proper analysis of why things were going wrong”. Unions grew stronger. In Britain, the Labour Party was founded, in Germany the Socialist Workers' Party, and in France the Federation of Socialist Workers. Then she writes “Faced with these threats to the status quo, the powers that be needed a new theory of value that cast them in a more favourable light” (p. 58) . In case those words were not enough to prepare the reader for the arrival of the new theory, on the same page Mazzucato adds “Above all, perhaps, the rising power of capitalists in a society long dominated by aristocratic landowners and local gentry meant that a new analysis of capitalism was required to justify their standing”.

     Then Mazzucato proceeds to describe the theories of the economists that would pop up around 1870 to satisfy that need, Leon Walras in Switzerland, Stanley Jevons in Britain, and Carl Menger in Austria. Mazzucato follows the standard procedure of lumping together these three economists, although they show differences that are not limited to the use of mathematics. That unfortunate starting point is followed by more confusion. Mazzucato links the new theory ―marginalism― to a long tradition in which she includes the medieval theory of the “just price” and Jeremy Bentham's utilitarian principle of the greatest good for the greatest number (ps. 60-61).

     Now to clarify: although Jevons cites Bentham with admiration, neither the medieval “just price” nor utilitarianism has anything to do with marginalism and in many respects both are incompatible with the new theory. At the center of the marginalist revolution is the idea that individuals are the ones who judge and get value from goods, that there is no such thing as a collective utility to be decided by a coterie of experts. Certainly, a bridge may be valuable to a large number of people both directly and indirectly, but then that is all the value it has. A bridge that serves nobody apart from “the fatherland” and some government's notion of prestige has no economic value.

     But Mazzucato does something worse than provide erroneous historical influences, she reverses the meaning of what the marginalists actually wrote. Through the book she repeats again and again that according to marginalist theory “price determines value, not vice versa” (p. 66). Already in the Introduction Mazzucato says that the modern theory was “a swing from value determining price to price determining value” (p. 7, similar statements in pages 8, 271, 272, 273).

     Actually, the new theorists said the opposite of what Mazzucato attributes to them. Carl Menger wrote in one of the most famous books in economics history that “the price of a good is a consequence of its value to economizing men, and the magnitude of its price is always determined by the magnitude of its value” (Menger Principles, p. 173).

What really was the new theory?

     The new theory rejected that value is a property of goods themselves, like the amount of labour employed on them. Instead the marginalists related the value of goods to the people who supposedly are to use or enjoy them. They wrote that when men realize that a good or a number of them are necessary for their well-being, and when they perceive that such goods are scarce, i.e. that losing one or more would mean that some needs won't be satisfied, then they economize such goods, which for that reason are ―unlike air― economic goods. Or in other words, that they have economic value.

     As Carl Menger wrote in 1871 “Value is thus the importance that individual goods or quantities of goods attain for us because we are conscious of being dependent on command of them for the satisfaction of our needs” (Principles p. 115). Then value is necessarily value for some individual, and changes with an individual's circumstances and needs. Lost in a desert he would value a bottle of water as his most valuable good, but he would not care about it if he is close to an abundant fountain.

     The word “marginalist” thought traditionally used to name the new theory is somewhat confusing because it refers to a corollary of the theory and not to the central theses mentioned above. For that reason sometimes the name “subjective” theory is used in order to stress that value is always value for an individual subject. Unfortunately “subjective” suggest caprice and arbitrariness which according to Menger is not part of the theory ―although some other thinkers would say so. Certainly abundance of goods may allow people to become capricious consumers and there is always the possibility of error in the appreciation of the usefulness of goods. But the central point is that value is always value to individuals in individual circumstances as they are able (or not) to recognize. It doesn't make sense to consider the value of goods in the abstract unrelated to persons, their needs, and their choices. That was the mistake of the old theories.

     The marginal theory of value does not assume that people have perfect knowledge and always make correct judgments. That is a straw-man often used to make the task of its adversaries ―like Mazzucato― easier. Carl Menger even treats the case of fake remedies and love potions, and more fundamentally dedicated a whole section of his Principles to “Time and Error” where he analyzed various production processes and said that economic judgment often requires thinking about the future, which is always uncertain.

     It is true that economists have occasionally pondered about the advantages of perfect knowledge, perfect competition, and other imaginary situations. They concluded that if we were perfect thinking machines with infinite knowledge about the present and the future, we would make perfect decisions. That is at best a tautology that adds nothing to our understanding and in no way is required by the marginalist theory of value. Nor does it serve to advocate more government intervention, unless we think that ministers and councils have infinite knowledge of present and future.

Who started the debate about value?

     Piling more bad consequences against the new marginalist theory, Mazzucato says that because of it economists have ceased to discuss value, which used to be at the core of economic thinking (Preface XVIII). But in fact the marginalists were the ones that initiated the debate about value ―and they won it. Before them the labour theory of value had been accepted without any serious challenge. Indeed, I suspect that it was adopted by Malthus and Smith almost by accident in their commendable but misguided effort to limit the notion of economic value. Carl Menger traces back that wrong turn in Malthus, a turn that might have seemed to solve a theoretical mistake but created another one that had lasting consequences.

     In 1820 Malthus published the first edition of his book “Principles of Political Economy” in which he defined wealth as “those material objects which are necessary, useful, or agreeable to mankind”. That definition was both too narrow and too broad. Too narrow because it excluded services, and too broad because it included non-economic goods like air. Nobody denies that air is useful, indeed indispensable to life, but it does not need economizing. We don't need to care about how much air we breath and so, although valuable in a broad sense, air has no economic value. Seven years later Malthus tried to correct that second mistake ―although he persisted in the first one, in limiting value to objects.

     In his book “Definitions in Political Economy” Malthus assigned value to “the material objects, necessary, useful or agreeable to man, which required some portion of human exertion to appropriate or produce”. In the second edition of his “Principles” Malthus wrote that “the latter part was added, in order to exclude air, light, rain, etc”. Menger tells us that Malthus himself recognized that this way of restricting the definition was unsatisfactory and that he tried other paths in later books, but failing again to elaborate a correct definition (Menger Principles p. 291). Leon Walras, another pioneer of the modern theory of value at the second half of the XIX century, tells us that Adam Smith too, like Malthus, offered only hesitant remarks that put labour as the sole source of value but contradicted those remarks when he included land along labour as social wealth (Leon Walras Elements of Theoretical Economics, parag. 158).

     That is why I think that the labour theory of value first appeared as an unfortunate effort to mend a definition that was too broad but without much debate or analysis of the issue. Later on, Karl Marx saw in it an opportunity, a bedrock on which to build his theory of exploitation. Still, he never considered alternatives, never dared question whether the foundation he found ready-made by Smith was solid. The marginalists Jevons, Menger and Walras were the ones that independently of each other challenged those assumptions and analyzed the whole issue. And now, more than a century later Mariana Mazzucato blames them for the lack of debate about the source of economic value (ps. 12, 76). Sure, the same way Copernicus is to blame for the lack of debate about whether the sun goes around the earth or the earth around the sun.

Collective creation does not require collective direction

     Mazzucato writes that value is a collective creation and so it is the innovation that promotes progress. (ps. 160, 184, 185, 191, 222). From that she argues for a fairer collective distribution of profits and an entrepreneurial State.

     Once again Mazzucato confuses the real question, which leads her to the wrong answers. Staunch defenders of free markets have always recognized that valuable goods are the result of collective efforts. What they deny is that this effort is or should be collectively directed.

     We must recall here the instructive story of how a pencil is made. It was first told in an essay by Leonard Read and it has been fondly repeated by Milton Friedman and many other champions of economic freedom. In the story, a pencil tells us: nobody knows how to make me. Those who fell trees to get the wood from which I am partly made know nothing about mining lead. And neither miners nor lumberjacks know or care about how the paint that covers my body is made. None of them have the faintest idea about the work of those who make the rubber tip attached on me as eraser. Or about the construction of the trains and the ships that carry those raw materials from the place where they are produced to the place where I will be assembled.

     It is no news to tell defenders of free markets that production, even of humble pencils, involve collective efforts. What Leonard Read and Milton Friedman tried to show is that the process is not directed and that precisely is what makes it efficient, even possible.

     The story of the pencil should prove to everybody something that is seen everywhere in reality but nevertheless looks counter-intuitive. How is it possible that a complex production process works when nobody directs it? Indeed, how is it that the absence of direction is what makes it possible?

     Mazzucato is not interested in these questions and has no time for a humble pencil. It was Carl Menger who in 1883 posed those questions in his book Investigations into the Method of the Social Sciences with Special Reference to Economics. There he showed how money and markets originated in the past without any direction from above. So Menger wasn't simply one of the earliest in challenging wrong theories of value, he was a pioneer in revealing the pervasive presence of spontaneous order in the economy. Later on, Friedrich Hayek and Ludwig von Mises followed in his tracks.

     Mazzucato chooses to skip all that. She goes on to apply her collectivistic approach to innovation and from there she ―again― castigates high private profits and argues for more government. Here too the true question is not whether technical and scientific innovation are collective efforts but whether they are or should be collectively directed. Matt Ridley has written a book, How Innovation woks, and Why it Flourishes in Freedom, were he describes how ideas combine in unexpected ways to foster innovation without a central direction. Ridley says that as in the pencil story “One person may make a technological breakthrough, another work out how to manufacture it and a third how to make it cheap enough to catch on. All are part of the innovation process and none of them knows how to achieve the whole innovation” (p. 256).

     In chapter 9 Ridley makes objections to Mazzucato's views on innovation. First, if government plays a central role in it, how is that the Industrial Revolution took place at a time when government had a negligible role in research and technical innovation? Ridley admits that “In the second half of the twentieth century, the state did become a sponsor of innovation on a large scale, but that is hardly surprising given that it went from spending 10 per cent of national income to 40 per cent in almost all Western countries. As Mingardi put it: ‘With such extraordinary growth, it is improbable that public spending wouldn’t end up in the neighborhood of innovation-producing business at one point or another.’ So it is not a matter of whether the state has caused some innovation. The question is whether it is better at doing so than other actors, and whether it does so in a directed fashion” (p. 276)

     Secondly, Ridley points out that “Mazzucato’s examples of government-funded innovation are mostly cases of ‘spillover’, rather than direction. Nobody has claimed that government set out deliberately to create a global internet when it funded the Defense Advanced Research Projects Agency’s computer networking. Indeed, the internet only took off when it eventually escaped the clutches of the Defense Department and was embraced by universities and businesses” (ps. 276-277).

    Moreover, says Ridley, the Soviet Union was a clear case of entrepreneurial state that founded a great deal of research and allowed virtually no private entreprise. The result was dismal lack of innovation in almost all sectors.

     Ridley's book was published in 2020. The same year, McCloskey and Mingardi published a direct challenge to Mazzucato's theses “The Myth of the Entrepreneurial State”. However, when in 2021 Mazzucato published a new book “Mission Economy. A Moonshot Guide to Changing Capitalism” she gave no answer to any of these objections, she didn't even mention these authors. As said, for someone who claims to have a vivid interest in fostering public debate, Mazzucato has an odd tendency to avoid any reference to different views.

The political theory of value

     When Mazzucato writes that value is a collective creation she does not mean merely that, as in the pencil story, lots of people intervene in the production of valuable things and services. She means that the creation of value must be politically directed. And at times it seems she also means that the very concept of economic value is a collective creation. At the beginning of the book she writes “The definition of value is always as much about politics, and about particular views on how society ought to be constructed, as it is about narrowly defined economics” (p. 14). But then, what should we believe, politics or economics? For my part I would say that the labour theory of value was as wrong in Adam Smith's time as it was in ancient Egypt. No matter their political convictions, at no time people asked how much labour a thing had demanded in order to establish its usefulness. If someone digs a hole in search for water and finds none, he would not be able to sell the hole by pointing out that it demanded a lot of work. That was true in ancient Egypt as it is today. That is what modern theory of value says and it has nothing to do with politics.

     As we noted before, one of the problems with Mazzucato's book is that it contains disclaimers that she immediately discards. She says that she is not arguing for one theory of value (p. 18). Well no, only arguing that Marx's theory was extraordinary in its insight that capitalism is dynamic, that Marx is the first to give capital a social dimension (p. 49), that Marx “introduced a powerful new idea which has informed thinking ever since: class struggle” (p. 51), that Marx was “acute in his understanding of the capacity of technology to transform society” (p. 52), that “In Marx's hands, value theory became a powerful tool for analysing society” (p. 57). All glowing marks for Marx.

     As we saw, when Mazzucato turns to those who challenged Marx, she introduces them by saying that the powers that be needed a justification for their privileges. Not a brilliant presentation. Then she goes on in many chapters blaming the new theory for almost all economic troubles, theoretical inaccuracies, and social injustice. It would have been much more useful if Mazzucato had disclosed her views and defended a theory of value openly.

     In another disclaimer Mazzucato declares that “the point is not to create a stark divide, labelling some activities as productive and categorizing others as unproductive rent-seeking”. But then she immediately adds “I believe we must instead be more forthright in linking our understanding of value creation to the way in which activities (whether in the financial sector or the real economy) should be structured, and how this is connected to the distribution of the rewards generated. Only in this way will the current narrative about value creation be subject to greater scrutiny, and statements such as ‘I am a wealth creator’ measured against credible ideas about where that wealth comes from” (p. 14). If she won't label some to be inside and others outside the “production boundary” how would she know which sector needs “structuring”? And how does she “subject to greater scrutiny” claims about value creation if she won't categorize some as falling on the wrong side of the boundary? Indeed, she does exactly what she says she won't do when she writes that today the financial sector lies outside the production boundary (p. 19).

     Besides, if Mazzucato doesn't want a stark divide, why is she concerned that the marginalists blurred a production boundary so neatly established before them? (p. 15).

Is economic value to be defined by referendum, or by committee, or by each individual?

     Mazzucato says that people should publicly debate who creates value in the economy, thus making everyone participate in a controversy that before was limited to experts. We must assume that she means debate not just for the sport of it but to adopt decisions.

     Any country that follows that advice (and it seems that there are many people in high positions eager to adopt it) will have to establish a political procedure to decide questions about value. Maybe a referendum with a form where people would tick what sectors in the economy they see as value creators. Then governments would have to decide the fate of those left outside. Or, what is more likely, a council of experts would advice ministers and legislators where to trace the “production boundary” and its consequences. Or perhaps the question would be deferred to international organizations that would issue regulations to member countries. In any case, it would then be a political decision about what is economic value.

    That would be a regression to ancient times. In modern times politicians do not decide what professions are worthy of respect, who produces valuable things, and who must be seen as leechers extracting value from the masses of toilers. Not even majorities are asked to decide such things. Concerning economic value, each adult is his sovereign, and the 51 percent does not rule over the 49 percent. Where that principle is lost, there is no longer economic freedom.

Note: book pages refer to Kindle editions of the books I cite, except for Menger Principles, in which case I cite the Mises Institute paper edition. Kindle pagination should correspond to that of the paper edition but there might be slight differences.

Carl Menger: the trouble with fiat money and fiat law

Carl Menger wrote a famous essay about the origins of money and a less known one about the origins of law. He showed that in both cases the process must have been driven by individuals seeking their own purposes and adapting to each other's actions. That is what we call spontaneous order today. Menger also mentioned the case of cities, most of which must have started spontaneously by a small number of artisans, like blacksmiths and carpenters, settling on a place where they could provide their services to peasants living in the surrounding area. Then small merchants joined them, and so on. Certainly some cities may have been created by royal command, by it is unrealistic to assume that every village and city started with a decree. For all we know, spontaneous order must have been the origin of cities, of money, and of law.

What I want to point out here is that Menger's ideas are relevant not only concerning the origins of money and law, but also about the way they work today. After all, we cannot assume that the motives that led men to use indirect means of exchange (money) to achieve their individual purposes have ceased to work. The same applies to law, as we cannot conceive that men no longer see the advantages of keeping one's word or that they have become blind about the dangers of letting criminals roam free.

Unfortunately Menger's pioneering work on spontaneous order has been overshadowed by Friedrich Hayek's better known contributions on the subject. Nevertheless, they complement each other. Menger dealt with the origins of money, cities, and law in appendixes to his book “Investigations into the Methods of the Social Sciences and Economics”. He limited his remarks to origins because he was interested in dispelling the notion, popular among German economists, according to which a national spirit was responsible for the creation and development of law and the economy. Menger argued that such explanation was both insufficient and wrong.

It was insufficient because it failed to say where that mythical collective spirit peculiar to each nation came from. Was it part of the race and transmitted along with the color of the skin and of the eyes? Was it part of a cultural tradition? If so, how did that tradition started? But besides being no explanation at all, said Menger, a collective national spirit was not the working force that created money and law. To counter that widespread opinion, he provided his own explanation. And in doing so, he showed to us the importance of spontaneous order. That he limited his analysis to origins and to primitive times must be understood in the context of his arguments against the German school of economics. But if the motives that created money, law, and many other institutions have not dissapeared, then we should examine what their influence today is.

Nowadays we have fiat money, that is, money that unlike a bar of gold has a value that does not come from people's want for such metal but from a government's decision. Certainly, governments cannot fix money's value at will. With the possible exception of politicians, most people know that the powers of governments in that respect are limited. When governments carelessly print money, they cause inflation, which in turn discourages saving, makes markets less efficient, etc. In short, by ignoring the limits of their powers governments harm the function that money should serve, they impair the advantages for which money was originally created by spontaneous process.

Fiat law

Much has been written about fiat money. But I think that we should make similar observations concerning law. Today we have what we might call “fiat law” which is no longer the result of a spontaneous process but results from decisions taken by governments. As with money, politicians often ignore the reasons that create spontaneous order and thus proceed to undermine law's value. Sometimes they cause it simply by inflating the number of laws in a process that makes each of them less significant, more difficult to understand, and to enforce. When subjects learn that there are always some statute or regulation they are violating, even when they try to be punctilious about their duties, they cease to reprobate legal transgressions.

And it is not only the sheer number of rules issued by governments, including supreme courts and, increasingly, international courts. Certainly, numbers alone create havoc, but there is also the fact that some of these rules multiply the number of rights and entitlements. Then they start to undermine each other's worth. A rule that acknowledges your right to find an occupation or to hire people would be undermined by another rule that makes it a a duty to give preference to individuals of a certain race. Or as in Argentina's Buenos Aires province, a rule that establishes the right the vote for the candidate of one's preference will be modified by the requirement that at least half of a party's candidates must be women. Again in Argentina, a law that recognized people's rights to their own bank accounts in hard currency was later “complemented” by a another law that allowed the government to take those savings and in exchange give bonds in depreciated currency to the savers. Which in turn becomes necessary if government is to be able to satisfy the millions of people who have received generous entitlements by -again- other rules issued by the government.

Spontaneous order creates a framework for action, one in which good and bad must be clearly separated. The straight line isn't always fair but when efforts to improve it make the line too crooked and muddy, law ceases to work. It makes sense to keep one's word while the impulses that give rise to spontaneous order are not thwarted. Nevertheless, in their pursuit of what they call social justice legislators and judges have multiplied the opportunities for going back on one's word. For many decades in Argentina, people who default their debts get the opportunity to argue that the interest rate they promised to pay is too high -a claim that most often than not is seen as fair by judges, who then proceed to fix the interest of loans below that of deposits. By modifying the rate, they make the loan cheaper, indeed cheaper than any loan available in the market. The trouble is that this is an advantage that is given only to people who don't pay their debts. Whereas the reasons that create spontaneous order make trustworthiness a definite asset, laws often make it a heavy burden. When legalized tricks become too many and are allowed to work against spontaneous impulses for too long, one sees -as in Argentina- that people get used to arguing about the terms of their contracts after signing them and not before.

The same forces operate today

Let's think. Is it possible to assume that the impulses that created law are not longer at work today? Menger wrote that men created order, not by collective decision, but in their efforts to better pursue their individual goals. All that is present today and still at work.

Lets take e-commerce. Successful operators in that new field know that being true to their clients is vital, so in order to pursue their entrepreneurial goals they build trust. Enforcement through lawyers and courts -sometimes across national borders- would be cumbersome and expensive for a man who bought a couple of books on Amazon. However, it doesn't matter because wise players know that trust is essential for their business. Hotel managers strive to keep their rooms clean and comfortable for their guests because they know that a bad name would damage their prospects. A lawsuit is not so bad because of the possibility of a sentence to pay damages, but for the effect on the reputation of a company.

Commerce would not survive a single week if it had to rest entirely on the work of lawyers and courts. There are individual impulses that keep order without following any collective purpose; these are the same impulses that Menger described in his article about the origins of law.

Police and courts could not keep crime at bay if the majority of the population would engage in robbery and murder. The delicate mechanisms of constitutions would fail very soon if people were convinced that the rules stamped in them are mere words. South American history bears witness to that.

Weakening spontaneous order

Spontaneous order begins and is kept working because people adapt to each others expectations and actions. Statutes and codes may reinforce that order, but they can also injure it. When government bans competition in an area, the company thus protected can follow its goals without taking into account their customers expectations. If workers know that promotion in their job depends only on seniority, then it is likely that skill and dedication would not flourish in their field. Employers adapt to bad incentives too. If they realize that laws and courts make it very costly to dismiss a worker, then they would hire only the bare minimum of workers.

It is an unfortunate fact that many statutes and court decisions that undermine spontaneous adherence to law don't always show their effect the day after they are enacted. Although confidence in government bonds may be damaged very swiftly by arbitrary rulings, the effects on the levels of crime, on the labor market, on investment have a delay. In family law, the effects may take decades. Confidence and decency may endure for a while, and that makes it more difficult for people to see why they deteriorate.

Why is Menger still relevant today?

In this and two previous articles I have tried to follow the paths Menger opened. Now I want to tell you how I came to the idea of writing them.

When I wrote my criticism of Murphy and Nagel's book “The Myth of Ownership” I found that they repeated once and again the following argument against ownership: “since there are no property rights independent from the tax system, taxes cannot violate those rights” (p. 4).

By that they mean that an individual's creation of wealth cannot be isolated from the services that governments provide, like judges, police, roads, which are paid by taxes. Therefore, they argue, it is absurd to complain against high taxes as if they infringed property rights. Tax law and regulations are part of that legal framework within which wealth is created. Therefore legislators can shape and reshape the meaning of ownership, can tax away most of it, and that shouldn't reasonably give grounds for complaints. Or should it?

The argument has been repeated by other philosophers (Ronald Dworkin, Cass Sunstain) and even by politicians (Elizabeth Warren). As I pointed out in my articles there are many defects in that argument. If consistently applied it would reject as absurd complaints against restrictions on any right, not only property. Censorship? Well, one disseminates ideas within the same legal framework that protects property, so apparently you shouldn't complain if your opinion is suppressed. Or should you?

There are other objections to the argument apart from inconsistency -I pointed them out in my articles on Murphy and Nagel's book. But apart from them, I said to myself: these people should have read Carl Menger. He wrote that law started as spontaneous order, that is, unintentionally created by people who pursued their own goals and adapted to each other's actions. People must have exchanged property on things well before law codes where ever written. It isn't true that there was a tabula rasa, no right to property before legislators and their advisers started to enact statutes and codes. Even today, life as we know and enjoy won't last a single week if it had to rest only on the work of legislators, judges, and law professors

Wherever people are able to enjoy the fruit of their efforts and the peace of their families, wherever law still survives without the constant presence of fear, of policemen, and jails, the same spontaneous order is at work.

That is what decided me to write these articles, trying to follow the lead of the -unfortunately- very short insights provided by the great Carl Menger.

Carl Menger and Edmund Burke, where do rights come from?

     In a previous article (link) we saw that Carl Menger traced the origin of money, cities, and law back to the action of individuals who pursued their own goals without following any common plan or being ordered about by any central authority. Unintentionally, they created an order that was spontaneous. Certainly, an order that grows out of individual pursuits must include some form of rights over land and other goods, as means to fulfill individual ends.

     Of course, sooner or later chieftains and kings started to issue their rules and impose their own order, which in their case wasn't individual, it was meant for all; it had a common purpose -good or bad. How exactly this process took place in different lands and nations is difficult to ascertain. Nevertheless it is unrealistic to assume that kings and parliaments started issuing commands on a blank slate. An order that they didn't create —with rights and duties— was already in place. So it is not true that, as some assume, every right and duty owns its existence either to the will of legislators or to the musings of sages. Certainly, statutes gave rights new shapes and thinkers inspired changes, but they did it on top of a spontaneous order that neither of them created.

     Unfortunately, both men in positions of power and revolutionaries often fail to see how it is possible that an order that is spontaneous works. The French economist Frederic Bastiat once wrote that people who despise the free market and its price mechanism do not realize how wonderful it is that a big city like Paris is fed without any central plan that tells bakers how much flour to buy and how many loafs of breed to bake —and so with potatoes, onions and thousands of other goods.

     There was at the end of the XVIII century an inordinate number of busybodies full with bright ideas about the way other people would have to conduct their lives. Worse than that, a good number of them thought themselves justified in imposing their plans by force. In such conviction were united both men in government and those who wanted to overthrow them —it was simply that the latter thought they had better and more radical plans to impose on others.

     No doubt at that time many nations, and in particular France, lived under very defective rule, the result of centuries of absolute kings imposing their will on people. The trouble was that on the other side there were men, revolutionaries and their mentors, even more ruthless in their disregard of anything and anyone that would hinder their plans.

Edmund Burke and the Rights of Man

     Carl Menger cites Edmund Burke as one of the first who understood how wrong they were those who, without understanding spontaneous order, worked to destroy it. Burke was no denier of natural law. Yet he saw that it was a very defective ground on which to defend rights, that is, rights that people must enjoy in the real world, not rights lingering in some theoretical cloud. Moreover, he realized that, as it happened in France, natural law could be used to knock down rights and even lead to tyranny.

     Neither was Burke an enemy of positive law. On the contrary, he wrote that “Men cannot enjoy rights of an uncivil and of a civil state together” (Reflexions on the Revolution in France, p. 50). On the issue of political power he wrote “Government is not made in virtue of natural rights, which may and do exist in total independence of it, and exist in much greater clearness and in a much greater degree of abstract perfection; but their abstract perfection is their practical defect” (op. cit. p. 51). In a famous image about the way rights work in a civil society Burke wrote “These metaphysic rights entering into common life, like rays of light which pierce into a dense medium, are by the laws of nature refracted from their straight line. Indeed, in the gross and complicated mass of human passions and concerns the primitive rights of men undergo such a variety of refractions and reflections that it becomes absurd to talk of them as if they continued in the simplicity of their original direction” (op. cit. p. 52).

     So Burke didn't deny natural rights and he acknowledged the importance of positive law. What was he against then? Burke was against positive law enacted on the basis of abstract reasoning resting only on very general dogmas.

     In his answer to the French philosophers and their British admirers Burke wrote that rights should be viewed as the inheritance of people -of each and every man and woman- and not the result of the will of the majority among them, or the majority in the assemblies they elect, or the plans devised by doctrinaires. That was the key element that distinguished British Glorious Revolution of 1688 from the French revolution of 1789.

     Burke compared the results of following English traditions and ancient laws and those of the theories of philosophers and the experiments of legislators. Already in his first essay “Vindication of Natural Society” he had assumed -tongue in cheek- the attitude of those who disdain the consequences of laws and value them only as the necessary corollaries of their petty theories.

     By the way, if people had followed Burke's advice, Marxism would have been discarded long ago, after its horrible consequences had become manifest in real life. Of course Marxists rejected with scorn the notion of natural rights, but they too built their systems on a few abstruse postulates and —as the French revolutionaries— where ready to kill anyone who opposed them. Marxists say: the reasoning looks good to us, so it doesn't matter if in the past all our patients have died, lets try the same medicine again. This time it will work.

     Burke was well aware of the many defects in the law of the land as it stood. But he thought it better to improve on it than to take it down. He used the image of a mortmain, that is, an estate that cannot be sold o renounced, but on which one could build. That applied even to legislatures. Burke wrote: “We entertain a high opinion of the legislative authority, but we have never dreamt that parliaments had any right whatever to violate property, to overrule prescription, or to force a currency of their own fiction in the place of that which is real and recognized by the law of nations” (op. cit. p. 126).

     Friederick Hayek agreed. As he wrote in The Road to Serfdom, “The idea that there is no limit to the powers of the legislator is in part a result of popular sovereignty and democratic government. It has been strengthened by the belief that, so long as all actions of the state are duly authorized by legislation, the Rule of Law will be preserved. But this is completely to misconceive the meaning of the Rule of Law. This rule has little to do with the question whether all actions of government are legal in the juridical sense. They may well be and yet not conform to the Rule of Law…It may well be that Hitler has obtained his unlimited powers in a strictly constitutional manner and that whatever he does is therefore legal in the juridical sense. But who would suggest for that reason that the Rule of Law still prevails in Germany?” (p. 91, 50th edition).

A false dichotomy

     Neither Burke nor Hayek based their convictions on an appeal to natural law or human rights. They praised the tradition of the rule of law, painstakingly built, first in Britain and then extended to other European countries and the United States. Yet the value of that tradition was not acknowledged by everyone. In Hayek's time (and still today) scholars offered their readers a misleading choice between positivism ands natural law. According to the first, we must assume that rights are the creatures of legislators, who will grant them or take them away A written constitution does not change significantly that picture because after all constitutions are voted at constitutional conventions, also by legislators. That is not a pretty picture.

     Then we are told that the alternative is to assume that there is a law that is “natural” in some sense. In its most simple formulation, natural law is assumed to be woven into the structure of the world and in every human heart. It is there for us to reveal, to discover but not to change at will. That is a prettier picture but unfortunately a very hazy one.

     If the source of that natural law is men's heart then we would have to explain away the burning of wives at the pyre of their husbands, practised in India for centuries. We would have to somehow dismiss the relevance of pogroms practised enthusiastically by people in Russia and Eastern Europe. Bear in mind that those were not actions taken by arbitrary rulers and resisted, or at least lamented, by common people. People did it, and often forced rulers to accept cruel customs against their better will. Human hearts and the natural law which, we are told, is written in each of them seem to have been awkwardly silent in these and many similar cases. Even sages like Aristotle saw no problem in endorsing slavery. If the human heart is the pillar on which rights stand, it is a very shaky one. Let alone the “structure of the universe”.

Hazy natural law

     Well aware of these objections, philosophers have tried to present refined versions of natural law. Nevertheless, in their efforts to bulletproof their theories they have distanced natural law from nature, they no longer claim that it can be deducted in any way from human nature or the structure of the universe. They readily recognized that the human heart is no sure source of it. That was bad enough a concession but at the same time philosophers have made natural law less similar to law. They no longer try to come up with a system that could remotely be compared to those that rule nations. By these means philosophers have have made their theories less susceptible to attack but also less useful as a weapon against injustice.

     This is no place to deal with the theories of Lon Fuller or John Finnis —two of the most renowned modern defenders of natural law— who in different ways have tried to parry the most obvious criticisms to which a naive version of natural law view is liable. I would just say that Lon Fuller's strategy avoids the whole issue about the origin and justification of natural law by arguing that it is already part of positive law. Fuller says that one cannot understand how judges (presumably he has in mind Western judges) apply law unless one takes into account some basic moral principles. Unfortunately, what he then enumerates are mostly procedural requirements for trials but he says very little about substantive law. (Lon Fuller:Positivism and Fidelity to Law).

     John Finnis does take substantive law into account. And he does not, as Fuller, make the rather self-defeating argument that natural law —or a bit of it— is in fact already positive law. The trouble is that Finnis provides only very general views that could easily be used to justify very different law systems, with the exception of the most obviously absurd and arbitrary ones. Concerning the issue of property rights —a usual subject of controversy—, he cites Aristotle, who wrote that “property ought to be common in a sense, but privately speaking generally...possessions should be privately owned, but common in use; and to train the citizens in this is the special task of the legislator”. If that wasn't sufficiently vague, Finnis adds that “the analyses put forward in this section, even when they are applicable on issues of current political debate in the reader's community, are not to be taken as if they were intended as a contribution to any particular such debate” (Finnis, John: Natural Law and Natural Rights, Oxford University Press 1980, p. 171).

     As all modern defenders of natural law do, Finnis does not pretend that even his highly general remarks would be acknowledged by all men as truths written in their hearts. Nevertheless, he argues that after all it is the same in science because -he asserts- all sciences rest on some epistemic principles that are indemonstrable. He cites Aquinas, who wrote that some propositions are self-evident only to the wise (op. cit. p. 32).

Collective goals dictated from above

     It is interesting to realize that for all their differences, positivism and naturalism tend to converge to similar solutions. The former relies on the views of legislators, the latter, at the end of the day, on those of philosophers and wise men. Both authorities will tell us what in their views is good not just for themselves but for the community. Appeals to the political power or to the opinions of wise men are different from appeals to an order that allows individuals to pursue their own goals.

     While positivists reserve the job of granting and taking rights to legislators, natural law champions add above them the pronouncements of sages who will find for us indemonstrable principles that they will be able, somehow, to uncover. In modern times it often means the opinions of Harvard, Yale, Oxford, and Cambridge professors —repeated in a simplified form by hundreds of other sources. It isn't clear that their findings are better informed or have more sense than those of legislators.

     There is another problem with naturalism, totally independent from the issue of the soundness of the opinions about it. The fact that we talk of natural “law” should not hide that it is —if it exists at all— something that cannot be viewed as being as detailed as positive law and thus running parallel to it so that we can contrast them. It is true that in the past some philosophers thought that they could deduce a whole system of law from the study of human nature. But modern thinkers have abandoned that pretension. One may peruse the many volumes written by John Finnis —perhaps the most lucid modern defender of natural law— without finding a clear-cut answer to any of the controversies that divide people today. I am not saying that Finnis's insights about the proper ways of reasoning about moral issues are useless. Nor am I saying that his remarks about what factors should be considered when pondering about, say distributive justice, have no point. But it is undeniable that they could be used to support too many answers, leaving outside only the most obviously wrong ones. The same applies to other philosophers and law scholars. As long as they remain abstract and indeterminate, they command assent; as soon as they try their methods in order to yield a direct answer, they became controversial and dubious.

     Law philosopher Pauline Westerman wrote an insightful book on the history of natural law for which she chose the title “The Disintegration of Natural Law Theory: Aquinas to Finnis”. About the modern efforts to make natural law less open to objections she wrote “strictly speaking, the new theory of natural law neither has anything to do with law nor with nature” (p. 256) and “In fact, the more these theories are fortified, the less versatile they are in dealing with practical problems (p. 293)

     The trouble is that the very purpose of having a natural law distinct from positive law was to use the first to assess the second. And it is very little comfort to say that perhaps even very hazy natural law theories would exclude Hitlerite and Leninist immorality. Nazis and communist empire builders are not easily persuaded by lectures about ways of moral reasoning. We have to be able to deal with subtler deviations from justice, those that open the road to the worst ones. Once they have grown into gross arbitrariness, debate is usually pointless.

     That is because, as David Hume wrote “It is seldom, that liberty of any kind is lost all at once. Slavery has so frightful an aspect to men accustomed to freedom, that it must steal upon them by degrees”. Lord Macaulay was of the same opinion. He wrote that in medieval times deviations from the law had a check in the ability of people or aristocrats (or both) to rise up in arms against royal power, "Our forefathers might indeed safely tolerate a king in a few excesses; for they had in reserve a check which soon brought the fiercest and proudest king to reason, the check of physical force". While the weapons at the disposal of kings were not very different from the pikes and the swords in the hands of their subjects, there was a limit that rulers had to take into account. That changed with professional armies. Moreover, Macaulay argued, in pre-industrial economies civil wars destroyed huts, cattle, and a few castles. Recovery took a short time. But in highly developed economies the material losses are immensely higher and people become reluctant to risk them. It is for these two reasons, says Macaulay, that in modern nations even small deviations have to be promptly controlled. (History of England, Vol. 1 p. 23).

     A natural law that commands assent as long as its precise meaning remains uncertain is not very useful in that respect. And today there are attacks against rights of the more subtle kind, of the kind that, as Lord Macaulay advised, should be controlled before the issue is no longer about ideas but about force, no longer about arguments but about secret police knocking doors at night.

Natural rights against the rule of law

     The tradition of the rule of law has often been confronted, as Burke described, by abstract theories about natural law and the rights of man. In our own time, so-called second and third generation human rights to free education, to a job, to a basic income, to subsidized prices, are among the most powerful weapons against the rule of law. This is exactly what Burke warned against; legislating —be it from Congress or from the bench— on the basis of abstract reasoning.

     In Argentina, law professors waged for decades a relentless war against the liberal rules in the old Civil Code (“liberal” in its classical meaning). Starting from a few abstruse postulates (the unity of the illicit phenomenon, the theory of the “adecuate” cause) seasoned with Roman maxims never known as law in Rome, they turned the Code upside down. Already in 1968, they convinced a military government to amend the Code and establish that applying new laws to contracts signed before them was not really retroactive. Finally, towards the end of Cristina Kirchner's government they got their victory, the complete replacement of the old code and the enthronement of their doctrines in a new one.

     Unfortunately, too many law professors wax lyrical about the new rights that they discover in the Constitution and human rights conventions but they have little time for the old rights. The trend includes the federal Supreme Court, which has recently published a summary of the cases the Court sees as more relevant in its record, covering the period 2003-2016 (link to the document, in Spanish). The report has a chapter on cases about “Fundamental Rights” which does not include property among them. In turn, we find special chapters on social rights, economic rights, environmental rights, union rights, collective rights but not one about property rights.

     Yet there have been very relevant cases on such issue, though there is very little to boast about them. In 2002 a Peronist government started confiscating people's dollar bank accounts and giving them bonds in exchange —which was done with the approval of most of the opposition. When the Court declared it was against the Constitution, Congress removed some judges from the Court and appointed new ones. In 2004 the new majority in the Court reversed its previous decision —now taking the dollars was right. In 2013 the same “revamped” Court rejected the claim of a man who tried to defend his private retirement account against its confiscation by the government. That case sealed the fate of the whole system of private pension funds which then were taken by the government. None of that comes out of mere chance or whim. In order to pay for the myriad of new special rights, the old ones must be looted.

Carl Menger on the origins of law

Carl Menger was the father of the Austrian School of Economics. Today, we know better the contributions of those who followed on his path, like Hayek and Mises, than those of the initiator. Neverthless, I think that there are still in Menger's works gems of thought that deserve greater consideration.

I plan to write three posts about one of those neglected gems, Menger's thoughts about the orgins of law. His article has been included as appendix VIII of his book "Investigations into the Method of the Social Sciences" (link to the book at Mises.org). 

This first post will tell briefly how he came to the notion of spontaneous order, and how he applied it to the origins of law. In the second post I will try to show how Menger provided a better understanding of law than today's dominant theories. In the last post I will trace a parallel between Menger's descriptions of the orgins of money and of law and will suggest that they are relevant not only concerning the origins of both in the distant past but to understand how money and law work today. So Menger's little article on the origins of law sheds light not only on history, but on legal and economic theory.

How did Menger come to the idea of spontaneous order? A few years after writing his book Principles of Economics (1871), he engaged in a famous debate with German economists who denied the very possibility of an economic theory. They claimed that economics had to be dissolved into national history as economic life was merely another manifestation of an undefined national "spirit". As part of his reply, Menger wrote about the real origins of economic institutions, showing that it wasn't a mistical collective spirit peculiar to every nation that shaped them, but the action of people who everywhere on earth tried to improve their situation. In his study, Menger came to the notion of spontaneous order, an order that results from individual efforts of people who pursue individual goals by adapting to each other's action. That is how markets work, without the need of a common national goal, State plan, or Weltanshauung.  The notion of spontaneous order became one of the key ideas of the Austrian School of Economics. It was later developed by Friedrich Hayek and many others who followed Menger's insight.

It is well known that Menger wrote an essay in which he explained that it was spontaneous order that created money. It is less often mentioned that he applied the same idea to the origins of cities and of law.

Menger said that the use of money came as the result of spontanous human actions that weren't commanded by any king or parliament but evolved from the mutual adaptation of people who pursued their own goals. Certainly, that is how barter must have started, as it is difficult to assume that some tribal leader gathered his people some day and told them: from now on you will have to exchange things. No, barter must have started by people who shought to improve their situation by offering things they had in excess -say animal skins- in exchange for things they lacked -say arrows. By the same spontaneous process -not following orders-, some individuals came to the idea of using intermediate objects that were easier to carry and were readily accepted everywhere. So they would exchange their excess goods for things they didn't really need, but which they could easly exchange for those they did need. Skins, salt, pieces of iron, silver, gold and many other things started to be used as intermediate goods that facilitated exchange well before any king decided to put his seal on a coin.

I won't try to repeat Menger's magnificent article about the origins of money and must simply recommend the lecture of the original (link). But, as said, I would point out that it is often forgotten that Menger used the same method he applied to the origins of money, to the more general issue of the origins of law. 

Today we tend to see law as something made by legislators, perhaps also by judges, maybe even by regulatory agencies. But we seldom stop to think that law must have started the same way money started, by the efforts of individuals who had in mind their own improvement and that of their families. If it is unrealistic to assume that kings ordered their people to engage in barter and then to use intermediate goods, it is even more so to assume that some day a king gathered his subjects and told them about a bright idea he had that he decided to call "inheritance", commanding his people to leave their huts and kattle to their children. 

No, some people must have started to do these things spontaneously, and many of them must have observed that those who respected their neighbours' children inheritance had a better chance of having their own children's inheritance respected. Of course, as with barter and money, there must have been variations and even exceptions -tribes that never came to these practices. But on the whole people tended to imitate the most sucessful ways of action.

In commerce, clever individuals in many places around the world must have observed that it is better to honor your word than to cheat. That if you manage to trick your neighbour and sell him a sick animal you won't be able to sell him another one, and probably won't sell kattle again in the whole village. Others would imitate that practice. Some must have observed that it is a good thing to isolate those who broke their promises and refrain to deal with them, which must have been an informal but effective punishment -as it is still today.

Some villagers must have started to use some formal words to stricke their agreements as a way to be certain about the meaning of what is promised. That was advantageous as a way to prevent disputes. Doing it in public must have worked in the same way. Helping others in the persecution and punishment of robbers and other criminals was bound to be seen as a way to protect yourself, your family, and the whole area from suffering future outrages. 

None of this implies that this evolution was perfect and without setbacks. Nor does it mean that legal practices were uniform (as there was wide diversity in the objects used to facilitate exchange). Nevertheless, discovery through experience, insight, and imitation of succesful practices worked in law as worked in building, cultivation, sailing, and many other human activities.  

We must understand that "spontaneous" does not mean "thoughtless". On the contrary: there are the thoughts of millions of people doing things that benefit each other. It means: practices and order that arise without anyone commanding people what to do, and without the need of an agreement on common goals.

Menger says that sooner or later, chieftains must have started to put their seal on these practices, as they did with money. They must have organized the persecution of criminals, given protection to commercial fairs...and too often abused their power. 

When kings issued orders, they called them "law" too. More often than not, it was simply an official seal given to ancient practices that had emerged spontaneously. Sometimes though, these laws were truly just the will of the rulers. Nevertheless, kings and governing bodies must have soon realized that issuing their commands under the name of "law" gave them an aura of respect that ancestral customs and rights possessed, and mere personal whim could not provide. Still, it seems that in some places people refused to use the same name for law that resulted from their own action and the edicts of some authority. In Roman law, the word "delicto" was reserved for those punished by the old rules of the city from time immemorial. Those other ones created by authorities received the name of "cuasidelicto", that is, "like delicto", but different in origin and therefore not to be confused. 

In modern times, we tend to think that law is simply the expression of the will of some authority, usually an assembly of legislators. That is because we see only the end result of a long historical evolution and, as with money, we tend to assume that everything must have started as it is today, with some authority putting its seal on something.