Libertarianism and the Importance of Understanding Causality

Even though support for the free market has become stronger in the last decades, libertarianism can still only be considered a fringe movement. Most people still believe that many social problems are due to “market failure” and therefore require state intervention to be “solved.” Despite the obvious flaws of modern socialism—with its unlikely combination of a redistributive welfare state and globalist crony capitalism—and despite libertarianism’s robust philosophical and empirical foundations, the liberalism of Ludwig von Mises is still far from enjoying the majority support that it so amply deserves.

There are many reasons for this. Of course, media bias and public education prevent the dissemination of the ideas of freedom in society and limit the understanding of the free market. However, an often overlooked, yet equally important, reason is a general disregard for causality. When the real and underlying causes for social and economic problems are unknown or misunderstood, the public’s support for wrong-headed statist solutions to these problems is not surprising.

The Importance of Causes

The importance of causes to human inquiry has been grasped since early antiquity, crystalizing with Aristotle and his theory of causality. Following in this tradition, Herbert Spencer considered the discovery of causal laws the essence of science; those who disregard the importance of the identification of causes, whatever the subject matter, are liable to draw erroneous conclusions.

In the Twilight of the Idols, Friedrich Nietzsche chastised modern society for still making errors of causality; namely, “the error of false causality,” “the error of imaginary causes,” and “the error of the confusion of cause and effect.” Unfortunately, these errors are made frequently in all areas of economic and political life.

In the realm of international relations, for instance, a disregard for contemporary history has led to an ignorance of the real causes of serious political events. Today’s conflicts could arguably have been avoided if their many and deep causes had been soberly and objectively considered by decision-makers. When George Santayana said that “those who cannot remember the past are condemned to repeat it” and when George Orwell wrote in his masterpiece 1984 that mastering the past is the key to mastering the present, both had in mind the crucial importance of knowing the actual causes of political events.

Nietzsche considered the error of the confusion of cause and effect to be the most dangerous one; he called it the “intrinsic perversion of reason.” This was not an exaggeration, considering the impact of this all-too-common reversal of causality. For example, this error happens when the state is absolved of the nefarious consequences of its previous actions, thereby empowering the state to legitimize policies that “solve” problems for which the state was itself originally responsible.

Examples: Recessions, Inflation, and Unemployment

As an example, it is possible to mention the boom-and-bust cycles of the typical state capitalist economy. The original cause for this cycle is the state, through its monopolistic monetary policy. As Murray Rothbard wrote, “The business cycle is generated by government: specifically, by bank credit expansion promoted and fueled by governmental expansion of bank reserves.”

Yet, during hard times—because this original cause of recessions is not generally recognized—the state itself is looked to by society to “save” the economy through measures such as bailouts or interest rate reductions (which mostly benefit big banks and strategic industries). This in turn sets the stage for the next artificial boom, and the cycle continues.

The problem of high inflation and high unemployment may be seen in the same way. Price inflation is caused by the state when it increases the money supply to pay for its chronic budget deficits, with the added benefit of reducing the relative size of its enormous debt. Yet, when prices increase in the economy because of such actions, then the state itself is expected to come to the rescue—for instance, by artificially imposing price controls or hiking interest rates, thus slowing economic activity—to the further detriment of society.

High unemployment is also a phenomenon caused by the state, of course, when it imposes rigid labor laws and high taxation on companies, when it redistributes “generous” unemployment benefits, and when it allows uneducated immigration for which there is no demand from the private sector. Yet, when unemployment becomes “too” high because of these actions, then the state itself is expected to solve the problem—for instance, by providing tax incentives to companies for hiring low-skilled workers or by hiring more civil servants.

The Fallacy of “Market Failure”

It seems counterintuitive to believe that an agent responsible for social problems should also be the one to solve those problems. The only reason this flawed logic continues to be accepted is because of errors of causality. The real causes for economic problems are not well understood by the general public and are often confused with its consequences. In economics, this disregard for causal connections has probably wrecked as much damage upon societies as the international conflicts mentioned earlier by giving free rein to those who see few limits to the state’s regulation of economic and social life.

The same reasoning is applicable to an aspect that is usually blamed on the free market: “externalities,” or the “external” costs that third parties sometimes bear. The extreme case of this is the concept of the “tragedy of the commons,” which is often used to justify the many globalist “green” initiatives to “fight” climate change. Quite apart from whether there are apocalyptic grounds to support such extreme social top-down policies, the libertarian view is that the real cause of many “externalities” is generally that private property rights have not been adequately defined.

Since causality is disregarded, social and economic problems such as those mentioned earlier are generally attributed to “market failure,” thereby reducing the credibility of libertarianism among the general public. Indeed, libertarianism is usually rejected by the majority as a political and economic system because social problems are attributed erroneously to an incapability of the free market to provide solutions. There is rarely any perception that the real causes of these problems are statist interventions in the free market in the first place.

Libertarians have always recognized the importance of causality, as per the title of Mises’s magnum opus Human Action. Carl Menger, the founder of the Austrian School of Economics, explicitly mentioned that he had “devoted special attention to the investigation of the causal connections” as an important means of gaining insight into economic processes. Importantly, this was not only the position of the Austrian School at the time because “the search for these causal laws of reality was very much an international enterprise among economists in the last quarter of the nineteenth century and up to World War I.” However, for several reasons, this focus on causal connections in economic research was then lost.

As this article has tried to show, it is essential for causality in both economics and politics to be better understood by the general public. This is key to rein in the authoritarian inroads from governments that are taking place in all areas of life. A better understanding of causal connections would lead to an increase in the popularity of libertarianism by demonstrating that the market only fails when it is constantly disrupted by state intervention.