Sweatshops, Bastiat, and (Potential) Misapplications of Economic Theory

“Economic theory thus has both an aprioristic moment and a hermeneutical moment. Apriorism comes in at the level of formal theory; hermeneutics comes in at the level of application. Hence recent disputes within the Austrian School between aprioristic and hermeneutical factions miss the point. Hermeneutical verstehen decides how to apply the formalism to particular cases, a subject on which the formalism itself cannot rule; but the formalism constrains the possible interpretations that verstehen can legitimately come up with. To paraphrase Kant’s famous maxim:


– Roderick T. Long, “Anti-Psychologism in Economics: Wittgenstein and Mises (pdf)

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In my intellectual sauntering, I recently heard an anarcho-communist acquaintance of mine give a critique of libertarianism that I am liable to never forget: “you folks need to lay off of the theory and actually read some history.” This pointed charge of ahistorical politics wasn’t directed at me, praises be, but I do believe this interlocutor put his finger on a weaker tendency in libertarian thinking.

Two articles that were published this week passed through the ever-vigilant libertarian blogosphere and dramatically illustrated the need for not only for a level of pure theory at which libertarians are relatively adept, but also a level of astute context-sensitivity and historical grounding in order to decide when it is appropriate to apply theory, which is often absent from libertarian discourse.

The more controversial of the two was a brief article Matthew Yglesias wrote for Slate on why Frédéric Bastiat, one of the enshrined saints of free marketeers, is outdated and irrelevant with regard to modern macroeconomics. Such a punch in the gut predictably produced responses of libertarian animosity, but I’ll return to this later.

The second article much more quietly streaked through our purview. At Reason Magazine, our associate Joseph R. Stromberg wrote a review of Fred Pearce’s The Land Grabbers: The New Fight over Who Owns the Earth, entitled “Land Grabs in the Developing World: How powerful interests seize land from peasants, pastoralists, and others around the globe.

With regard to globalization, libertarians have never seemed to me to be paying very close attention to its critics who oppose the sorts of policies documented in Pearce’s book and Stromberg’s writings, even though they would almost certainly side with the indigenous victims of expropriation if they were to become interested enough to dive into the details. When libertarians do take the time to examine how globalization is occurring, which is less common, they tend to see the creation of legible and “productive” property rights as a positive development, favoring Hernando de Soto over James Scott, the Bloomington School, and the spontaneous order tradition as a whole, while in somewhat Whiggish[1] fashion undervaluing what is lost in the process, and this exposition may be peppered with exclamations that voluntary and increased trade is good for all parties. But more is needed at this step of inquiry!

When commentators don’t investigate the localized details of globalization, they usually skip past the point where the people have been forced off of their ancestral homelands and are now flooding the sweatshops of new urban centers or working their own lands now managed as oligarchical latifundia for the benefit of the powerful, etc.

At this point libertarians occasionally like to declare with moral certitude, “A-ha! These indigenous people prefer sweatshop labor to their alternatives; they’ve clearly demonstrated their preferences!” And they aren’t wrong. Generally, given the opportunities available to them which have been truncated by historical circumstance, sweatshop labor may be the best available choice within the options presented. Moreover, I’m certain there are places which exist where wages are high enough without systematic expropriation to tempt pastoralists into becoming urban working class, but the thing is, the specifics count for a lot here, and if one doesn’t have a healthy dose of political economy, history, and institutional analysis present with your economic theory, one may end up defending people one wouldn’t otherwise support, or inadequately defending an ongoing process that is more complex than it appears when only pushed through the pure logic of choice.

The same thing is true for the kerfuffle over Yglesia’s screed against Bastiat. The broken window fallacy, or “what is seen and not seen,” is the economic principle which aims to illustrate that the breaking of a window, though it may put the glazier to work, does not help the economy as a whole because even though it made the glazier productive, society had to replace a window instead of having the original window and some other new creation that would have been created with the money that paid for the window’s replacement. This parable teaches that getting the economy moving by destruction or waste is a deceptive way of thinking about economics, and an undesirable policy.

This seems to me to be a fairly logical principle, but in applying it libertarians may have to be a bit more careful than they have generally been.

If you think the American political economy is fundamentally statist and dependent on the political class with some sprinkles of free market principles on top (as opposed to thinking of the “base of the American economy as free enterprise which unwillingly supports a parasitic superstructural class of regulators, moochers and bureaucrats”), then what we have now is a sort of mutant economy far from what would naturally[2] exist in a freed market. In the Misesian sense that “middle-of-the-road policy leads to (state) socialism,” increasing state intervention is necessary to manage the original interventions into the economy, which produced irrational and uneconomical results.

For instance, Carsonian political economy claims that we live in a system of monopoly capitalism that is far more capital-intensive and with far longer supply chains than a freed market would support, and that the owners of these capital goods historically needed reasonable assurance from the state that such investments would be sustainable and their outputs would be absorbed through consumption, destruction via war, bubbles, etc. all supported by state-provided infrastructure that gives them taxpayer-funded access to national and international markets. In reality, we have the technology now to be far nimbler and scaled down compared to a hundred years ago (think hand tools vs. turbine-run factory floors), but there is an interest in maintaining the bigness of the current system because it funnels wealth upward as little folks would put the big firms with huge overheads out of work through competition. Therein lay a need for macroeconomic policy in the given political economy to manage the inputs and outputs that would not be necessary in a genuinely freed market (and rational) economy.

In other words, when most economists think there is a need for some degree of fiscal and/or monetary macroeconomic policy, they seem to be acknowledging by virtue of their opinions that the system which currently exists needs state inputs to stay in existence. If we keep the given legal structure and political economy, a freed market may indeed pose a very real threat to the economy’s stability. When they think that libertarian ideas are wacky it is primarily, I believe, in that they think that not providing state inputs would legitimately crash the economy as it currently exists.

Libertarians do not always defend the existing economy and the status quo, and in many senses desire the end of its injustice, but because they don’t realize both how radical they actually are, and how dependent the economy is upon state inputs, they end up thinking anyone advocating macroeconomic policies is just plain stupid, which is not so, as they may very well be correct that libertarian policies are bad for the monopoly capitalist economy (or whatever you call what we have now. Economists generally refer to it as “capitalism,” “democratic capitalism,” “liberal capitalism,” etc.)

Not committing the so-named broken window fallacy through policy would eventually lead to a saner economy, but it probably wouldn’t sustain the structure we currently inhabit. In this way, supporters of interventionist[3] macroeconomic policies as well as fans of Frédéric Bastiat’s laissez faire ideas may both misunderstand each other on the crucial level I’ve described.

Ultimately in both the case of Bastiat and of globalization’s sweatshops, “as Chris Sciabarra would say, individual phenomena must be viewed not in an atomistic sense, abstracted from everything else, but viewed in terms of their functional role within a larger whole.”[4] Being dialectical in this way is an integral part of grasping our social relations and the political economy we inhabit in the full range of its complexity.

When we default to theory without looking rather closely at the given historical circumstances and political economy, we miss the hermeneutical moment, we miss the chance to closely examine whether or not it is appropriate to apply our theories. We have deployed the empty formalism that Austrians so love to criticize in “mainstream economics” in the rush to make a stand for freed market principles, and in doing so, we may misdirect our efforts away from aligning with the most vulnerable of our planet with whom our sympathy actually resides.


[1] I find Deirdre McCloskey’s work on this topic is very interesting too, and I believe the long-term arc of the world is indeed very positive, though I think often a degree of reverence at this step of the equation is missing from the minds of many libertarians. Nothing in this world comes without a price tag, and “economic development” is no exception.

[2] I use the word naturally with a good deal of skepticism, as I think attempts to view our social world in naturalized language is generally abused. What is a natural human when so much is dependent on her social relations?

[3] I don’t especially care for this term either. The enforcement of property rights is an intervention in its own right as well. This language assumes that there exists a “natural” economy free from some system of order which allows an economy to exist, which reveals its in-built ideological assumptions.

[4] Internal email communication with Kevin Carson.

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