Monday, July 28, 2008

EconTalk: Law and Legislation

I recently listened to an EconTalk podcast featuring Don Boudreaux discussing with host Russell Roberts another book by F.A. von Hayek titled Law, Legislation, and Liberty. The focus is on a subtle, yet extraordinarily insightful distiction between what Hayek terms "the law" and what is merely legislation. But the discussion does not stop there and touches upon several other concepts treated by Hayek regarding the common law, spontaneous orders, and the use of knowledge in society.

At the beginning of the podcast Dr. Boudreaux and Dr. Roberts try to stress the importance of language and the particular words we use to describe the orders that emerge through human actions yet are not the product of any one mind's deliberate construction. We tend to anthropomorphize things like "the market" and "society" when they have no sentience; they have no ability to act on their own volition. We typically say that "the market" determines the price of such and such, or that "society" should strive to establish a more fair and equitable distribution of resources, but these are just abuses of language. Society is the derivation of an incomprehensible multitude of seperate, yet interconnected human actions. The market is a term we ascribe to the results of the interplay of these human actions, and the prices that are determined on the market are not products of "the market" as such, but instead are established by these actions. The market determines nothing; it is the people that establish the relative prices of resources in the economy.

Like prices, according to Hayek "the Law" also emerges from the interplay of human actions apart from any deliberate design by any one mind. Law can only be codified by authorities, not established by them. Hammurabi's code is cited as an example. Also, Dr. Roberts and Dr. Boudreaux use another interesting example to illustrate the point. Think of a cafeteria someplace where a table has someone's backpack on a chair or books on the table. Most people would assume that this table is claimed and would move on to find another place to sit. Although no one in particular is sitting there at the moment, we commonly regard the seat to be taken. No one has codified this fact; there is no rule stating that "if a table has either: a) a backpack on a seat, or b) books on the table, then it is currently in use by the person owning any of those materials." But if someone came and sat at the place with either a backpack or books on the table, many would percieve this to be a wrong committed against the person who's stuff was there first. It took no authority or legislation to establish that taking someone's seat is wrong. It was established by no one person, but instead emerged spontaneously from the actions of many people over time. This is one of the most important insights I ever encountered in that it conveys a few simple facts: 1) that no legislation is necessary to establish laws to which people adhere to in their day-to-day lives; 2) Laws, to the extent that legislation can establish them, are merely codifications of existing behavior; 3) Any disequilibrium (excuse the economic terminology but I know no other way to express this) between "the Law" and what is legislated by the legislators can only serve to cause confusion amongst the people, and results in the wasting of resources and productive effort as people now need to discover what the legislation states and how it differs from the existing actions of people as they truly act.

Roberts and Boudreaux also touch on another interesting concept as they were explaining the spontaneous emergence of prices on the market. They cite the housing market to provide examples but leave a very keen insight untapped. I now believe that there are no specific "markets" per se, at least to the extent that one can say "the housing market" or "the automobile market". There is a market for something to the extent that the good or service is similar. The more homogenized a good or service, then the more one can call the trading of it a market, ie. according to this definition there is an oil market, though this is tenuous to the extent that the crude varies (Canadian crude differs from Saudi crude and that from Texas crude). So in the real world most any goods and services are monopolies, at least in a very loose sense (again, I cannot think of a more apt way to express this). There is no better example to illustrate my point then that which is typically called the "housing market". Only one house exists at such and such address. Each house differs in its relative quality, size, age, and numerous other characteristics that make a house unique. What creates the competition, the downward or upward price pressures that are commonly attributed to supply and demand, are the extents to which there exist satisfactory substitutes for a particular good or service. The competitiveness of a market consists in the relative distances between 1st, 2nd, and so on best choices. So long as alternatives exist, then a market is "competitive", at least in the only sense that this term can be used to describe anything pertaining to reality. There exists no specific market, only one great economy wide market.

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